Money Matters: The Business Finance Terms Every Small Business Must Know

When it comes to even the thought of money, many business owners retreat. But it’s time to stop that. 

It’s not surprising though, because topics like money can be considered taboo in American society — it’s not something you talk about openly around the dinner table nor the company’s town hall. The topic of money is typically kept on the DL. 

Plus, there’s no formal class about money in the public school system. You don’t learn about how to make, manage, and invest your money while growing up. Wouldn’t it be nice if you understood how to manage your money and do your taxes early on? With the help of this little thing called the internet, we now have more resources than ever to continue to expand our financial knowledge.

Money Matters From Day One

In personal and professional finance, money matters from day 1. Whether you remember it or not, I’m sure money affected you or your family from the early days of childhood that you can remember and likely through your adult years and life up until today. You’re tackling this battle every day of the year — what groceries are you buying for meals this week? Should I go grab a coffee this morning? How am I going to pay rent this month? 

Oftentimes, money is associated with trauma more than it is happiness. So, it’s no wonder that money has become a scary subject that is very scarcely taught, talked about or shared. 

Money, though, is another part of the story. You shouldn’t let it define you, but you should allow it to guide you.

You don’t need money to start a business, nor be considered ‘successful’, but money is absolutely essential in fueling our society and it’s so incredibly crucial to understand it in order to use it effectively. 

Understanding Finances

As with personal and professional goals, it’s important to learn what and how to use your numbers to reach your goal and not scare you out of it. 

Only by acknowledging the importance of money can we begin to have honest conversations around it and understand exactly how we can use it to fuel progress towards your personal and professional milestones. 

Even the most talented or skilled entrepreneurs tend to struggle with one key business component: finances. Even if you don’t do your own bookkeeping, you need to be able to read your numbers and understand when you’re making money, how you’re making money, where your money is going, and what you are spending your money on. 

Managing your money and business finances can make or break your ambitions. Many people avoid tackling their finances because it’s scary, but with some basic knowledge of finance terms, you can more effectively manage your money and get even closer to reaching your goals and finding success. 

So, here we go, my first finance class — woohoo! I am not a financial planner or CPA, but I have transformed my business as well as my clients’ drastically by having the mere understanding of these terms and how they can affect your P&L (you’ll learn what this is soon!) and business success.

These are the most common terms used in business finances that are important to understanding how your business operates and is performing. These are also very important terms when it comes to filing your business taxes.

• Assets = Business assets are the items that your business owns such as buildings, cash on hand, furniture, equipment and even things like trademarks, copyrights, and patents.
  

• Liabilities = A liability is something that your business owes to another entity (typically another business or person) such as money, goods, or services promised. The most common liabilities include items in your accounts payable, wages and benefits that your employees are owed (payroll), as well as any investments that you are actively returning such as loans or mortgages.
  

• Working Capital = Working capital is your business’ ability to pay your current liabilities with your current assets. In order words, the amount of physical money/cash in the business that is workable. Working capital helps plan for future needs and ensures the company has enough cash or cash equivalents to meet short-term obligations.
  
  To calculate this, divide your current liabilities by your current assets. A ratio above 1 means you can cover your liabilities with your assets. The higher your ratio, the better financial standing of your business.
  

• Fixed Costs = Understanding your business spending and costs is essential to basic budgeting and cash flow management. Fixed Costs are predictable expenses that occur regularly on an ongoing basis that usually have a “fixed” or “flat” rate. For example: lease payments, insurance, and payroll.
  

• Variable Costs = Variable costs, on the other hand, are expenses and costs that vary from month-to-month based on your operations or activity. Majority of the time, the more business you do, the higher your variable costs. Some examples of variable costs include travel or transportation, contracted/hourly labor, and even raw materials that vary cost-wise with the market and timing of the buy. This is a very important cost to analyze and plan for when scaling a business.
  

• Accounts Payables = When an invoice is generated for your business (as in, you need to pay it) it falls under Accounts Payable. On the flip side, if you invoice a client, it’s then in their payables.
  

• Accounts Receivables = When your business provides a product or service to a customer who agrees to pay at a later date, the amount you are owed will fall under Accounts Receivable.
  

• Burn Rate = Burn Rate is the rate at which a company consumes its cash to cover overhead costs. It is typically a measure of negative cash flow and is usually measured on a monthly basis. For example, if a company has $250K in cash and has a burn rate of $50K a month, it will run out of cash in 5 months.
  

• Gross Revenue = Gross Revenue (also called Gross Sales) is the total amount that your business earns from selling a service or product prior to deductions! This is all the income earned from your customer. 

• Gross Profit on the other hand is gross revenue minus COGs only.
  

• Net Income = The Net Income (also called Net Profit), however, is the total amount of money your business earns from selling a service or product after deductions. This takes into account all of your business expenses related to selling that product or service including Cost of Goods Sold, Advertising Costs, Inventory, etc. Typically, your business expenses should be lower than your gross revenue in order to have a positive net income.
  
  To calculate Net Income, subtract your business expenses from your gross revenue.
  

• Profit & Loss (P&L) = This is one of the most important financial statements that every business needs and details the revenue and expenses of a business (AKA the profits and losses) over a period of time. 

There’s a lot to it, but it doesn’t sound as intimidating anymore, right? These are the terms you need to understand in order to properly measure your business performance and make accurate projections. 

Here at JDP Consult, my business is to help businesses grow through strategic planning and implementation. One of the biggest areas that I’ve identified is typically the largest factor affecting a businesses’ growth is within its finances. And majority of the time, it’s due to a lack of financial literacy.

Money matters and I’m here to help you with these finance basics so you can focus on the fun stuff when it comes to running your business. 

Need additional support or want me to help you with aligning your business finances?

HI THERE, I’M JORDYN

Serial entrepreneur, strategic integrator and financial aficionado.

My mission is to revolutionize the way businesses grow with strategic clarity and implementation. It goes beyond consultancy—as I want to be a dedicated partner in propelling your success with strategy and impactful execution with zest and honesty.