17 BASIC BUSINESS TERMS AND DEFINITIONS EVERY BUSINESS OWNERS SHOULD KNOW
Sometimes, finding the right personal financial terms to describe a concept can seem like a struggle. To avoid this and to ensure that you understand your finances, here some key terms that you should know:
- Dividend
Remember shareholder equity! It’s time to pay them for banking with you. A dividend is a payment you make to your shareholders, especially as the distribution of profits.
You can either distribute all the profits earned from your business among the shareholders or retain some of it to re-invest in that business – retained earnings.
- Business portfolio
As a business owner, your business portfolio is a collection of the product and services your business provides. It is often a reflection of your mission, vision, and management plan for that business.
- Leverage
Leverage is an essential tool for business startups. By definition, leverage means the degree at which businesses can acquire new assets for startup or expansion.
A leveraged business would mean a business that has borrowed money from a lender to boost its assets. More importantly, leveraging allows you to retain full ownership of your business. Besides, it offers tax breaks, and it is less formal.
However, huge dependence on leverage as a business owner will expose your business to financial risks. It is better to keep it to a minimal level.
- Cash flow and cash flow projections
Cash flow is a business term that describes the amount of working capital that flows through a business – and affects its liquidity. Primarily, cash flow reports the flow of capital for a particular period, which is usually a month or one accounting period.
On the other hand, cash flow projections translate to analyzing various cash flow patterns. An accurate cash flow projection helps your business to plan for future expenses and working capital.
- Exchange-Traded Fund (ETF)
ETF is simply an investment fund that holds assets such as stocks, bonds, or foreign currencies. It operates similarly to shareholder equity.
The difference between the two is that investors in ETF do not directly own the investments in your business. They (investors) rather have an indirect claim that positions them to earn from the profits earned from your business.
- Business bonds
Business bonds refer to the agreement a business owner honors to protect their businesses. More so, they (business bonds) are crucial for businesses to survive across various industries as state laws require them.
More importantly, business bonds are great marketing tools. Your customers will trust your business more when you have proof that such business is bonded. It is a form of security for them against theft.
- Gross and net incomes
Gross income is the overall income you earn from your business before taxes and other due payments. Also, gross income is what your business earns from the sales of goods and services before expenses have been deducted.
On the other hand, net income is the profit your business earns after you subtracted taxes and other business expenses from your gross income. In other words, net income is the final amount of profit or loss you realize from your business after including all the due expenses.
- Principal
Principal is usually one of the three components of a loan. In essence, it refers to the actual amount that was borrowed by business owners from lenders.
- Equity
Equity is the difference between a business’ worth and the debts owed on such business. Simply put, equity is what is left when you remove your liabilities from the assets you’ve got.
In other words, your equity (owner’s equity) is what is yours in your business. Equity can be owned in others’ businesses, too – shareholder equity
- Fixed and working capitals
Capital, in general means the overall wealth of your business – the investments, cash accounts, and assets. Fixed capital, in particular, refers to the long-term worth of a business. It might be the equipment you use or investing in an employee through professional training.
Working capital refers to the capital required for maintaining the daily operations of your business. In other words, it is the cash at hand or an asset that can be easily converted to cash to enable you manage your business smoothly.
- Bootstrapping
The chances are that you might not find an investor to fund you as a startup. So what do you do?
You use your own money to finance the startup process and the eventual growth of such business. That is called bootstrapping.
Simply put, bootstrapping refers to using your resources (such as personal savings, your garage space, and personal computer) to start and grow a business.
- Assets
Anything of value, either tangible (equipment) or intangible (professional training for employees) that is owned by your business, is your asset. In brief, assets are anything that can you can turn into cash.
It is quite similar to working capital, isn’t it? An asset is not a working capital until you use it to run a business.
- Account receivable (AR)
Account receivable refers to the money owed to your business by customers or other entities for goods and services rendered. AR represents their (debtors) due obligation to pay your business in cash for what it is owed.
- Liquidity
Liquidity refers to how quickly you can cash out on your assets. The more liquidity your business has, the more flexible it is to attain financial stability.
- Liabilities
Liabilities refer to the debts a business owes another person or an institution. Typical examples of liabilities are the loans you take to finance your business, as well as the wages and taxes you pay on such business.
- Account payable (AP)
Account payable refers to the due obligation a business has to pay its owed debts to lenders or investors.
- Secured and unsecured loans
Secured loans are loans that require a borrower to tender an asset in the form of collateral. Let’s say the borrower defaults on the agreed payment; such collateral can be claimed by the lender to offset what was owed or the unpaid balance.
Unlike secured loans, unsecured loans require no collateral. Mind you; unsecured loans have shorter repayment times with higher interest rates. A typical example is a credit card.
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