The deck is stacked against the small business owner, with more than 20% of these businesses folding in the first year and 50% calling it quits within five.
So with that in mind, when launching a business, you need to have a certain level of financial and accounting acumen to get you through your formative years.
That means knowing the lingo that accompanies the dollars and cents of your business. In the following article, we’ll examine some essential accounting terms that will contribute to your small business’s success.
Accounts Receivable vs. Payable
Accounts receivable and payable start our list of terms because it’s the money in and money out for your business.
When you provide goods or services, you will detail your work, charges, and taxes in an invoice. When this is issued to the client, it is considered the account receivable or, in other words, the money owed to your business.
The payable is the opposite. This is an open invoice issued by your vendor. Accounts payable can also represent your business payroll.
Ideally, your accounts receivable should be less than your accounts receivable to make a profit.
However, don’t assume that the above statement is always the case. Just because you’re owed money on paper doesn’t mean that you have the money. This is a real warning sign. To track real profit, you need to show actual funds in the bank rather than money owed.
Small business accounting software is something to consider to keep track of real profit.
In contrast to profit, cash flow represents the money flowing between your accounts receivable and the accounts payable. Your business’s cash flow is the financial high-wire act that small-business owners are expected to walk.
Your business’s cash flow varies depending on the draws on your receivables and your payables’ expectations.
Assets are an item on your balance sheet that represents property your business owns. You can often borrow against these assets, which may include property. These assets could be tangible like a vehicle or heavy machinery, or they could be intangible, like patents.
However, be mindful that many assets depreciate over time, so you can’t count on them to hold their value when conducting your business accounting.
This refers to the document that holds your business’s big picture. The balance sheet is a summary of your financial health and includes the aforementioned assets and cash flow.
Expenses and Liabilities
These two terms are both debts you pay. However, expenses are short-term monies paid for day-to-day operations, while liabilities refer to financial or legal debts.
Liabilities are usually long-term and are usually predictable payments, while total expenses may vary widely from month-to-month.
Profit and Loss Statement
In some ways, your profit and loss statement is similar to a balance sheet, although it takes a longer view of your business’s long-term financial health. This document is vital for projecting a stable financial plan and recognizing how and when to make significant changes to your business’s operating structure.
Launching a Business? Consult an Expert
There are so many financial factors to consider when launching a business that many people never have the courage to take the plunge.
But you don’t have to go it alone. Organizations like the Small Business and Entrepreneurship Council, the U.S. Small Business Administration, even the IRS, offer free accounting help to guide fledgling business owners to financial success.
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