Understanding your finances can be confusing at first, but to add some clarity, here are the top six accounting terms to know and understand your business finances:
Materials that are directly owned by a company and have future economic values. In other words, an asset can be easily turned into cash.
Examples: Cash, Investments, Accounts Receivable, Intangible/Tangible property, Building, Vehicles and Equipment.
A liability is simply a debt owed by a company to a vendor or a supplier. Liabilities can be goods, services or loans.
Examples: Loan payable, salaries wages payable, accounts payable, and notes payable.
Expenses are part of the cost of doing business. To put it simply, this could be your business’ indirect cost, direct cost, or overhead costs.
Common business operating expenses: Rent, phone, equipment costs, inventory, marketing, payroll and insurance.
You’ve heard the phrase, “cash is king!” But making better sense of that is understanding your business Cash Flow. Cash flow is the money flowing in and out of your business. Money flows both ways, into your business and out in form of payment for expenses or liabilities. Lack of cash flow management is one of the biggest pitfalls of why most small business fail.
Example of a simple process of Accounts Receivable and Accounts Payable:
Cost of Goods Sold (COGS)
If you’re in retail, a general contractor, or in the staffing industry, you will incur direct costs attributable to the goods sold in a your business. In layman terms, what is the cost of sales? What cost will your business incur in order to produce a product? Cost of Goods Sold includes raw materials, freight costs, direct labor costs, factory overhead costs and depreciation. There are different methods or impact on Cost of Goods Sold value based on your inventory costing method.
Formula on how to calculate Cost of Good Sold:
COGS = Beginning Inventory + Purchased Cost of Goods – Ending Inventory
In most cases, small business owners don’t understand the term Equity and how it plays a big role in their business. Equity is the book value of the business or company. Below is a formula for equity and an explanation on why it is important.
Formula: Stockholders Equity or Owner’s Equity = Liability – Assets
Example: Jimmy has a total of $6 Million in assets for the year 2017. However, Jimmy’s business has a total liability or debt of $5.9 Million. Jimmy’s equity in the business is $100,000. Being that the business has a high amount of debt, it makes it difficult to achieve profitability.
Still a little cloudy? Get in touch with 365 BOOKSPRO’s Accountants and Bookkeepers now to duly understand your financial situation. Let’s make your business profitable!