A few years ago I spent the summer in Greece with my husband and his Greek family. I spent many evenings enjoying the company of my own thoughts and plates of saganaki and baklava while they all chattered away to each other in Greek. It really was “all Greek to me,” and entire conversations floated over my head while I attempted to nod and smile at the appropriate times. I had no idea what was going on.
You don’t have to be in Greece to feel that way. In fact, you don’t even have to be in a foreign country to feel that way. Every career, métier, job etc… has its own vocabulary, and it’s easy to feel totally lost without knowing the jargon.
Accounting is no different. You may not be an accountant, in fact, you may know very little about it, but suddenly as the owner, CEO, manager etc… of a business, you find yourself responsible for knowing and using terms like fiscal year and variable expense.
This can be very overwhelming, which is why we are here to help. We want you to be able to do more than just smile and nod, and we want you to be able to better understand your business and its inner workings.
So, here are 9 basic accounting terms to help you sound like a pro and make smarter financial decisions.
9 Basic Accounting Terms
1. Accounts Payable: An account payable exists when you owe money to someone for a good or service that has already been purchased or provided. For example, if your company bought inventory on credit, that amount would be considered an account payable until it was paid off.
2. Accounts Receivable: These are like the opposite of accounts payable. Accounts receivable exist when someone buys a good or service from you, the good or service has delivered or performed, but the customer hasn’t paid you yet.
3. Capital-Does this word take you back to 4th grade and trying to remember how to spell Montpelier? It may be spelled the same, but in business the word ‘capital’ does not refer to the capital city of a state. In the business world, capital refers to money or certain assets that are used to increase a business’s wealth. Often thought of as cash, capital can also include physical objects such as machinery and cars.
Small businesses and startups usually acquire startup capital from banks or investors.
4. Assets: Asset is a term that we hear in a variety of contexts. Though the definition, “a useful or valuable thing, person, or quality” remains fairly consistent no matter what the environment, when it comes to business, it gets a little more specific.
Simply put, an asset is anything—tangible or intangible—that can be used to produce cash. Assets can range from buildings, equipment, and cars to things such as patents. Investopedia offers good general overview of the different types of assets found in a business. Accounts receivable and capital are both considered assets.
5. Cash Flow: As the term suggests, cash flow is the cash that ‘flows’ into the business and the cash that ‘flows’ out of the business. The cash flowing in comes from sales and revenues and cash that flows out is for expenses such as payroll, utilities, rent, or paying down debt. A business wants to have a positive cash flow, meaning that more cash is coming in than going out.
6. Fixed expense: Every business has expenses. Fixed expenses are the ones that typically remain the same from month to month. For example, mortgage or rent payments, insurance, salaries etc….
7. Variable expense: Unlike fixed expenses, variable expenses can change. For example, your gas bill will fluctuate throughout the year depending on the season and whether or not the heat is turned on. The phone bill may vary from month to month as may travel expenses.
8. Fiscal year: Fiscal comes from the Latin word fiscus, which meant treasury. Today, fiscal refers to financial matters. The fiscal year or FY for businesses is a designated 12 month period that doesn’t follow the calendar year. For example, the United States Federal Government has a fiscal year that begins on October 1 and ends on September 30.
There can be a variety of reasons for choosing to adopt a fiscal year instead of a calendar year for your business, and whether or not you choose to do so will be determined by the needs of your company.
9. Profit Margin-A profit margin is a number expressed as a percentage. There are a few different types of profit margins: gross, net, or operating. Often, profit margin is referring to the net profit margin, which consists of “the percentage of revenue remaining after all costs, depreciation, interest, taxes, and other expenses have been deducted.” You can calculate it using the following formula: (Total Sales – Total Expenses)/Total Sales = Profit Margin [Source: Investing Answers]
The good news is that you don’t have to be an accounting expert to run a successful business. Outsourcing your accounting is a great way to make sure that your business’s accounts are taken care of by experts while you can focus on other parts of the business. A knowledge of basic accounting terms will help you to keep up with what is happening.
For more information and advice, contact Lucid Advisory and Finance.