10 Business Financial Terms You Need to Know

Thursday, 4 Feb 2021

Business owners may be great leaders but taking stock of the books may not come easily to them. They may have a fair knowledge of how the entity can be made profitable, but it is not enough for an entrepreneur.

They should be able to understand the financial data and determine valuable inferences from it to make informed decisions. However, financial management is not every entrepreneur’s cup of tea.

Thus, most of them rely on a professional bookkeeper in Melbourne to take care of financial work. In addition, they need to know about the important business terms that give them an understanding of financial dealings, output, and investments.

Without this knowledge, it can be challenging for the entrepreneur to crack profitable deals, negotiate with vendors and suppliers and save money. So here is a list of the most common terms that must become a part of your personal dictionary if you own a business in Melbourne.

1. Assets

As the name suggests, everything owned by the business in Melbourne, which has a market value is termed as an asset, such as cash, vehicles, inventory, furniture, etc. These can be current assets which can be effortlessly converted into capital such as stock and investments, or fixed assets which take a long time to be transformed into cash such as real estate and equipment.

Both fixed and current assets are tangible assets while other resources which cannot be physically seen or touched are intangible assets such as patents, trademarks, copyrights, etc. Your bookkeeper can provide you with a clear estimate of the different categories of assets.

2. Liabilities

Liabilities are the sum of money owed by the business in Melbourne at any given time. These are legal responsibilities, and the money has to be paid at present or in the future. These include loans and debts or any other financial obligation, such as bank loans and credit card debts that the business has accumulated over the period.

The current liabilities are those amounts which have to paid back in a year’s time, such as the amount payable to the suppliers. Fixed liabilities are those amounts which need to be paid back over a longer period of time, such as bank loans and tax liabilities in Melbourne.

3. Equity

Equity is the amount that is given back to the company shareholders at the time of liquidation when all the debts are cleared, and the assets are liquidated. It is given to the investors who get a share in the business.

Bookkeepers calculate it by subtracting the total liabilities of the company from its total assets. In simple terms, business equity is the stake owned by the investors and is represented in the balance sheet as equity.

4. Gross Margin

It is the net revenue generated from the sales of goods and services offered by the company in Melbourne after deducting their cost of production. The gross margin amount is utilised to pay for the business overheads, such as rent, utilities, wages, etc.

It gives the total amount of net sales minus the cost of goods sold. On the other hand, gross profit margin displays the amount of profit made before subtracting the indirect costs that are involved with selling and administration. Your bookkeeper can further enlighten you about this term.

5. Cost of Goods Sold

Also known as the cost of sales, the cost of goods sold is the expense incurred by the business in Melbourne while manufacturing its goods. It includes only the cost of production, such as labour, raw material, use of equipment, etc. It does not include other expenses associated with the sale, such as the distribution of the goods.

6. Profits

Profit is the capital earned by the company through a business activity, which is higher in value than the amount spent on the project, including the direct cost, indirect expenses, and taxes.

The revenue generated by the venture can be either kept as a business saving or put back into the business on the suggestion of the bookkeeper. Profit is determined by bookkeepers using the simple formula of subtracting total expenses from total revenue.

7. Working Capital

It is highly crucial for entrepreneurs in Melbourne to understand the working capital as it is helpful in identifying the financial well-being of the business. Bookkeeping companies utilise a simple calculation of deducting current liabilities from the current assets to get the figure.

Working capital helps the entrepreneurs to analyse how much actual capital is available to pay for any business expense. It aids bookkeepers to plan for long-term growth and manage the regular expenses incurred by the business.

8. Cash Flow Statement

Cash flow gives the total amount of capital moving in and out of business during a specific time period. It is positive when the money coming into the organisation is more than the amount going out through transactions, and it is negative if the money going out is more than what is coming into the business.

Bookkeepers determine the net cash flow by subtracting cash spent from the cash received. The cash flow statement gives the details of capital inflow and outflow in a definite time period. The information allows the entrepreneur to understand if the company is financially capable of paying its bills or not. 

 9. Profit and Loss Statement

It is determined by one of the reports generated by the bookkeeper. The profit and loss statement is a financial report that provides details about the profits generated and the losses incurred by the business during a quarter or the financial year.

It is also known as the income statement and helps the business owner in Melbourne to make decisions that help in reducing the losses and enhancing the profits.

10. Balance Sheet

The balance sheet is a financial statement which provides the business owner with the information about the company’s assets, liabilities, equity, debts, and more. The statement places the assets on one side and the liabilities on the other.

For the balance sheet to provide the correct financial information, the assets must be equal to the sum of liabilities and equity. It gives a peek into the financial condition of the business and can be calculated after every quarter, six months, or end of the financial year.

Conclusion

Although your bookkeeper in Melbourne will help you in the preparation and analysis of the financial statements, you too should have the basic knowledge of the terms to understand the deductions.

It gives you an insight into the financial health of the business and be prepared to talk about financial matters with partners, stakeholders, and suppliers. 

 

 

Let‘s Connect

Search

Get In Touch

    Archives

    Categories