A startup or an established organization, all business owners must be familiar with the financial terminologies commonly used in the market. Employing a financial advisor or utilizing accounting software benefits your company. However, it remains crucial for you to possess a fundamental comprehension of your business’s financial dynamics.
Avoid confusion when encountering unfamiliar terms in an investor meeting. Knowing essential financial terms empowers you to manage your business finances with confidence. This guide equips you with knowledge of 25 essential financial terms essential for entrepreneurs and small business owners.
Avoid confusion when encountering unfamiliar terms in an investor meeting. Knowing essential financial terms empowers you to manage your business finances with confidence. This guide equips you with knowledge of 25 essential financial terms essential for entrepreneurs and small business owners.
Table of Contents
25 Common Financial Terms to Know in 2024
25 Common Financial Terms to Know in 2024
Here are 25 commonly used financial terms with the simplest definitions for your understanding.
Accounts payable refers to the funds that your business owes to external entities for goods or services received. This situation arises when your business has obtained a product or service, typically through credit, but has not yet settled the payment.
On balance sheets, your business represents Accounts payable as short-term debts or liabilities.
Accounts receivable refers to the funds owed to your business by clients or customers for products or services rendered but not yet compensated. This indicates that a sale has been conducted, yet payment is pending.
Your business commonly issues invoices to customers detailing the amount owed. On balance sheets, Accounts receivable is recorded as an asset.
Accounts receivable refers to the funds owed to your business by clients or customers for products or services rendered but not yet compensated. This indicates that a sale has been conducted, yet payment is pending.
Your business commonly issues invoices to customers detailing the amount owed. On balance sheets, Accounts receivable is recorded as an asset.
Your business commonly issues invoices to customers detailing the amount owed. On balance sheets, Accounts receivable is recorded as an asset.
Adjusted Gross Income (AGI) is the overall income derived from wages or investments, subtracting income adjustments approved by the IRS.
These adjustments encompass items such as interest on student loans, contributions to retirement accounts, or work-related expenses. The IRS utilizes your AGI to ascertain your taxable income and assess eligibility for specific Tax Deductions or credits.
Amortization
Amortization is the systematic repayment of debt through regular installments over a designated period. Lenders or other entities compute amortization by considering the total loan amount and the mutually agreed-upon interest rate.
Usually remitted on a monthly basis, these payments encompass both the incurred interest costs and the reduction of the loan balance.
Amortization
Amortization is the systematic repayment of debt through regular installments over a designated period. Lenders or other entities compute amortization by considering the total loan amount and the mutually agreed-upon interest rate.
Usually remitted on a monthly basis, these payments encompass both the incurred interest costs and the reduction of the loan balance.
Usually remitted on a monthly basis, these payments encompass both the incurred interest costs and the reduction of the loan balance.
Asset
An asset is an economically valuable item owned by you or your business and is reflected on the balance sheets of your business. Current assets, also known as liquid assets, are assets that can be readily and swiftly converted into cash, typically within a year. Examples encompass balances in checking or savings accounts, inventory, and short-term investments.
In contrast, non-current assets are fixed assets. These take a longer time to be liquidated and include items such as property, machinery, and equipment.
Assets can be tangible, representing material items like cash or equipment, or intangible, signifying non-physical entities that still hold value. These include trademarks, patents, copyrights, and franchise agreements.
In contrast, non-current assets are fixed assets. These take a longer time to be liquidated and include items such as property, machinery, and equipment.
Assets can be tangible, representing material items like cash or equipment, or intangible, signifying non-physical entities that still hold value. These include trademarks, patents, copyrights, and franchise agreements.
Asset allocation
Asset allocation is the strategic determination by your organization regarding the assets in which you intend to invest. The primary asset classes are cash, stocks, and bonds. In making these investment decisions, your company commonly assesses the potential risks and returns associated with each class.
Periodically, your business may engage in asset rebalancing, adjusting its asset allocation to align with business needs or enhance profitability.
