You don’t need to be an accountant or financial expert to manage a successful business, but you must know the basics, such as marketing functions, financial tips, and terms.
These 10 must-know financial phrases may help you make informed decisions and manage your finances, whether starting or growing your business.
What are the five factors that businesses consider when choosing a source of finance?
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1. The cost of Capital is the expense of obtaining funds from a source, including interest rates on loans and investor returns.
Companies must consider the cost of Capital when selecting a financing source, which affects their profitability.
2. Businesses consider their risk tolerance level when choosing a source of finance.
Some may prefer high-risk financing options like venture capital or angel investment, while others may opt for lower-risk options like bank loans.
3. The purpose of the funds required also plays a significant role in choosing a source of finance.
Start-up financing ideas like short-term financing may be suitable for working capital needs, while long-term funding may be required for expansion plans.
4. Businesses also need to consider the repayment terms of a financing option carefully.
Some sources need quick return, while others provide longer terms and lower interest rates.
5. Businesses also consider the control and ownership implications of different sources of finance.
Debt financing may not dilute ownership or control, while equity financing may result in giving up partial ownership and decision-making power to investors.
What is the most important financial resource for a small business owner?
The most important financial resource for a small business owner without investment is their cash flow.
Business cash flow is the money that enters and leaves a company.
Small businesses must have a steady and positive cash flow to meet their day-to-day expenses, pay employees, invest in growth opportunities, and ultimately stay operational.
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Small businesses might fail fast without appropriate cash flow management.
This is especially true for new or growing businesses that may not have established credit or access to traditional sources of financing.
Must-Know Financial Terms for Business Owners
1. Cash Flow
- The net amount of cash transferred into and out of a business indicates its liquidity and overall financial health.
2. Balance Sheet
- A financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity at a specific point in time, providing a snapshot of its financial position.
3. Profit and Loss Statement (P&L)
- Also known as an income statement, this document shows a company’s revenues, costs, and expenses during a particular period, indicating its ability to generate profit by increasing revenue, reducing costs, or both.
4. Gross Margin
- The difference between revenue and cost of goods sold (COGS), divided by revenue, is expressed as a percentage. It represents the proportion of each dollar of revenue that the company retains as gross profit.
5. Net Income
- A company’s total profit is the revenue left after all expenses and taxes have been deducted. It is often referred to as the bottom line.
6. Return on Investment (ROI)
- A measure is used to evaluate an investment’s efficiency or compare several different investments’ efficiency. ROI is calculated by dividing the benefit (return) of an investment by the cost of the investment.
7. Working Capital
- Capital ratio is the ratio between a company’s current assets, such as cash, accounts receivable, and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable.
8. Liquidity
- A measure of how easily assets can be converted into cash without affecting their market price. High liquidity indicates that a company can more readily cover its short-term liabilities.
9. Break-even Point
- The point at which total cost and total revenue are equal means the business is neither making a profit nor a loss. This analysis is crucial for understanding the minimum performance required to sustain the business.
10. Accounts Receivable and Payable
- Accounts Receivable represent the money owed to a company by its debtors for goods or services delivered but not yet paid for. Accounts Payable represents the money a company owes to its creditors for goods or services received.
Takeaways
In conclusion, it is crucial to understand financial concepts to make informed decisions about a company’s finances.
It not only helps in managing the day-to-day activities but also enables them to strategize for long-term success.
Business owners can communicate effectively with their accountants, investors, and other financial professionals by knowing and using these must-know financial terms.
This will also allow them to analyze their company’s financial health and make better decisions for growth and expansion.
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