Key Accounting Terms All Small Business Owners Need to Know By Rae Steinbach
Anyone who owns a small business has many responsibilities.
They simply don’t have a large staff to handle all key tasks.
For example, many small business owners need to manage their own accounting (at least to some degree).
That means they need to know certain essential accounting terms.
The following are key examples.
Just keep in mind that, while this blog will help you better understand which specific accounting terms you should be familiar with, it’s also a good idea to have a financial terms glossary you can turn to whenever you’re not sure what a certain relevant finance-related word or phrase means.
One of the simplest but most effective ways to ensure a small business continues to thrive is pursuing payment from clients/customers who have yet to pay invoices. “Accounts receivable” refers to the money these customers owe.
Giving this money its own classification is important for small business owners. I
t establishes that the funds are a type of asset, but certainly not a liquid asset, because the business owner doesn’t currently have them.
Making that distinction helps a small business owner budget reasonably and accurately.
“Accruals” is similar to accounts receivable, in that the term refers to money that hasn’t actually been transferred from one party to the other yet.
However, whereas accounts receivable only refers to money a client has been billed for but hasn’t yet paid, accruals can also include expenses that the business owner hasn’t paid.
For example, if a business owner hired a contractor for a project that was completed, but had yet to pay that contractor, the money they owe would be an accrual.
Business owners use the term “assets” so often that it’s easy to forget what it actually means.
Essentially, your assets are anything your business owns. This naturally includes the cash in your accounts. However, it can also include equipment, property/land, and tools.
Businesses may also have assets that don’t actually exist physically. These may be stock, patents, copyrights, etc.
Succeeding as a small business owner requires planning for the future.
“Forecasting” specifically refers to planning for a business’ financial future.
Smart entrepreneurs set aside time throughout the year to study their financial histories, using that information to make predictions about everything from potential future revenue to potential future expenses.
It may be a basic term, but “revenue” is worth including on this list simply because many aspiring business owners mistakenly believe it’s synonymous with “profit.”
That’s not technically the case.
Revenue is the total amount of income, providing a service or product generates.
However, it doesn’t include expenses involved in offering that product or service.
For example, perhaps you sell a product for $10. That would be your revenue.
That said, if you first bought the product for $2, your profit is $8.
Remember, this is merely a shortlist of accounting terms small business owners should be familiar with.
There are many others worth learning about.
Although managing finances isn’t necessarily the most fun part of owning a small business, it is one of the most essential.
About Rae Steinbach
Rae is a graduate of Tufts University with a combined International Relations and Chinese degree. After spending time living and working abroad in China, she returned to NYC to pursue her career and continue curating quality content. Rae is passionate about travel, food, and writing for Funding Circle.
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