A general understanding of how business work is pivotal to the success of an entrepreneur. This appreciation of concepts will help in crafting a comprehensive business model that helps in solving a real problem in a sustainable way.
According to Microsoft Business Insights, here are some of the fundamental business terms you should know:
This concept should be in every entrepreneur’s arsenal of basic business terms. Accounting involves the systematic recording and reporting of business financial transactions. Accounting is often complicated. You may want to hire a professional to handle this.
This is the amount of money your customers or clients owe your business for goods or services you supply. This total value can give you a snapshot of the amount owed to your business at any given time.
Accounts payable is a measure of how much you owe your creditors for goods or services supplied to you.
“Assets” refers to your business’ cumulative financial holdings. These are usually classified as current or fixed. Current, or short-term, assets include cash or inventory. Fixed, or long-term assets, include equipment or land.
Liabilities are debts your business owes another person or entity. Like assets, you’ll have to define liabilities as current or long-term. Current, or short-term, liabilities might include an expense payable to a supplier. Many business loans are long-term debts.
Revenue refers to the income you get from a business activity in a given time. You can calculate earnings by multiplying the per-unit cost of goods or services by the number of units sold.
Does your business incur expenditures for equipment, utilities or inventory? These are all examples of expenses—money you spend to operate your business. For the self-employed, legitimate business expenses are tax-deductible.
Usually represented as a percentage, Owner’s Equity refers to the owner’s part of business assets.
This key financial document provides a snapshot of business assets, liabilities and owner’s equity.
Also known as your “bottom line.” Net profit represents total revenues less total expenses. This figure is especially important at tax time. This is because you pay self-employment taxes as a percentage of net profit.
If your total expenses exceed your overall revenues, you have a net loss. The risk of a net loss is one of many strong reasons to keep company costs under control.
This essential business term measures how much profit you keep relative to total sales. There are three types of profit margins: gross, operating and net. Calculate these by dividing the profit (revenue minus costs) by the revenue.
Cash flow is the movement of money in and out of your business. You want there to be a higher flow of income into the business than there is an outflow of expenses from the business. This is called positive cash flow.
Return on investment
Your Return on Investment, or ROI, shows how much you gained or lost on a business investment relative to how much you spent on it. Calculate ROI by dividing net profit by the cost of the investment.
Is the purpose of your business to supply goods or services to other business? If so, you operate a B2B, or business-to-business, venture. On the flip side of B2B businesses are B2C businesses. These businesses supply goods or services directly to an end user or consumer.