A balance sheet is one of the fundamental financial documents produced by your business. It illustrates your organization’s financial standing at a specific moment. Furthermore, it showcases the company’s assets, liabilities, and shareholders’ equity.
This financial statement presents assets on one side and liabilities along with shareholders’ equity on the other, ensuring that the sums on both sides are equivalent.
This financial statement presents assets on one side and liabilities along with shareholders’ equity on the other, ensuring that the sums on both sides are equivalent.
A balance sheet is one of the fundamental financial documents produced by your business. It illustrates your organization’s financial standing at a specific moment. Furthermore, it showcases the company’s assets, liabilities, and shareholders’ equity.
This financial statement presents assets on one side and liabilities along with shareholders’ equity on the other, ensuring that the sums on both sides are equivalent.
This financial statement presents assets on one side and liabilities along with shareholders’ equity on the other, ensuring that the sums on both sides are equivalent.
Bonds
Bonds are financial instruments representing investments in debt and belong to the category of fixed-income securities.
When you purchase a bond, you essentially lending money to an entity, frequently a corporation or government, for a specified duration. In return, the entity repays you at regular intervals, typically with interest.
Budget
A budget is a financial blueprint crafted by your business to outline the anticipated expenditures over a specific period. During the budgeting process, you (as an individual or a company) typically take into account factors like income, assets, and liabilities.
The purpose of a budget is to enable you to assess the balance between earnings and expenditures, facilitating informed financial decisions and future planning.
Budget
A budget is a financial blueprint crafted by your business to outline the anticipated expenditures over a specific period. During the budgeting process, you (as an individual or a company) typically take into account factors like income, assets, and liabilities.
The purpose of a budget is to enable you to assess the balance between earnings and expenditures, facilitating informed financial decisions and future planning.
The purpose of a budget is to enable you to assess the balance between earnings and expenditures, facilitating informed financial decisions and future planning.
Capital gains
Capital gains refer to the appreciation in the value of an asset or investment beyond its original purchase price. It signifies the disparity between the current worth of something and its value at the time of acquisition.
A realized capital gain happens when you sell the asset or investment at a profit. Conversely, a capital loss occurs if the asset or investment decreases in value compared to its purchase price.
Cashflow statement
A cash flow statement constitutes a fundamental financial document for your business. It portrays the inflow and outflow of money within a specific timeframe.
This statement evaluates solvency, indicating your organization’s capacity to settle its bills and expenses. Your business is deemed cash-flow positive when the inflow of money surpasses its outflow.
Cashflow statement
A cash flow statement constitutes a fundamental financial document for your business. It portrays the inflow and outflow of money within a specific timeframe.
This statement evaluates solvency, indicating your organization’s capacity to settle its bills and expenses. Your business is deemed cash-flow positive when the inflow of money surpasses its outflow.
This statement evaluates solvency, indicating your organization’s capacity to settle its bills and expenses. Your business is deemed cash-flow positive when the inflow of money surpasses its outflow.
Compound interest
Compound interest denotes the interest accrued on a loan or deposit, computed on the initial amount plus the accumulated interest over time.
Banks and lenders calculate simple interest as a percentage of the initial or principal amount. However, compound interest is calculated annually as a percentage of the new loan or deposit amount. This leads to a faster growth rate for a debt or deposit with compound interest compared to simple interest.
Credit
Credit is a formal agreement where a lender provides money to a borrower with the understanding that the borrower will repay it at a later date. Trustworthiness can be demonstrated by consistently repaying credit in full and on time. Credit cards serve as a prevalent example of purchasing on credit.
Credit
Credit is a formal agreement where a lender provides money to a borrower with the understanding that the borrower will repay it at a later date. Trustworthiness can be demonstrated by consistently repaying credit in full and on time. Credit cards serve as a prevalent example of purchasing on credit.
Expenses
Expenses constitute the expenditures associated with running your business. It is directly tied to revenue generation. Common examples of expenses include rent, utilities, employee wages, and marketing costs.
