Learning basic business terms is pivotal to improving your business acumen. Fortunately, you don’t need an MBA to master key business concepts. This primer will walk you through the basic business terms in easy-to-understand ways.
Basic Business Terms To Know
Here are some of the basic business terms you should know. If some of these seem too easy for you, let us know in the comments what you’d like to learn more about.
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Accounting
This concept should be in every entrepreneur’s arsenal of basic business terms. Accounting involves the methodical recording and reporting of business financial transactions. As you know, this can be complicated and you may want to hire a professional to handle this.
Accounts Receivable
This is the amount of money your customers or clients owe your business for goods or services you supply. The total value of your outstanding invoices can give you a snapshot of the amount owed to your business at any given time.
Accounts Payable
Accounts payable is a measure of how much you owe your creditors for goods or services supplied to you.
Assets
“Assets” refers to your business’ cumulative financial holdings. These are usually classified as current or fixed. Current, or short-term, assets include cash or inventory. Fixed, or long-term assets, include equipment or land.
Liabilities
Liabilities are debts your business owes another person or entity. Like assets, liabilities are defined as current or long-term. Current, or short-term, liabilities might include an expense payable to a supplier. On the other hand, many business loans are long-term debts.
Revenue
Revenue refers to the income you get from a business activity in a given time period. You can calculate revenue by multiplying the per-unit cost of goods or services by the quantity of units sold.
Expenses
Does your business incur expenditures for equipment, utilities or inventory? These are all examples of expenses—money you spend to operate your business. For the self-employed, legitimate business expenses are tax-deductible.
Owner’s Equity
Usually represented as a percentage, Owner’s Equity refers to the owner’s part of business assets.
Balance Sheet
This key financial document provides a snapshot in time of business assets, liabilities and owner’s equity.
Net Profit
Also known as your “bottom line,” net profit represents total revenues less total expenses. This figure is especially important at tax time. This is because self-employment taxes are imposed as a percentage of net profit.
Net Loss
If your total expenses exceed your total revenues, you have a net loss. The risk of a net loss is one of many strong reasons to keep company costs under control.
Profit Margin
While it sounds complex, this basic business term simply measures how much profit you keep relative to total sales. There are three types of profit margins: gross, operating and net. All three are calculated by dividing the profit (revenue minus costs) by the revenue.
Cash Flow
Cash flow is the movement of money in and out of your business. You want there to be a higher flow of income into the business than there is an outflow of expenses from the business. This scenario is called a positive cash flow.
Return on Investment
Your Return on Investment, or ROI, shows how much you gained or lost on a business investment relative to how much you spent on it. Calculate ROI by dividing net profit by the cost of the investment.
B2B/B2C
Is the purpose of your business to supply goods or services to other business? If so, you operate a B2B, or business-to-business, venture. On the flip side of B2B businesses are B2C businesses. These businesses supply goods or services directly to an end user or consumer.
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Manasa Reddigari
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.
