When a 2012 study in Florida revealed that over 50% of small business owners don’t read their own financial reports – with 86% of that 50% struggling with those same financials – the question must be asked whether it’s less a matter of not caring and more about comprehension.
Which brings us to our personal solution: a three-part, easy-reference guide to commonly used financial terms to help bridge that gap between accountants and small business owners. See a foreign word on your financial statement? Here’s what it means…
Accounts receivable is the amount of money a business is owed from customers through invoices or other claims. Essentially, the total money they can expect to receive from services provided.
Accounts payable, also known as trade payable, is like accounts receivable, but the total money owed to other businesses – usually varying with the invoice and due within 15-45 days.
Accrued expenses vary from accounts payable in that it’s money owed that isn’t paid yet, whether because they haven’t been invoiced or it’s not due. Accrued expenses can include things like loan interest, taxes, or employee paychecks that aren’t yet due.
An asset can be anything owned by the business that is worth something and is easily converted into cash (if not already in this form).
A balance sheet offers a general overview of a business’s financial position as of a particular date, taking into account company assets owned, monies payable, and any amounts paid in or withdrawn from the officers/owners of the business.
Cash or Cash Equivalents
Cash or cash equivalents reflect either the actual amount of cash on hand and in the bank, or any assets that could be easily sold off and converted into cash.
Cash flow is the number used to represent how much money is going in and out of the business. If a business brings in more than it spends, it’s known as “cash flow positive”, while if it spends more than it brought in from sales and financing, it’s referred to as “cash flow negative”.
Cost of Goods Sold
Otherwise known as “cost of revenue”, cost of goods sold is the total amount spent producing what the business sells – including cost of machinery, software, and labor.
In part two, we will be explaining terms like the gross profit margin, liabilities, and notes payable and receivable. Stay tuned and don’t forget to subscribe for all the latest tax tips, updates, and small business advice. To receive our monthly newsletter, sign-up at http://bit.ly/1VFopHS.