1. Revenue
Definition: Total income earned from the sale of goods or services before expenses.
Why It Matters: Revenue is the starting point of the financial picture, showing how much money is generated.
Example: Money earned from selling products online.
2. Expenses
Definition: Costs incurred to run the business, such as rent, utilities, and supplies.
Why It Matters: Tracking expenses helps in understanding where your money goes and where to cut costs.
Example: Office supplies, salaries, and marketing expenses.
3. Profit (Net Income)
Definition: The amount remaining after all expenses are subtracted from revenue.
Why It Matters: Profit indicates the health of your business. Positive profit means you’re making money!
Formula: Profit = Revenue - Expenses
Example: If revenue is $10,000 and expenses are $7,000, then profit is $3,000.
4. Assets
Definition: Resources owned by the business that have economic value, such as cash, equipment, and property.
Why It Matters: Assets represent the business's resources that can be used for future growth.
Example: Cash in the bank, office computers, and inventory.
5. Liabilities
Definition: Financial obligations or debts the business owes to others, such as loans and payables.
Why It Matters: Liabilities are essential to track as they represent what the business owes and can affect cash flow.
Example: Bank loans, credit card balances, and unpaid supplier invoices.
6. Equity
Definition: The owner’s claim on the assets after all liabilities have been deducted.
Why It Matters: Equity reflects the value that the business owner truly owns.
Formula: Equity = Assets - Liabilities
Example: If assets are $50,000 and liabilities are $20,000, equity is $30,000.
7. Cash Flow
Definition: The net amount of cash moving in and out of the business.
Why It Matters: Positive cash flow ensures the business can meet expenses and invest in growth.
Example: Monthly cash inflow from sales minus cash outflow for expenses.
8. Accounts Receivable (AR)
Definition: Money owed to the business by customers for products or services delivered.
Why It Matters: AR tracks what’s owed to the business, impacting cash flow management.
Example: A client who has been invoiced but hasn’t yet paid.
9. Accounts Payable (AP)
Definition: Money the business owes to suppliers or creditors for products or services received.
Why It Matters: Managing AP ensures the business maintains good relationships with vendors and avoids late fees.
Example: An invoice received from a supplier that is not yet paid.
10. Gross Margin
Definition: A measure of profitability, showing the percentage of revenue remaining after deducting the cost of goods sold (COGS).
Why It Matters: Gross margin highlights profitability on products/services before overhead costs.
Formula: Gross Margin = (Revenue - COGS) / Revenue
Example: If revenue is $10,000 and COGS is $4,000, the gross margin is 60%.
Understanding these terms helps you make better financial decisions.
Use these terms in conversation with your accountant to get the most out of your financial reports.