A LIST OF THE MOST IMPORTANT BUSINESS FINANCE TERMS EVERY BUSINESS OWNER SHOULD BE AWARE OF.
Whether you are an entrepreneur or a seasoned business owner, you know that things can get overwhelming at times, especially when you have to talk financing. In this article, we’ll go over a few finance terms that can help you in your conversation with any banking professional.
Asset
Consider an asset a resource a business owns. These resources can include inventory, cash, buildings, patents, etc. In business, assets assist in generating income. A business owner can think of assets as the foundation of their business.
Business Asset Categories
Typically, a business asset is classified into one of these three categories: tangible, intangible, and intellectual property. Businesses that are striving for success should offer a balanced combination of all three.
Tangible Assets
Tangible assets include everything that you can touch! For example, things like:
- Cash
- Vehicles
- Equipment
- Buildings
Intangible Assets
Intangible assets do not exist in physical form. For example, things like:
- Goodwill
- Brand Equity
- Customer Lists
An intangible asset can also be a strong representation of the clout of your business. For example, your business’s reputation and credibility in the industry.
Intellectual Property
Intellectual Property is a variation of an intangible asset. Must like an intangible asset, this particular asset does not typically take physical form.
- Trademarks
- Patents
- Logos
Capital
Capital is the total amount of resources available to your business and is equal to your equity and debt. When someone refers to “working capital,” they are referencing a business’s current assets minus current liabilities. Working capital is an essential part of a company’s financial and operational health. An efficient working capital allows a business to maintain smooth operations and can assist in building a company’s earnings and profitability.
Cash flow
Cash flow is the movement of money in and out of your business. Any business owner loves this word as long as the “cash flow” is positive. If you’re on the flip side and in the negative, just hearing the word cash flow can hurt.
Types Of Cash Flows In Business
Cash flow can be broken down into two categories, inflows and outflows.
Inflows
Anything income or revenue related will be considered an “inflow” of cash. Examples of inflows include:
- Tax Refunds
- Interest Earned
- Lease Revenue
Outflows
This is the amount of money a business has paid out within a certain amount of time. Typically, outflows consist of expenses and can include payments to:
- Suppliers
- Banks
Collateral
Collateral is any property a borrower pledges to a lender just in case of a default. For example, if the business owner fails to repay the loan at any point, the lender can take the property. Most of the time, especially for small business owners, collateral is required for significant bank loans and commercial mortgages. However, in a smaller term loan or line of credit, collateral may not be necessary.
Popular Types of Collateral
When applying for business financing, it’s important to remember that a borrower may be asked to put down some form of collateral to compensate for any unreturned borrowed money if the problem arises. These are the most common types of business collateral.
- Real Estate
- Cash Secured Loan
- Invoice Collateral
- Inventory Financing
- Blanket Liens
Equity
Consider equity as a business owner’s interest in a company. Equity is equal to your assets minus your liabilities. Investopedia does a great job explaining the components of equity and how it works in this article.
Expense
Expenses are the costs of running your business big or small. A lot of the time, a company tries to minimize costs while not skipping out on essentials. On an income statement, business expenses are subtracted from revenue to arrive at a company’s taxable net income. These types of expenses can include, but are not limited to:
- Advertising
- Education
- Equipment Rentals
- Interest Paid
- Office Supplies
Liabilities
A business’s liabilities are financial debts or obligations. There are two types of liabilities: current and long-term.
Current Liabilities
Current liabilities are due in the next year. Typical current liabilities include:
- Accounts Payable
- Wages
- Taxes
Example of Current Liability
For example, if you have a 20-year mortgage on an apartment building, next year’s payments owed will be listed in the current liabilities section.
Long-Term Liabilities
Long-term liabilities are not due until at least a year later. Typical long-term liabilities include:
- Long-term loans
- Capital leases
- Deferred compensation
Example Of Long-Term Liability
Let’s take that same 20-year mortgage on your apartment building. The remaining balance will be shown as a long-term liability.
Profit
Profit is the net income or the “bottom line.” These are revenues minus costs for a given period. Typically, business owners will use profits to help grow a company.
Revenue
Revenue, also known as gross income and sales, revenue is the money you earn from operations. For example, marketing or sales efforts help generate or increase revenues. You direct your marketing and sales activities to generate revenues.
Valuation
How much is your business worth? The worth of your business is your “valuation” and is most important when seeking funding from investors.
Popular Business Valuation Methods
- Asset-Based
- Market Value-Based
- Revenue Basis
- ROI
- Book Value
Business Education Is Important
If you are looking to communicate with any type of financial expert on a more professional level, educating yourself on finance terms is a great place to start. If your next step is to finance your business, be sure to check out how the loan origination process works and how it applies to your particular situation.