Launching a small business is no small endeavor. The financial learning curve is steep for many aspiring entrepreneurs and one of the most common hurdles is understanding the financial terms that come with running a business.
No matter the industry in which you seek to operate, there’s likely a multitude of acronyms and business concepts to master, especially for those who don’t have a finance or business degree. Luckily, it won't take long to get up to speed with common financial definitions.
We’ll help you navigate the basics of financial lingo through three modules. The first describes essential definitions, the second centers on terms associated with good financial stewardship, and we’ll close with resources to further help you master the talks of your trade.
Business Terms 101 – Acronyms and Basic Definitions
Many entrepreneurs are experts in their crafts but may be unsure about the financial side of operating a business. Understanding fundamental financial terms is one key step to becoming a confident business owner. Here are the need-to-knows:
1. Cost of Goods Sold (COGS)
Cost of goods sold is the total cost of making and selling a product. It includes expenses related to acquiring materials, labor, and other items directly attributable to the production of items you sell. It does not include sales, marketing, and distribution costs.
2. Gross Margin
Gross margin is the difference between your revenue and COGS, expressed as a percentage. It’s a profitability and efficiency metric that helps small business owners gauge how well the company produces and sells its products.
3. ROI (Return on Investment)
ROI is a lot like a profit margin, but it’s used to assess the viability of individual projects. You take the expected profit from a single project and then divide it by the total required initial investment. This ratio can help you determine if a specific endeavor is worth pursuing.
4. Equity
Equity is simply the ownership value of a business after all liabilities are subtracted from its assets. The higher the equity, the more valuable your ownership stake is.
5. Financial Statements
There are four financial statements business owners should know: the income statement, balance sheet, statement of cash flows, and statement of shareholders’ equity. Each provides a different perspective on a firm’s financial health.
Business Terms 102 – Terms Associated with Good Financial Stewardship
Knowing essential financial terminology is important, but understanding how to run your business responsibly could also affect your long-term success. Grasping the following terms can help you make better decisions.
1. Cash Flow Management
Cash flow is simply money coming in and going out. Effective cash flow management requires monitoring and optimization so that the business remains sufficiently “liquid,” or having adequate cash on hand to meet financial obligations. Accessing financing capital can also help shore up a firm’s cash flow.
2. Financial Reporting
Regularly producing and updating the four financial statements can help you track the business’s financial performance and make better decisions. It might even be required by law depending on how your company is structured. Financial planning and analysis is often an entire department for larger organizations.
3. Financial Reserves and Contingency Planning
Financial reserves include liquid assets, like cash, and access to capital. A good business steward knows there will be ups and downs, and planning for unexpected challenges is important to help promote long-term sustainability. Staying on top of your business’s credit score is a good practice, too.
4. Tax Planning
Tax planning involves understanding the business’s tax obligations and making strategic decisions to minimize tax liability over the long term. Knowing what tax deductions and credits are available is helpful, and reaching out to a tax professional is often prudent.
Continuing Education via Resources, Materials, and Workshops
Mastering financial terminology could involve continued learning to help you stay informed and build your expertise. Here are some resources to consider:
1. Online Courses
There is a wealth of information available on the web. Industry and social networking sites, such as Coursera, Udemy, and LinkedIn Learning, offer business, finance, and entrepreneurship courses that can help you focus on specific areas. What’s more, you can learn at your own pace.
2. Industry Publications
Keeping up to speed with the latest trends, technologies, and overall happenings within your field can be achieved by reading industry publications, including journals. Harvard Business Review and Forbes are two examples.
3. Community Workshops
Learning is sometimes best done in a group setting with like-minded individuals. Check out what’s available in your town or city. Local chambers of commerce and industry associations might host seminars relevant to your business.
4. Mentorship Programs
Finding a mentor might be your preferred route to grow your knowledge as an entrepreneur. Connecting with an expert willing to share their wisdom and experience can give you a broader perspective. A local university may help you partner with a mentor. Also, check out SCORE (Service Corps of Retired Executives). According to the U.S. Small Business Administration, it’s the nation’s largest network of volunteer business experts.[1]
Keep Learning
Aspiring small business owners, and those just getting started as entrepreneurs, commonly require some thoughtful research around the terms and definitions of running their business. And understanding the lingo helps ensure a business’s success. PNC Bank is here to support your business with financial products and services to help it grow. Mastering the language of finance is a process, and sticking with a mindset of continuous learning can help your business thrive.
