20 Essential Financial Terms for Small Business Planning

09/07/2021

You learn a lot of things when operating your own business. Whether you are an established small business brand, or a new entrepreneur with great ideas; there is so much you need to know – tools to use, problems to solve, and business terms to understand.

But how do you begin? The best thing is to not go overboard but instead take one step at a time. For instance, you have to understand and discuss the financial needs of your company regularly. Ultimately, understanding the financial terms used in business becomes a part of the business owners’ job. From business loans, to business financial activities to accounting, there are several financial terms to know.

Luckily, today you don’t have to be a financial planner or an accountant to understand and manage your finances. Here, we have a list of financial terms and business terms that are important for your understanding.

Abandonment Value

This refers to the cash value earned from abandoning or discontinuing a project after repaying any debts incurred. Normally business owners do this when the project’s net present value (NPV) of its expected cash flows is lower than the salvage value. In such a case, the underperforming assets/projects are assessed for their Abandonment Value before being sold or liquidated.

The Abandonment Value is also determined using the supply and demand conditions, fair value appraisals and liquidity.

Abnormal Rate of Return

An abnormal return is an unusual profit gained through given portfolios or securities over a given time span. It is called abnormal because it’s different from the usual rate of return for the investment that is expected. Abnormal returns calculation can affect your business in 3 ways:

Compare risk-adjusted performance on portfolios or securities against the market benchmark index.
Identify the skill of the portfolio manager on a risk-adjusted basis.
Identify if investors got appropriate compensation for the amount of investment risk they have taken up.

Accounts Payable

This is a list of all the pending payments, or the short-term debts you owe to your creditors and suppliers etc. You can find the Accounts Payable information of your company in the general ledger. And on the company's balance sheet, it is a sum of all outstanding payable amounts.

In other words Accounts Payable is the outstanding amount accumulated for services, goods that have been bought and received by you, but haven't been paid for.

Accounts Receivable

These are the payments that are due in the short-term to your company from the customers. Here, the purchases are made on credit – i.e. all services and goods purchased have been delivered but you have not received payment. This sum is also listed on the balance sheets as a current asset account.

Accrual Accounting

This is the tool used for measuring the economic events irrespective of whether cash transactions took place or not.

It takes into account all expenses, and revenue occurring when a transaction occurs. In other words, all revenues and expenses are recognized in the same period. The result helps to determine the position and performance of your company.

Financial Statement Audit

One of the key financial terms is the financial statement audit where all financial statements are evaluated for accuracy. It’s an objective assessment to ensure that all transactions are presented fairly and accurately on the statements. These assessments are carried out internally by select employees or externally by government authorities.

Audit Types

Sub Types

Audit Reporting Opinions

Statutory audits

Tax Audits

Company Audits

Unqualified opinion

Qualified opinion

Internal audits

Disclaimer of opinion

Critical Internal Audits

Operational Audit

Compliance Audit

Financial Audit

Adverse opinion

Non-Critical Internal Audits

Follow up Audit

Investigative Audit

IT Audit

Management Audit

Balance Sheet

A term refers to the main financial statement listing out all critical operating components in a company. It mentions the liabilities and shareholders' equity, and company's assets at any time point. Balance sheets are used for calculating return rates and evaluating capital structure health.

Balloon Payment

Balloon payments are done towards the end of a balloon loan. Balloon loans are short term, where only a part of the principal balance is amortized in the term period. The remainder payment is fulfilled at the end of the term as a final payment.

Balloon payments are common financial terms in commercial lending. We use the term ‘balloon’ to show that this final payment is large, normally twice the amount of the previous payments.

Bill of Sale

This is a legal document to show a goods ownership transfer from seller to buyer. It may even be used for accounting and tax purposes as well. Bills of sale can be applied in various situations where goods are being sold, exchanged, gifted, or mortgaged. Overall, some conditions remain the same:

- It’s used by unincorporated businesses and individuals
- It’s used to indicate ownership transfer of tangible, moveable goods
- It’s used to indicate ownership transfer of goods that are already owned

Capital Growth

A stage in business where there is an increase in the overall value of an investment and asset. This growth takes place over time and is often referred to as capital appreciation. It is measured by assessing the difference between the current/market value and the purchase value of that asset.

Cash Accounting

An accounting method where payment receipts are assessed during the time they are received and considers all revenues and expenses only when cash is paid up. It’s a simple process where transactions are recorded when cash moves in and out of accounts. This method isn’t suitable for bigger companies with bigger inventories as it doesn’t depict the full financial position.

Cash Flow

This is the net amount of cash/cash-equivalents that move in and out of a business. It is important to maintain positive cash flows in order to create value for shareholders. Positive cash flow tells you that the cash reserves are increasing and permitting future reinvestments, shareholder payments, and debt payments. There are 3 important financial terms in cash flow: 1) investing, 2) operating, 3) financing.

Understanding your cash flow statements gives you a better idea of the timing, uncertainties and amount of cash flows. As a result, you can assess your company’s overall financial performance, flexibility and liquidity.

Chattel Mortgage

Chattel mortgages are different from conventional mortgages. This is a loan agreement where a moveable property is used as security and the lender holds interest on that moveable property.

Contingent Liability

This is a liability that is likely to occur considering possible outcomes of an uncertain future event. It is recorded only when the contingency is likely to happen and is indicated as a footnote on statements.

Debt Consolidation

You undertake debt consolidation when you apply for a new loan to pay up for existing loans, unsecured liabilities, and consumer debts. Here, you combine many smaller debts into one single debt amount. This larger debt amount is supported by extra, favorable payoff terms including lower EMIs, smaller interest rate, etc.

Debt Finance

In debt financing, you raise funds to be used as capital expenditures/ working capital by selling out debt instruments. These debt instruments are bought by institutional investors or people who become your creditors. You take on the responsibility of repaying the principal and interest for that debt.

Distributive Bargaining

Here, two parties enter into a negotiation strategy with fixed assets. Only one party can win or gain as much as possible, seeking to acquire the maximum share on those assets. It cannot be equally distributed as the assets are fixed and can be more durable.

Equity Finance

This is where you raise capital by selling off shares. In other words, the ownership of the company is sold in exchange for stock financing and cash. You can find equity financing from many sources like investors IPOs (initial public offerings), close friends and family too. Big names like Facebook, Google have used IPOs to collect billions of dollars.

Invoice Finance

This is a way to borrow money against customer debts. Your business will have to pay a certain percentage of the invoice amount as a borrowing fee. It lets you pay employees, reinvest and increase cash flow earlier instead of waiting for customers to pay full balance. It can even come in handy when you can’t find other business credit.

Open Book Management

It is a form of running a business where you are open about the company operations with employees. You provide them with transparency, data and training that helps them take on leadership roles. This includes giving them access to financial statements, letting them invest in ESOPS, initiating employee shareholder programs etc.

List of financial terms and business terms that are important for your understanding

Conclusion

Now that you are aware of the popular and important business financial terms, it’s time to start selling and put your knowledge to use. Register now on Amazon and gain access to ultimate seller advantages.

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