Basic Business Financial Terms

Working Capital

Your business’ total investment in current assets (things you need to run your business). Cash, Accounts Receivable, Inventory.

Net Working Capital

The difference between your current assets and current liabilities. (A better judge of where you really are).

Cash Management

The difficult process of balancing cash inflow and cash outflow. Knowing “how much?” “when?” and “where?”.

Balance Sheet

A snapshot of your financial condition that lists assets, liabilities and shareholders equity at a point in time. Your accounting software should automatically be able to give you this. Banks like to see these statements when reviewing you for a loan.

Income Statement

This report tells you about your profit or loss for a period of time. This is usually used in the accrual method of accounting (see below).

Statement of Cash Flows

Details your business cash management. Pretty detailed, and includes operating expenses, investing, and financing activities.

Cash Method of Accounting

Your books reflect transactions only when the cash is actually paid or received. Just because your customer signed a contract for $10,000, your books won’t show it until they pay the bill 30 days later and the money is received.

Accrual Method of Accounting

You record everything when the event takes place (not just the cash). You receive $3,450 in bills on a Monday, but they are not due for 20 days. In this method of accounting you would record them today and they would affect your bottom line today. The good news is that the $10,000 from the example above would also be on your books today.

How to Win the Accounting Game

Even though your business seems to be going along fine, your cash flow can really make a difference between strong growth and failure. Make sure you regularly monitor your financial situation so you can plan ahead. Consult with a qualified accountant who will keep your books in good working order and help you with some advice. Just like in your personal checkbook, keeping too much money in a non-interest bearing account is silly – put your money to work for you!