Every industry has jargon, those words and phrases that are specific to that business, sector, skill set, or task. Once you've learned it and become immersed in it, there's no question that jargon can be a useful shorthand. It's also true though, that the overuse of these context-specific terms can be a real barrier to understanding some pretty important concepts for anyone who needs to be more casually acquainted with them.
Let's take, for example, business finance terms. If you are an accountant or a CFO (Chief Financial Officer, there's a bit of jargon for you), then you will have spent years getting to grips with the differences between net and gross profit, and have an intimate understanding of cash flow. For anyone starting a business though? Well, for a lot of people it may as well be a foreign language, especially when you've come from a job in a company where it was the role of someone else, or a different department entirely, to look after the finances.
Unfortunately, you're probably going to need a basic understanding of some of the most common financial terms as you start your life as a business owner. It's too vital to your future success, not to mention your standing with HMRC, that you can keep track of your money and understand what it's doing throughout the year.
Don't worry though, because we're here to demystify things for you.
To that end, we thought it would be a good idea to explain just a few of the most regularly occurring business finance terms, the words and concepts that you'll need to have a handle on in order to make the first months and years of business ownership go as smoothly as possible (until the point when you can hire an accountant, at any rate).
A nice easy one to start off. Accounts payable is just the money that your business owes to any suppliers. If, for example, you open a cafe then accounts payable will include your regular outgoings to whoever supplies your dairy and ingredients. If you've started a design consultancy, then it can the likes of rent for office space, or the purchase of tools and materials. Basically, it's the money you pay for any goods or services that you use to keep your business operational.
Think of this as the flip side – accounts receivable is the money owed to you by your customers for the work or produce you've provided. Whether you've created a new website for a client, delivered a corporate training session, or just delivered a new painting, the fee that you agreed, the money you're owed, falls under accounts receivable.
Profit and loss
Okay, so there's two things to look at here. One is the basic definitions of profit and loss, and the other is a profit and loss statement.
Profit is the amount of money that you make at the end of the day, when all of your outgoings for various overheads and accounts payable have been taken into consideration. Loss is any instance where you've spent more than you've earned.
A profit and loss statement then, is a fairly standard breakdown of the above over a specific period of time, such as a financial year.
For more information on getting started with budgets, cashflow and pricing, click here.
A balance sheet is just a run down of your expenditure without context or judgement. Think of it like a standard bank statement, the type that people used to get delivered to their house each month but now only really exists when you log on to online banking.
Put simply, cashflow is a holistic look at the money that passes through your business.
Whether it flows in from client payments, business loans, grants etc., or flows out to service providers, contractors and bills for overheads, it all counts toward the status of your cashflow.
For more information on optimising cashflow for small businesses during Coronavirus, click here.
Okay, this is where it gets a little bit trickier, so stick with us.
Gross profit is the amount of money you've made after subtracting the costs associated with manufacturing your products or providing your services. So, say you've set up a business selling t-shirts, or workwear, then your gross profit is what you're left with at the end of the month or financial year after deducting the costs of buying your shirt stock, or having company logos embroidered onto jackets. If it's money that you pay on a product in order to be able to sell it on, then it comes off your profit to leave you with the gross. Got it?
Right, onto net profit..
After you've worked out your gross profit, you can then find out what your net profit is. Net profit takes things a step further, and to find it you'll have to deduct all the money that your business has paid out to other sources. That includes all other operating costs, and everything you pay in taxes.
Once you've done that, you'll be left with your actual, or net, profit, which will give you a good idea of how you're spending money, and what you should maybe look to cut down on.
And if you end up with a negative number after carrying out your calculations, then you've made what is known as a 'net loss'.
It may sound grand, but a personal guarantee is just the legal promise that you, as the business owner, make to take responsibility for any debts that the business can't pay.
The long and the short of it, is that if the business is given a loan that it can't pay back out of its own funds, the personal guarantee means you're obligated to make the payments from your own pocket. Another reason why it's important to keep an eye on cash flow and net profit, really.
If you'd feel more comfortable speaking with an accountant before making any finance related decisions, you can find our guide on how to find an accountant, here.