When starting a business, your initial focus might be on brand activation, networking, marketing, and inventory upkeep. However, a pivotal element for all businesses alike is navigating financial reports. Is your new small business learning how to tackle financials? We can help you get started. In the content below, we define general financial terminology, key terms found on balance sheets, and components of income statements.
38 Terms to Know When Navigating Small Business Financial Reports
1. Accounting Period: The span of time covered in reported statements. Examples include a week, month, quarter, or year.
2. Allocation: The procedure of assigning funds to various accounts or periods such as multiple months or several departments.
3. Business (or Legal) Entity: The legal structure and type of a business. Common formations include Sole Proprietor, Partnership, Limited Liability Corp (LLC), S-Corp and C-Corp. Each entity abides by unique requirements, laws, and tax implications.
4. Cash Flow (CF): The influx and outflow of cash. Positive numbers indicate more cash flowed into the business than out, whereas a negative number reveals the contrary. To calculate net cash flow, follow the equation: Net Cash Flow = Beginning Cash Balance – Ending Cash Balance.
5. Credit: The increase in a liability or equity account, or a decrease in an asset or expense account.
6. Debit: The increase of an asset or expense account, or a decrease in a liability or equity account (the inverse of a credit).
7. Diversification: A method of risk reduction that allocates capital across multiple assets so the negative performance of a single asset doesn’t jeopardize the total.
8. Fixed Cost (FC): A concrete cost that does not change with the volume of sales such as rent and salaries. Any fluctuating costs are considered Variable Costs.
9. General Ledger (GL): The complete record of a company’s financial transactions used to prepare all financial statements.
10. Generally Accepted Accounting Principles (GAAP): General rules that all accountants abide by, making it is easier to compare the same metrics when analyzing financial reports.
11. Interest: The amount paid on loans or other lines of credit that exceeds the repayment of the principal balance.
12. Journal Entry (JE): The process in which updates and changes are made to a company’s books. Every entry must include a unique identifier (the reason to record the entry), a date, a debit/credit, an amount, and an account code (determining which account is altered).
13. Liquidity: The time in which an asset can be converted into cash. A quicker time frame results in a higher liquidity. For example, stocks have a higher liquidity than a house since stocks can turn into cash sooner than real estate.
14. Material: Influential information that impacts decisions. For example, if a company has revenue in the millions of dollars, an amount of $1.00 is hardly material. However, GAAP requires disclosure on all material considerations.
15. On Credit/On Account: An immediate purchase that happens On Credit or On Account in which the balance will be paid at a future time, allowing the buyer to enjoy the benefit of that purchase immediately. Consider this like a tab at a restaurant or bar.
16. Overhead: Expenses that relate to running the business, including rent and executive salaries. Overhead costs exclude expenses that make the product or deliver the service.
17. Payroll: The account showing payments made to employee salaries, wages, bonuses, and deductions. Payroll can also appear on the balance sheet as a liability the company owes for accrued vacation pay or any outstanding, unpaid wages.
18. Present Value (PV): The value of an asset in today’s market, as opposed to a different point in time.
19. Receipts: Documents proving both a transaction and payment occurred. A business produces receipts when providing products or services and receives receipts upon paying for goods and services from other businesses. All received receipts should be saved and catalogued to verify accuracy on all incurred expenses.
20. Return on Investment (ROI): The total profit a company makes on an investment, project, or objective. For example, if a company spent $5,000 on marketing, which produced $10,000 in profit, the company’s ROI on marketing spend is 50%. To calculate an ROI, follow the formula: ROI = Profit / Investment.
21. Trial Balance (TB): The listing of all accounts in the General Ledger with their balance amount (either debit or credit). The total debits must equal the total credits to reflect the balance.
22. Variable Cost (VC): Costs that fluctuate with the volume of sales in coalition with supply and demand. Variable costs are opposite of Fixed Costs.
Balance Sheet Terms
1. Accounts Payable (AP): Outlines every incurred business expense that has yet to be paid, otherwise considered an outstanding debt. This account is recorded as a liability on the Balance Sheet.
2. Accounts Receivable (AR): Lists every unpaid sales invoices, in other words, money that is owed to a company. This is recorded on the balance sheet until the sales invoice is paid off.
3. Accrued Expense: An expense that been incurred. Examples include wages, utilities, office supplies, and marketing.
4. Asset (A): Anything with monetary value that the company owns. These are typically listed by liquidity, from cash (the most liquid) to land (least liquid).
5. Balance Sheet (BS): A financial report summarizing a company’s assets, liabilities, and equity. Balance sheets utilize the equation: Assets = Liabilities + Equity.
6. Book Value (BV): Highlights the current market value of an asset considering original value less accumulated depreciation. Book value utilizes the equation: Book Value = Original Value – Depreciation.
7. Equity (E): Indicates the remaining value of an asset upon removing liabilities. Equity refers to the portion of the company that is owned by the investors and owners. To calculate equity, follow the equation: Equity = Assets – Liabilities
8. Liability (L): The company’s remaining debt balance. Common liabilities include: accounts payable, payroll, and loans.
Profit & Loss Statement / Income Statement Terms
1. Cost of Goods Sold (COGS): Expenses directly related to the manufacturing or work behind a product or service. Examples include cost of materials or direct labor. However, this category excludes business operational costs.
2. Depreciation (Dep): An asset’s loss of value over time. Depreciation appears on the Income Statement as an expense categorized as a “Non-Cash Expense,” since it indirectly impacts a company’s cash position. Examples include automobiles and equipment.
3. Gross Margin (GM): The profitability of a company after deducting the Cost of Goods Sold. To find this percentage, utilize the equation: Gross Margin = Gross Profit / Revenue
4. Gross Profit (GP): The profitability of a company in dollars, without factoring overhead expenses. To calculate the GP, follow the equation: Gross Profit = COGS – Revenue.
5. Income Statement (Profit and Loss) (IS or P&L): The financial statement outlining revenues, expenses, and profits over a set period (monthly, quarterly, annually, etc.). Revenue earned is shown at the top of the report and various costs (expenses) are subtracted from it until all costs are accounted for. The bottom of the report reveals the company’s Net Income.
6. Net Income (NI): The dollar amount earned in profits. To calculate the net income over a given period, follow the equation: Net Income = Revenue – All Expenses (COGS, Overhead, Depreciation, and Taxes).
7. Net Margin: The percentage demonstrating the profit of a company in correlation with revenue. To find the net margin, follow the equation: Net Margin = Net Income / Revenue
8. Revenue (Sales) (Rev): Any money earned by the business from a sale.
Navigate Small Business Financial Reports with Ease at Eco-Tax
Bookkeeping is essential for proper financial management, legal protection, and personal success. If you feel overwhelmed with your small business financials, don’t stress! We at Eco-Tax are ready and here to support you through it all.
To offer the best client satisfaction, our experts at Eco-Tax remain:
- Economical: We offer affordable, transparent pricing. Gain access to key services, industry experts & the technology you need to keep your business thriving.
- Experienced: Our CPAs, EAs, bookkeeping, payroll, and financial specialists have the education, training, and experience to help your business grow.
- Eco-Friendly: Working virtually allows us to go paperless. All documents can be quickly shared through our secure portal, and you can meet your accountant online anytime.
If you’d like to talk with our team about your small business bookkeeping needs, do not hesitate to contact us today and book a free consultation with one of our trusted advisors.
We look forward to having a personalized discussion and creating a plan of action to give you the peace of mind that comes from knowing you have a partner in your financials.