Before diving into the world of business, understanding the terminologies and lingo is essential for proper communication. It will allow you to better understand your finances and communicate with your vendors and customers.
Since there are thousands of terminologies in the business world, it might be difficult for small business owners to learn about them. Nevertheless, there are a few that are important that you must know. So to help you out, we’ll tell you about the top 20 terms that every business owner must know and why they are so important.
Why is it important to be schooled in business lingo?
In today’s hyper-competitive environment, having proper knowledge and understanding of business terms is vital. It will ensure that you don’t interpret a term incorrectly, leading to bad decisions or misunderstandings. Misinterpretations about the terms can lead to marketing, sales, or operational mistakes.
It can also make it difficult for you to conduct financial planning and analysis for your business. One of the best things about having complete knowledge of the business lingo is that you can communicate with your suppliers, customers, investors, and other stakeholders in a better way.
You can speak confidently in front of all the stakeholders since knowing the business lingo will add value to your words. Moreover, it can also enhance overall productivity since you can accurately understand business finances.
Therefore, you can reduce the chances of possible human errors and make the right decisions through the available data. Most importantly, it can play a critical role in saving you from possible tax defrauds or other issues.
For instance, if you don’t know the terms, you might miss or enter particular transactions in your statements incorrectly. It can impact the net profit or loss as well as the taxes on them. So, you might end up facing issues with the IRS. Therefore, knowing basic business terms is vital for small business owners.
20 terms all small business owners must know
Accounting software and applications make it easier for small business owners to manage their finances. However, proper knowledge of business terminologies is important since it will allow you to know what they mean. It will be beneficial for business owners to handle their overall finances.
- Sole Proprietorship
The term sole proprietorship refers to a business that a single person owns and runs. Most business owners start their businesses as sole proprietorships since it involves less paperwork and licenses.
- Profit Margin
Profit margin refers to the business’s growth potential and shows how each dollar of revenue leads to profit. The main types of profit margins are:
- Gross profit
- Net profit
- Operating profit margin
- Limited Liability Company (LLC)
An LLC is a business structure in that business owners can register themselves to get access to various benefits. It makes it for them to secure financing and get liability protection. The LLC requirements vary from state to state, so you must check before registering your business as LLC.
- Accounting Period
The accounting period is a time frame in which a business needs to create all the financial statements. Generally, it is for 12 months, but businesses can also have an accounting period of 18 months. Businesses need to keep proper track of their transactions throughout the accounting period so the accountants or business owners can make financial statements.
- Key Performance Indicators (KPIs)
KPIs refer to the specific metrics that a business can use to gauge its performance. For example, a business can set its gross profit margins or email referrals as a KPI. The KPIs can help businesses learn about the areas they’re lacking so they can make relevant strategies for improvement.
Assets are all the things that a company owns and can turn into cash. There are two types of assets: tangible and non-tangible. Examples of tangible assets include cash, inventory, account receivables, land, etc. On the other hand, non-tangible assets are copyrights and trademarks.
Liabilities include all the debts and loans that the business borrows from other entities, such as banks and other financial institutions. Another example of liabilities can be accounts payable, which are the suppliers who give you inventory.
Capital (also known as Equity) refers to the resources a business needs to provide services or produce goods. It can be in the form of loans or credit lines through banks or through offering shares to investors. Intangible things such as brand names and identity also come under capital.
- Financial Statements
Financial statements help you assess the overall business performance and liquidity/profitability position. Investors, auditors, lenders, and investors require these statements to know how you’re business is doing. The fundamental financial statements are:
- Balance Sheet: It is created on the bases of the accounting formula, which is Assets = Liabilities + Equity
- Cash Flow Statement: It includes the cash inflows (money coming into the business) and cash outflows (money going out of the business) for a specific time.
- Income Statement (Profit and Loss): It includes the revenue that the business generated over the accounting period. The COGS and operating expenses are subtracted from the revenue to obtain net profit/loss.
- Employer Identification Number (EIN)
EIN, also known as Federal Employer Identification Number, helps you find your company on various government forms. It is a nine-digit number that the IRS assigns to the business entity operating in the U.S.
- Costs of Goods Sold (COGS)
COGS are the cost of producing goods or the items you purchase with the intention of reselling. It includes the raw material, labor, and other expenses that go into producing the goods. Business owners need to keep track of COGS to calculate gross and net profits.
- Business Plan
A business plan is a comprehensive strategy for how a company is going to succeed in the short and long term. It gives a step-by-step guide for businesses to achieve their objectives for expanding operations and making a profit.
- Business Days (VS Calendar Days)
You might tell your customers that you’ll deliver the goods in 3 to 4 days, or the supplier says they’ll give you the goods within 1 to 2 days. However, there might be weekends or bank holidays that can make the timeline a bit confusing. Therefore, the business days refer to the days business operates, while the calendar days refer to all days from Monday to Sunday.
The FICO credit score is a number that tells about your credit score. It is a 3-digit number that lenders check to assess whether they should lend you money. A FICO score above 680 will result in a positive response from the lender. You would find it difficult to raise money if the FICO score is below 600.
Goodwill refers to a company’s identity and reputation through which it can have a competitive edge over others. It is an intangible asset that can help a business increase its earning power. You can also add it as a non-current asset on the balance sheet to show the true value of your business.
- Bank Reconciliation
There can be times when the balance on your bank statements and general ledger (G/L) accounts isn’t the same. That is where bank reconciliation comes into play. It is a method for you to find and list all the bank charges you missed in the GL ledger and for any bank error postings, for example, bounced checks.
- Certified Public Accountant (CPA)
A CPA is an individual that is known for income tax expertise. They can specialize in various areas of finance and can help you with taxation, bookkeeping, auditing, etc. These individuals have to pass exams and meet requirements set by the American Institute of Certified Public Accountants (AICPA).
- B2B and B2C
B2B stands for business to business, while B2C refers to business to consumers. Any transaction where a business sells goods or provides services to another business comes under B2B transactions. On the other hand, transactions between a company and an end-user regarding goods or services will fall under B2C.
- Generally Accepted Accounting Principles (GAAP)
GAAP is the common set of guidelines that the Financial Accounting Standards Board (FASB) sets. It includes all the rules, basic accounting principles, criteria, and methods a business has to follow. There are ten key principles of the GAAP guidelines that every business listed on the stock exchanges throughout the US must follow.
Liquidity refers to a business’s ability to turn its current and non-current assets into a cash form. For example, liquidity can be the business’s ability to acquire a loan from a bank or any other financial institute. Another example is the business’s ability to sell its current inventory and convert it into cash.
We hope you now clearly understand the business terms used often. These terminologies will give you a better idea about the business’s finances and will help your business to take on its way to success.