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Whether you’re a food business startup or newly introduced to a managerial role, running the day-to-day operations of a business or organisation can ask a lot of you, let alone managing its finances. To help SMEs get a handle on their finances, the Funding Circle has put together this list of basic terminology.
You probably already understand the basics of accounting; it’s the process of recording financial transactions in a way that makes the information useful for things like paying your taxes. Basic accounting knowledge is good to have as a business owner, but you should look to advance your knowledge where possible, such as learning the difference between cash accounting and accrual accounting.
Bookkeeping is the daily chronological recording of financial transactions. It’s a part of the accounting process and extremely important because it ensures that your financial records are accurate and up to date.
These include anything your company owns that has value, such as cash, inventory, property and equipment. As a business owner, you not only need to know what assets are, but you also need to understand the difference between fixed assets and current assets.
These cover anything your company owes, from the wages you pay your employees and loans that you have to pay, to bills for inventory or materials that you purchase.
This is your company’s income. When people pay you for your products or services, you have revenue.
Expenses are things that cost your business money. When you pay the bill for a utility, it is an expense. Other types of expenses include insurance or services that your company may need to pay for.
This is the amount a company makes after you subtract for the costs associated with making or acquiring a product, or the cost of performing the service your company sells.
Net profit tells you how much your company makes after subtracting all costs. Instead of just focusing on the costs that go directly into providing a product or service, net profit also accounts for the overhead costs that go into running your business as well.
Cost of Sales
This refers to the cost it takes to provide a product or service. For example, if you provide a food product, the cost of sales would include all of the ingredients used.
Some assets maintain their value over time while others lose value – a vehicle is a good example of an asset that depreciates over time. With these assets, using depreciation allows you to recover the cost over the useful life of the asset instead of taking it all at once. It is therefore important to learn how to calculate depreciation for these assets.
This metric shows how money flows in and out of a business. Positive cash flow means more money is coming in than going out, while negative cash flow means more money is going out than coming in. A cash flow statement is often used to show how a business generates value.
Learning the basics can do a lot to help you navigate the world of business finance but depending on your business, you may have a lot more to learn or do, such as hiring professional bookkeepers or accountants. Take a look at the Funding Circle’s resource centre to better understand how to make your business thrive, and subscribe to our newsletter here for updates on consumer trends in the food industry and expert tips for SMEs.
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