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Hiring a bookkeeper is widely considered best practice for small business owners. You may think you cannot afford bookkeeper, but think about how long it takes you to do certain tasks such as invoicing, bank reconciliations, activity statements (BAS & IAS) and ask yourself, is that a good use of your time? The answer will quite possibly will be “no”. You most likely
Please don’t think though that delegating financial analysis and reporting means you get to completely check out of the process each month or quarter. On the contrary, it’s recommended that business owners work closely with their bookkeepers and accountants throughout the year to better understand their financial position and make smart plans for future growth.
Do you want to increase your accounting knowledge so you can have more informed, insightful discussions with us this quarter?
Start right now, with this list of 9 essential accounting terms for small business owners.
1. Cash Flow
Cash Flow is the measure of actual cash flowing in and out of a business.
Do you have more cash flowing into your business each month than you pay out to cover costs and expenses? If so, you can conclude that you are “cash flow positive.” If the opposite is true and you have more costs and expenses to cover than cash flowing in, your cash flow statement will reveal that you are “cash flow negative.”
Having excess cash on hand means you can be better equipped to keep up with debt, cover unforeseen expenses, and invest in growth opportunities. Aurora Accounts can generate a cash flow statement each quarter to keep tabs on this key performance indicator.
2. Profit and Loss Statement
The profit and loss statement (sometimes also called an income statement) is one of the most important documents used to determine the profitability of your business.
The P&L statement lists all sales 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 net profit aka “bottom line” so you know if you are operating at a loss or turning a profit.
3. Gross vs Net Profit
Gross profit (also known as net sales) is the difference when you subtract the cost of goods sold (COGS) which are your direct costs from your total sales. Net profit, on the other hand, drills deeper. It is the total gross profit minus all business expenses and reveals your exact dollar 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 a business on a particular date. It lists all your assets and liabilities and works out the net assets and 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 capital. In a nutshell, the balance sheet shows what you own, as well as what you owe.
5. Accounts Receivable
Simply put, accounts receivable is money your business is owed by customers for goods or services sold, it is a record of all short-term accounts (less than 12 months) from customers you sell to but are yet to pay. It is considered an asset on your balance sheet.
6. Accounts Payable
Conversely, accounts payable is money you owe suppliers and any bills you have yet to pay, so it is listed as a liability on your balance sheet.
Accounts Payable is a record of all unpaid short-term (less than 12 months) invoices, bills, and other liabilities. Examples of accounts payable include invoices for goods or services, bills for utilities and tax payments due.
7. Bad Debt Expenses
Bad Debts relate to money that is unlikely to be paid in the near future.
Bad debt happens when you cannot 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.
8. Assets
Things you own. These can be cash and or accounts receivable, and inventory (current assets) or something you can convert into cash such as land and buildings (property), vehicles, equipment (non-current assets).
Assets are resources with economic value which businesses expect to provide them with future benefits. These can reduce expenses, generate cash flow, or improve sales for the business.
9. Accounting Period
An accounting period refers to the span of time in which a set of financial statements are released. It is important to analyse the financial performance over time of your business by comparing different accounting periods. Accounting cycles track accounting events from when the transactions first occur to when they end, all within given accounting periods.
Consider reviewing your financial statements at least every three months, but no matter the length, accounting periods should remain consistent over time to gain the best understanding of your financials.