7 Bookkeeping Terms Every Small Business Owner Should Know
We’re pretty deep into bookkeeping. It’s what we’re trained in, it’s what we deal with day in and day out with our clients, and we dream about it at night (okay, maybe that’s a stretch). Bookkeeping might not be the most exciting topic in the world, so we try to talk about the value that bookkeepers can provide business owners: helping them understand and manage their business finances effectively. But we also see that we use some terms that some people might not be so familiar with, so we’re going to take some time to explain seven bookkeeping terms that every business owner or manager should be intimately familiar with.
Here are seven business finance terms that every business owner or manager should know:
Income Statement – The most important financial document in your business, this report tells you whether your business is making or losing money. An income statement lists all the revenues and expenses in your business over a period of time. If you generated more revenue than expenses then your business made a profit. If you didn’t then your business took a loss. You should keep your business books up to date and look at your income statement regularly because if your business is losing money you want to know straight away, not at the end of the year.
Balance Sheet – While your income statement tells you how your business performed over a period of time, a balance sheet is a snapshot of your business financials at a single moment in time. A balance sheet lists the assets and liabilities of your business, with the difference between the assets and liabilities being the equity the owner has in the business. Your balance sheet will change daily so it’s a good idea to review it regularly so you always have a good idea of what your business finances look like.
Revenues – If you’re in business, you’re probably familiar with revenues, but we’ll go a bit beyond a basic definition here. Simply put, revenues are any income generated by your business. The most common types of revenues come from the sales of your products and services, but revenue can also come from interest your business earns from bank accounts, maturing investments, or government grants or bursaries.
Expenses – Pretty much every business owner knows what expenses are – they the costs that you pay to operate your business. There are two main types of expenses in your business: fixed and variable. Fixed expenses don’t change no matter how much or little your business is selling. Think about your office rent – your rent doesn’t increase if your business is super busy, nor does it decrease if business is slow. Variable expenses are more related to the activity level of your business. Think about your cost of goods sold – the more product you sell, the more raw materials you’ll have to buy. These types of expenses vary with how busy your business is.
Assets – This is the general term for all the “stuff” your business owns, tangible and intangible. Assets most commonly include money in the bank, accounts receivables, office equipment and machinery, but can also include patents, intellectual property, trademarks and other intangibles.
Liabilities – Liabilities are debts that your business owe. Most business will have accounts payable, businesses that own their building might have a mortgage payment, and new or growing businesses might have a line of credit. These are all moneys that your business owes to another organization and are common types of liabilities.
Profit/Loss – The most important thing you need to keep track of in your business is profitability – if your business isn’t profitable then it’s only a matter of time before it fails. That isn’t to say that your business will fail if it isn’t profitable for a short period of time – if you have a healthy balance sheet and you’re effectively managing the finances of your business then you should be able to weather brief periods of loss. This might even be expected if your business is seasonal or going through significant growth. But business owners must keep an eye on their income statement and make sure the business is overall profitable otherwise that’s a sure sign of trouble if your business is regularly running at a loss.
Let Your Bookkeeper Help!
It’s a dangerous position if you own or run a business and you’re not aware of how your business is performing financially. If things are going well and you’re running profitably then that’s great, but if your business is running at a loss and you don’t know it then that can be very dangerous for longer term sustainability.
A bookkeeper can help keep your business finances up to date and make sure that you understand how the finances of your business are performing. If business finances aren’t your strongest skill or if you just can’t find the time to keep up with your bookkeeping, it might be time to bring a part-time bookkeeper on board to help out.
Business owners must be intimately familiar with their business finances, including the income statement and balance sheet. You must also have an appreciation for the revenues, expenses, assets and liabilities because these are the basic building blocks of your business finances. At the end of the day, if your business isn’t profitable then it’s only a matter of time before you start struggling, so have a bookkeeper help you understand your business finances and review them on a regular basis.
Simply Bookkeeping1 provides professional bookkeeping services for freelancers, solopreneurs and owners of unincorporated and incorporated businesses. We customize our services based on your needs – we only see some of our clients a few hours a month but others we see on a more regular basis. Our services are reasonably priced and we tightly track the amount of time we spend working for you so you only pay for the services you get.
To learn more about us, please visit our website at www.simplybookkeeping1.com or contact Michele Hyde by phone at (647) 668 – 9363 or by email at firstname.lastname@example.org.
Have Your Say
Do year hear accounting and bookkeeping terms that you don’t fully understand? If so, leave us a comment and we’ll do our best to not only explain them but to describe how and why they’re important to your business. Also, please share this article using the social media share buttons – other people might also be unsure about some of these terms and could benefit from this post.