Anyone looking to start a business should know the meanings of basic business terms. Here are some important terms that every entrepreneur should know about according to experts like Ram V Chary and others:
Accounts Receivable
Money owed to a company by customers who have purchased on credit. Usually, accounts receivable refers to the debtors from whom the company has not yet received payment for products or services provided on credit. Accounts payable refers to the creditors to whom the company owes money for purchased goods or services on credit.
Accounts Payable
The accounts payable of a business is the sum of all outstanding invoices that customers have not yet paid. Accounts payable can often be found in its balance sheet.
Balance Sheet
A summary of assets (what you own), liabilities (what you owe), and shareholder’s equity (the amount invested into the business). The difference between assets and liabilities represents shareholder’s equity. A balance sheet is ‘balanced’ because total debits equal total credits; that is, that the debits equal the credits (assets = liabilities + shareholders’ equity). Accordingly, both sides must be equal; if they are not, there has been a mistake.
Cash Flow Statement
A document that provides information about the cash inflows and outflows of a business over a specific period of time. Cash flow statements are often used to monitor short-term liquidity. A positive cash flow from operating activities is required before a company can increase dividends or expand its assets, for example.
Depreciation
The amount by which an asset has been used up over a certain period of time, typically in one year. It is not considered an expense on an income statement but rather allocated to depreciation expenses, thus reducing book value over several years. Shareholders’ equity reflects the total capital shareholders have invested in the company’s long-term assets less any depreciation taken against those assets. In order to provide “true and fair” financial statements under IFRS, depreciation must be disclosed in a manner that reflects the “economic reality.”
Fee-for-Service (FFS)
Paying for goods or services based on time consumption. For example, paying an accountant to count your money instead of counting it yourself; paying lawyers by the hour for their service. Sometimes also called unit billing.
Free Cash Flow
The amount of cash available after all expenses, including taxes, interest payments, and maintenance capital expenditures necessary to maintain long-term competitiveness, have been paid for. Free Cash Flow is sometimes confused with owner earnings; however, free cash flow does not include dividends or investment in working capital or fixed assets while owner earnings do.
Gross Margin
Gross profit divided by total revenues. This is the profit a business makes from selling goods or services before operating expenses are deducted. Businesses that have high revenue may still report a loss if they have very high operating expenses.
Inventory Turnover
The number of times a company turns over its inventory in a year, or equivalently, how quickly it sells its current inventory (or how many times and within what time period its inventory changes). A higher turnover implies lower stock levels and is considered better for businesses as it means less tying up capital in raw materials, finished products, and other inventories. An increase in inventory turnover can be achieved by reducing excess stocks or increasing sales volume. A decrease can be brought about by slower sales and lower stock levels.
