Running a business is stressful and consists of several learning curves. One of these is learning how to handle your finances. Afterall, you need to stay on top of your company’s financial situation. What’s more is that you don’t have to be a finance major for it.
Even if you chose to outsource your accounting to another company, here are 6 financial concepts that every business owner needs to know and understand.
Cash flow is the movement of money in and out of your business. Inflows mean that you’re receiving money for example in the form of tax refunds or sales revenues, and outflows mean that money is being spent. Outflows may include office rent or electricity bills.
These are the economic resources owned by your business. There are two types of assets, current assets are the ones that you can exchange for cash immediately for example, cash itself, receivables, or even inventory. The other kinds of assets are long-term assets and these take longer to be converted into cash for example, equipment, vehicles or your building.
As opposed to assets, liabilities are debts that are owned by your business. Liabilities also have two types; current liabilities are the ones that you need to pay back within one accounting period (typically one year). These could include credit card balances, or tax.
The second type is long-term liabilities, and these are the ones you have a considerably longer time to pay back for example, loans mortgages.
This is essentially the amount of capital that was contributed by the different owners of a company. Essentially, this value is your liabilities subtracted by your assets.
Your total capital is your debt subtracted by your equity. These make the total resources that your business owns. Your working capital is the amount of resources you have to support your operations per day and is calculated by subtracting current liabilities from current assets.
This is also popular as ‘net income’ among financial analysts and is calculated by subtracting costs from revenues for the given accounting period. These can be accumulated in a separate account known as ‘retained earnings’. Profits are often used to give raises to employees and for growth and expansion.
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