Understanding the jargon - 6 key accounting phrases

6 Essential Accounting Terms for Small Businesses

Outsourcing your accounts is a great idea, but you still need to understand the reports we send (even though we try and keep it simple with the jargon).

Start right now, with this list of 6 essential accounting terms for small business owners.

1. Cash Flow

Do you have more cash flowing into your business each month than you pay out to cover costs and expenses? If so, you`re "cash flow positive." If the opposite is true, your cash flow statement will reveal that you're "cash flow negative."

Having excess cash on hand means you're better equipped to keep up with debt, cover unforeseen expenses, and invest in growth opportunities. We offer a simple cashflow forecast to all our clients (& if you need to know a bit more, and are making plans, we can do an in depth forecast, based on many different variables).

2. Profit and Loss Statement

The profit and loss statement is one of the most important documents used by business owners to determine the profitability of your business.

The P&L statement lists revenues and gains as well as expenses and losses over a specific period of time (typically every three months for small businesses). It calculates your all important "bottom line" so you know if you're operating at a loss or turning a profit.

3. Gross vs Net Profit

Gross profit is what remains when you subtract the cost of goods sold (COGS) from your total revenue. Net profit, on the other hand, drills deeper. It reveals your exact pound per profit of sales after subtracting all operating expenses, including COGS, taxes, interest paid on debt, etc.

Gross and net profit are both profitability ratios. They are key for measuring business performance against an industry benchmark and your competitors.

4. Balance Sheet

The balance sheet offers a snapshot of your overall financial position at a particular moment in time. It lists the assets (such as cash, inventory, accounts receivable, and equipment); liabilities (like accounts payable, income tax, and employee salaries); and shareholder/owner capital. In a nutshell, the balance sheet shows what you own, as well as what you owe.

5. Accounts Receivable & Accounts Payable

Simply put, accounts receivable is money your business is owed by customers for goods or services sold. It is considered an asset on your balance sheet. Conversely, accounts payable is money you owe suppliers and any bills you have yet to pay, so it's listed as a liability on your balance sheet.

6. Bad Debt Expenses

Bad debt happens when you can't collect payment from your customers. Long term outstanding accounts receivable could be listed on your balance sheet as "bad debts", and if they're never collected, may have to be written off as a loss.

And there you have it – six key terms to help you build your accounting vocabulary, join the conversation, and empower smarter decision-making.