As a fresh business owner or entrepreneur there are quite a few terminologies you’re expected to be conversant with in order to smoothly navigate the business terrain. These terminologies are important because they cover central concepts that guide every business.
These are the total resources, cash or assets, available to your business, and is equal to your equity and debt. Working capital is equal to current assets minus current liabilities, and represents the resources available to run day-to-day operations.
A valuation is an estimate of how much a business is worth . Valuation is important when you are seeking for loans or funding from investors.
Assets are economic resources owned by your business which you use to generate income. Current assets are items like cash, receivables and inventory. Long-term assets include equipment, buildings, vehicles, furniture and patents.
4. Cash flow
Cash flow is the movement of money into, through and out of your business. Inflows include of sales revenues, tax refunds, and interest earned. Outflows are expenditures of cash and include payment of expenses and acquisition of assets.
The costs of running your business, including rent, salaries, legal costs, advertising, taxes paid, and utilities. In order for a business to be profitable its owners will try to minimize expenses and maximise revenue.
Profit, also called gross income and sales is the income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted.
Profit, also known as net income is the surplus remaining after total costs are deducted from total revenue, and the basis on which tax is computed and dividend is paid. A successful business should maximise profits and minimise losses.
Negative net income, created when your costs exceed your revenues. This is a sign that your business is not profitable and might fail if there are no other sources of income or necessary actions are not taken.
Liabilities are a company’s legal financial debts or obligations that arise during the course of business operations. Current liabilities are due within one year and will include, invoices from suppliers, taxes due, wages earned but not yet paid etc. Long-term liabilities include rents and loans that mature in more than one year.
10. Financial statements
Detailed summary reports that show the financial condition of your company or business. Details include the balance sheet (a snapshot of assets, liabilities and equity), income statement (revenues and expenses for a given period), and cash flow statement (inflows and outflows for a given period).