Your business monitors expenses for profit and loss statements. Furthermore, certain expenses may be eligible for write-offs on income tax returns, provided they adhere to IRS regulations.
Fico Score
A FICO score, or credit score, is a numerical representation comprising three digits that assess your reliability in repaying loans or debts.
Financial entities, including banks and lenders, determine your credit scores by evaluating factors like payment history, length of credit history, and outstanding debts. A higher score enhances the likelihood of you obtaining favorable terms on loans or credit cards.
Fico Score
A FICO score, or credit score, is a numerical representation comprising three digits that assess your reliability in repaying loans or debts.
Financial entities, including banks and lenders, determine your credit scores by evaluating factors like payment history, length of credit history, and outstanding debts. A higher score enhances the likelihood of you obtaining favorable terms on loans or credit cards.
Financial entities, including banks and lenders, determine your credit scores by evaluating factors like payment history, length of credit history, and outstanding debts. A higher score enhances the likelihood of you obtaining favorable terms on loans or credit cards.
Income
Income refers to the funds you earn from the sale of goods and services or through investments. For instance, as a salesperson, you generate income by selling products to customers.
Revenue represents your overall income received from regular work activities. On the other hand, net income or net profit is the amount remaining after deducting expenses or costs from your total income.
Income Statement
An income statement is alternatively referred to as a profit and loss statement. It stands as another essential financial document for your business. This statement outlines your company’s revenues, losses, or expenses during a specific period, typically on a monthly basis.
Serving as a crucial tool, the income statement aids in assessing your company’s revenue-generating capability and its potential for growth.
Income Statement
An income statement is alternatively referred to as a profit and loss statement. It stands as another essential financial document for your business. This statement outlines your company’s revenues, losses, or expenses during a specific period, typically on a monthly basis.
Serving as a crucial tool, the income statement aids in assessing your company’s revenue-generating capability and its potential for growth.
Serving as a crucial tool, the income statement aids in assessing your company’s revenue-generating capability and its potential for growth.
Interest
Interest represents the extra amount you are obligated to repay when you borrow money. Entities lending money typically impose interest, calculated as a percentage of the loan.
For instance, if you obtain a $30,000 car loan, a lender might stipulate an additional 5% of the loan, resulting in $1,500 in interest. Interest rates are subject to variation, influenced by factors like your credit score and the repayment duration.
Similarly, you have the opportunity to earn interest when investing or saving money.
Investment
An investment involves allocating money with the anticipation of obtaining a profit or tangible benefit in return. Unlike purchasing goods for personal use, you make investments to enhance value or generate additional funds.
A common avenue for investment is the stock market, where people aim to increase their wealth. Additionally, you may invest in real estate properties or other assets that appreciate in value over time.
Investment
An investment involves allocating money with the anticipation of obtaining a profit or tangible benefit in return. Unlike purchasing goods for personal use, you make investments to enhance value or generate additional funds.
A common avenue for investment is the stock market, where people aim to increase their wealth. Additionally, you may invest in real estate properties or other assets that appreciate in value over time.
A common avenue for investment is the stock market, where people aim to increase their wealth. Additionally, you may invest in real estate properties or other assets that appreciate in value over time.
Liability
A liability refers to a debt or monetary obligation that one person or company owes to another. Instances of liabilities encompass bank loans, accounts payable, and credit card debts.
Current liabilities are obligations due within a year, whereas non-current liabilities, such as mortgages and leases, are more prolonged. Similar to assets, liabilities are reflected on the balance sheets of your business.
Loan
A loan refers to a financial arrangement wherein one entity lends a specified amount of money or an item to another entity. The borrower is obligated to repay the borrowed sum to the lender within a predetermined timeframe and may be subject to interest charges.
When seeking a loan, you have to furnish a lending institution with a rationale for the funds along with pertinent financial details, including your credit score and employment verification.
In certain cases, lenders may demand collateral, establishing an agreement that allows the lender to seize property in the event of non-repayment, commonly referred to as default.
