6 Financial terms every small business owner should know

When you’re starting your own small business, it’s important to understand the right terminology that comes along with the territory. This can help you evolve from a passionate entrepreneur to a savvy business person. You’ll run your company better and also be better prepared for working with lenders, investors, and other professional relationships.

1. Cash Flow

Understanding cash flow is hugely important to running a successful small business. This is the amount of money that moves in and out of your business. It’s a major indicator of the health of your company and helps to determine your liquidity. In short, your goal is to reach a positive cash flow, because it means that you’re making more money than you’re spending.

2. Assets

An asset refers to anything that adds value to your company, whether it’s actual cash, equipment, machinery, or real estate. To count as an asset, the piece of property must be owned by the company. These resources are included on your company’s balance sheet.

3. Liabilities

Conversely, your liabilities refer to any types of debt related to your business. It could be from a loan, a lease, rent, or even your company’s regular utility bills.

4. Working Capital

This term refers to how much money your business has to navigate day-to-day operations. You can determine your company’s working capital by subtracting your amount of liabilities from your assets. It gives you a short-term snapshot of the financial health of your company. In addition to looking at how positive your working capital is, you can also compare different time periods to see if the margin is growing or shrinking.

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5. Balance Sheet

This financial statement includes your assets, liabilities, and capital for the business. It’s meant to give a general overview of how well your business is performing because you can see what you own compared to what you may owe. If you have investors, their equity is also included on the balance sheet.

6. Capital Expenditures

All the information found on your balance sheet can help you make informed decisions about your capital expenditures. These are longer-term investments that are purchased and then meant to add value to your business for a year or more. Think equipment, technology, and real estate.

With a few basic definitions under your belt, you’ll take your business to the next level. This becomes even more relevant as you begin to grow your company since that generally means a more complicated structure. You’ll appreciate a new-found level of professionalism when you have the right vocabulary in your toolbelt.