Small Business Accounting Terms – What Are They and What You Need To Know…

As a small business owner, you will likely find yourself taking on a lot of different responsibilities and on a hugely steep learning curve, not least with accounting and finance!

As the owner of a small business – whether that is start-up or scale up – you must know how to communicate with all members of your team, investors and other professionals you bring in to support your growing business. Understanding business terms or ‘jargon’ can also help you increase communication efficiency in your business, especially in business-critical functions such as finance and accounting.

These are our top accounting terms every small business owner should know, understand and be able to converse about…

Accounting Period

This is the period to which a business’s financial accounts relate, usually 12 months. You can compare headline numbers from different accounting periods to assess how well your business is performing or developing, monthly, quarterly etc.

Accounts Payable

This is a record of money owed by a business to its suppliers. This is shown as a liability on a business’s balance sheet.

Accounts Receivable is money owed to a business by its customers.

Assets

These are items of value that a business owns. Assets can be physical, tangible things, such as vehicles, tech, premises, computers, office furniture, etc, or non-physical, intangible things, such as intellectual property, brand identity or customer base.They are added to the balance sheet and their cost is charged to the profit and loss over their useful life using depreciation charges. Both types of assets are considered when valuing a business.

Balance sheet

A balance sheet is a financial statement that shows a business’s assets and liabilities at a given point, while detailing shareholder equity. The term ‘Bottom Line’ comes from the last line on a balance sheet that shows total profit or loss.

Cash Accounting

Cash accounting is the method of accounting that records income when it’s received, and details expenses when they’re paid. This is opposed to ‘Accrual Accounting’, which is where income and expenses are recorded when they’re invoiced/incurred regardless of when cash actually enters or leaves a business.

Cash Flow

Cash Flow is the process of monies entering and leaving a business. Cashflow problems arise when you spend more than you make or when you don’t have sufficient cash in the business to pay your short-term debts. Cash really is King, and all our Smart FD’s will help you to understand your cashflow forecast as well as what is driving your existing cashflows

Credit control

Credit control is the process of monitoring customer accounts and prompting them when necessary to ensure that they pay their invoices when due.

Creditor

A person or business your business owes money to. Your suppliers can be described as trade creditors. A debtor is a person or business that owes money to your business.

Double-entry

A bookkeeping system which details a transaction in two places within your accounts, once as a debit and once as a credit. The double-entry system can make it easier to prepare financial statements and identify errors. Its key to balancing the books – put something on one side – you need to put it on the other side to balance the books!

Gross Profit

Your Gross Profit is your turnover minus your cost of sales and direct costs.

Income

This is money that you or your business receives in exchange for your labour or supplying goods or services. Income can also be earned through investment. Your ‘net income’ is income minus cost of goods/services sold, expenses, and tax.

Inventory

These are materials and/or stock that a business buys to sell and/or make into products for sale. Your inventory is reported as an asset on a company’s balance sheet.

Margin

Margin is the sale price of your items over and above the cost of goods/services sold. So, if you sell a product for £50 and it costs you £35 to make, your margin is £15 or 30%

Markup

Markup is how much you add to your costs to reach your sales price. If your items retail for £50 and you purchase the items in at £35 your markup is £15 or 42.9%

Net profit

This is your gross profit – see above – minus your indirect costs and expenses. For example, if your gross profit is £30,000 and your indirect costs and expenses are £5,000, your net profit is £25,000.

Overheads

Your business overheads are your day-to-day running costs. These are costs such as rent, rates, etc. These are sometimes known as “fixed costs”, due to the fact they don’t change regardless of how much you make or sell. Your business’s “variable costs” will increase or decrease with how much you seel Eg commissions

Petty cash

Small amounts of cash belonging to a business that is kept for low-value day-to-day purchases, such as small items of stationery, kitchen supplies etc. Obviously, petty cash purchases must be accounted for.

ROI

ROI stands for ‘Return on Investment’. The financial rewards your business gets back from things it invests in, often used in a marketing or media context, but can also be a new item of manufacturing equipment.

Turnover

This is one of the most common words used by business owners, accountants and investors. Turnover simply means the total value of sales made in a year. A Smart FD can help you analyse what changes you can make to increase your turnover

Working Capital

Basically put this is the amount of money your business needs to operate on a day to day basis. It’s the money you need to fund your debtors and creditors. You take your current liabilities (how much you owe) away from your current assets (your available cash, accounts receivable, inventory and short-term investments) to calculate your working capital.

Year-end

Quite self-explanatory, this refers to the end of a company’s accounting or financial year. It usually is on the last day of the month during which the company was registered with Companies House -although it can be changed.

At The Smart Team we not only provide invaluable financial leadership services, but we can also provide day to day services with our Virtual Finance Team. Our VFT can provide Small Business accounting services, with a raft of experience in all areas of business finance from payroll to VAT.

More details on our VFT can be found here Virtual Finance Team