Essential Financial Terms Every Small Business Owner Should Know
Everyone starting a small business likely knows the typical business jargon like “bandwidth,” “deliverable” and “circle back.” However, there are some crucial financial terms that small business owners should understand in order to efficiently run their business and ensure long-term success.
Gross Profit
This term is defined as the revenue a company earns from selling its goods and services, minus the direct costs of producing them. It is a key metric for assessing a company’s efficiency in producing goods and services. A high gross profit indicates more money to cover other expenses, and it is a sign that a business is doing well.
Net Profit
Net profit is defined as the amount of money that is left after all taxes, expenses, and other additional costs are deducted from the revenue. The net profit is a key indicator of the overall profitability and health of a business.
Cash Flow
In business terms, cash flow refers to the movement of money coming into and out of a company, representing the total amount of cash a business generates from its operations, investments, and financing activities over a certain period of time.
Cash flow is typically categorized into three main types: Operating cash flow, which is cash generated from day-to-day business activities like sales and paying suppliers, Investing cash flow, which is cash related to purchasing or selling long-term assets such as property or equipment, and financing cash flow, which is related to activities such as taking out loans and paying dividends.
A positive cash flow ensures that your small business is equipped to meet its financial obligations, including rent, payroll, and inventory purchases.
Break-Even Point
A break-even point is the level of sales where a business’s total revenue equals its exact total cost, meaning there is neither an additional profit being made nor a loss. While a break-even point is not necessarily a good or bad thing, knowing what it is helps small business owners set goals and pricing strategies.
At JTS Associates, our team is familiar with many essential financial business terms that you should know if you are starting a small business. For more information, contact us today at (516) 877-5900.
