The ultimate dictionary for small business owners
- Accounts payable (AP)
- Accounts receivable (AR)
- Balance sheet
- Cash flow
- Cost of goods sold (COGS)
- Employer identification number (EIN)
- Gross profit
- ITIN (individual taxpayer identification number)
- Net terms
- Net profit
- Point of sale (POS)
- Sole proprietorship
- Working capital
- Know your basics
Between coming up with an amazing business idea and working endlessly to get it off the ground, the world of small business ownership can feel overwhelming. Add to that a bunch of lingo that you’ve never heard before and you’re definitely in for a bumpy ride.
That’s why we’ve put together this list of essential terms to help you navigate critical conversations you may have with vendors, financial partners, or your accountant. Let’s dive right in.
Accounting involves the systematic recording and reporting of business financial transactions. It’s often complicated and you may want to consult or hire a professional to help out with this process.
Accounts payable (AP)
The amount of money you owe your creditors, vendors, and suppliers for goods or services they’ve supplied to you is called accounts payable.
Accounts receivable (AR)
Any payment you expect to receive for goods or services you supplied is considered accounts receivable (AR). Even though AR refers to money that hasn’t been paid yet, it’s listed on the balance sheet as a current asset. Plus, any amount of money owed by customers for purchases made on credit is considered AR.
Your business’s total financial holdings, or in layman’s terms, everything your business owns is called assets. The two main types of assets are tangible and intangible. Tangible assets are physical or quantifiable objects with a clear financial value. Intangible assets are not physical objects you can touch or count. While they have monetary value, which affects the company’s worth, it is often difficult to quantify.
You can also separate your assets into current and non-current assets. Current assets is anything tangible that a company expects to turn into cash within a 12-month period is considered a current asset. That includes physical cash, inventory, and raw materials. Non-current assets aren’t expected to turn into cash within 12 months. Examples of non-current assets include real estate, company vehicles, office furniture, stocks and bonds.
A balance sheet summarizes the state of your business’s financial status and is often a useful tool for investors or stakeholders. It includes a list of assets like cash on hand and inventory, liabilities like expenses, taxes payable, and owners’ or stockholders’ equity.
Cash flow represents the balance of money flowing in and out of your business at a given time. It represents the amount of available cash you have on hand that can be used to cover your expenses and liabilities, including AP, salaries and taxes, to name a few. While AR is money owed to you, it’s not considered cash flow until you receive the payment.
Cost of goods sold (COGS)
All costs involved in the product or service your business is selling are called cost of goods sold, or COGS. If you run a landscaping business and are building a fence for your customers, the cost of materials like wood, paint, nails, their delivery, and the cost of labor would all be summed up and called COGS. As a business owner, you would need to charge a sum on top of that in order to make a profit.
Employer identification number (EIN)
EIN or employer identification number is a number used to identify business entities for tax purposes. The nine-digit number is also known as the Federal Tax Identification Number.
While this term seems trivial, it’s really important to know what you can consider a business expense. A business expense is a cost that businesses incur when running their operations. Equipment, inventory, and rent are all examples of business expenses—money you spend to keep your doors open.
Expenses are deducted from revenue to arrive at profits. Businesses are allowed to deduct certain expenses from taxes to help alleviate the tax burden and bulk up profits. Not sure what’s considered a business expense? That’s where your accountant can help.
Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing services. Gross profit is an indicator of a company’s financial health and success. However, even if the gross profit is positive, that doesn’t mean the company is profitable.
An invoice is a document sent by a seller to a customer to provide documentation of a sale that has yet to be paid for and is typically due at a later date. According to U.S. law, a valid invoice needs to adhere to a specific format, unlike a bill, which is more flexible.
ITIN (individual taxpayer identification number)
An individual taxpayer identification number (ITIN) is a tax processing number issued by the IRS.
Your business’s financial obligations or unpaid debts are liabilities. Vendor bills, loans, and payroll are all liabilities. Like assets, you’ll have to define liabilities as either current or long-term. Current Liabilities include any debt a company intends to clear within the next 12 months. Non-current Liabilities are debt that will not be covered within a year, like long-term loans.
Net terms are deferred payment terms offered to customers who are seeking extended periods of time to pay for their goods and services. Suppliers that extend net terms to their customers typically give them between 30 to 120 days to make full payment.
Net profit is generally your revenue from sales minus cost of goods sold, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses.
Point of sale (POS)
A point of sale (POS) is a device that’s used to process transactions. A cash register is a type of POS. In recent years, the cash register has largely been replaced by electronic POS terminals that can be used to process credit or debit card transactions.
A receipt is a written acknowledgment that money has been transferred from one party to another. For most business expenses, you should keep receipts and other records for three years after filing taxes, as this is how long it takes for the period of limitations to run out.
Account reconciliation means comparing the numbers in an account with other financial records to verify the balances match. So basically, making sure your books match your bank account.
Differences that are detected when reconciling the accounts are called discrepancies.
Reconciling the books is important not just for the sake of those of you who don’t like a messy back office. It also keeps your business on track with its finances, as well as with different regulatory requirements.
This term refers to the income you get from a business activity at a given time. In other words, the money you get from selling your service or product. You can calculate your business profit by subtracting your total expenses from your revenue.
A sole proprietorship—also referred to as a sole trader or a proprietorship—is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business.
It’s the easiest type of business to establish because it has fewer government regulations. Most small businesses start as sole proprietorships and either stay that way or expand and transition to a limited liability entity or corporation.
Working capital is the amount of money your business needs to operate day to day. When starting a new business, it can be tricky to calculate your working capital as there are a lot of unexpected expenses. But the more time you’re in business, the easier it gets.
You can calculate working capital by subtracting your current liabilities from your current assets.
Know your basics
That was probably a lot of terms to take in. Down the line, however, you’ll know these by heart. It’s a good idea to have them handy and if they come up in a conversation, just come back here and take a peek.