Loan
A loan refers to a financial arrangement wherein one entity lends a specified amount of money or an item to another entity. The borrower is obligated to repay the borrowed sum to the lender within a predetermined timeframe and may be subject to interest charges.
When seeking a loan, you have to furnish a lending institution with a rationale for the funds along with pertinent financial details, including your credit score and employment verification.
In certain cases, lenders may demand collateral, establishing an agreement that allows the lender to seize property in the event of non-repayment, commonly referred to as default.
When seeking a loan, you have to furnish a lending institution with a rationale for the funds along with pertinent financial details, including your credit score and employment verification.
In certain cases, lenders may demand collateral, establishing an agreement that allows the lender to seize property in the event of non-repayment, commonly referred to as default.
Mortgage
A mortgage is a financial loan employed for the acquisition of property. As a mortgage borrower, you make regular payments, including interest, to banks or financial lenders over a designated period to repay your mortgages.
The property itself serves as collateral, providing the lender with the right to seize it if you fail to meet your payment obligations.
Net worth
Net worth is the aggregate value of your personal or business possessions minus the total amount of debts owed. Consequently, it signifies the disparity between your assets and liabilities.
You can ascertain your net worth by summing up the value of all your assets and deducting your debts from that total.
Net worth
Net worth is the aggregate value of your personal or business possessions minus the total amount of debts owed. Consequently, it signifies the disparity between your assets and liabilities.
You can ascertain your net worth by summing up the value of all your assets and deducting your debts from that total.
You can ascertain your net worth by summing up the value of all your assets and deducting your debts from that total.
Stocks
Stocks, alternatively known as equities, represent ownership shares in a company. Companies issue stocks to generate funds for product development, debt payments, and business expansion. You as a person or a business can purchase a company’s stock are essentially investing in that particular business.
As the value of stocks appreciates over time, you (as an investor) may sell them later to realize a profit. Additionally, you can benefit from stocks that pay dividends, which are portions of the company’s earnings distributed to shareholders.
Taxes are levies imposed on you or your business by governments to finance public spending and various programs. The revenue generated from taxes is utilized for purposes such as national defense, funding police and firefighting forces, community development, and addressing the national debt.
Taxes rates may fluctuate based on geographic location and the annual income of individuals or organizations.
Taxes are levies imposed on you or your business by governments to finance public spending and various programs. The revenue generated from taxes is utilized for purposes such as national defense, funding police and firefighting forces, community development, and addressing the national debt.
Taxes rates may fluctuate based on geographic location and the annual income of individuals or organizations.
Taxes rates may fluctuate based on geographic location and the annual income of individuals or organizations.
Frequently Asked Questions
Finance is the discipline that encompasses the administration of money and involves various activities, including investing, borrowing, lending, budgeting, saving, and forecasting.
The fundamental financial terms comprise revenue, costs, profits and losses, the average rate of return, and break-even.
Familiarity with finance terms is crucial as it enables individuals to comprehend and oversee their personal financial well-being or the financial condition of a business. This understanding becomes particularly valuable when engaging with industry professionals like investors and accountants.
Grasping personal finance is essential for making prudent financial decisions and establishing a stable future. Essentially, personal finance revolves around the effective management of income, expenses, savings, and investments.
Financial literacy empowers individuals and businesses to make informed borrowing decisions, establish a favorable credit history, and steer clear of falling into debt traps.
Conclusion
Acquiring knowledge of these financial terms and maintaining a vigilant eye on your business operations enhance its likelihood of success. It enables you to fulfill your initial goal of growing your business and witnessing its prosperity.
As an entrepreneur or small business owner, your decision to run your own company probably driven by the more than the joy of creating and analyzing financial statements. Fortunately, our certified publish accountant provides assistance in the efficient management of your books.
Schedule a Free Consultation Today!
As an entrepreneur or small business owner, your decision to run your own company probably driven by the more than the joy of creating and analyzing financial statements. Fortunately, our certified publish accountant provides assistance in the efficient management of your books.
Schedule a Free Consultation Today!
