Financial Terms

Unless you're starting a business in the finance industry, you're probably not familiar with all the financial terms used in running a business. But by the end of this lesson, you'll be fluent in the art of speaking financials.

In this lesson, you'll learn important financial terms used throughout the rest of your course and where you might need to apply these terms in a business setting.

Budgeting Terms

Whether you're starting your business or running one, estimating budgets and understanding expenses is crucial to ensuring your business stays afloat. The following terms will be helpful for you in understanding costs for putting your budget together.

For information on putting your budget together, head to Brainstorming Your Business Budget.

Profit Terms

When you're in a room full of investors, with the end goal for them to support your business idea, showing them that your business can generate profit is huge. In order to do that, you'll need to use a few financial buzz terms.

The following financial terms are helpful for discussing your business' value:

In addition to the terms listed above, break-even point is important to understand as well. A break-even point is the point at which revenue and operational costs even out. A break-even analysis is important for investors because it tells them when they can expect to see a profit. In order to run a breakeven analysis, you'll need to first identify your startup costs, projected revenue, fixed, and variable costs.

As you review these terms, you'll notice that the key theme in each is monetary growth. And that's exactly what investors want to see. That you can clearly demonstrate how you anticipate your business to grow – not overnight, but over the course of several months to a year.

Financial Statements

Whether you're prepping your business plan or keeping monthly tabs on your financials, there are three financial statements you'll report on quarterly and annually. We discuss them below.

Monthly Budget and Cash Flow Statement

As previously mentioned, a cash flow statement explains how much money is flowing in and out of your business. It depicts how much money you're bringing in, in addition, to how much is going out due to expenses and operational costs.

As a result, preparing a monthly budget or cash flow statement demonstrates that you know exactly how much your business will spend and earn, which is important for making payments on loans for instance. More importantly, it also shows investors that you plan to keep to a budget; you're not negligent and won't overspend (their) money.

Be prepared to include your operational costs, fixed expenses, projected revenue, and profit. For startups, a cash-flow projection can be broken down into 12 months because you're making educated estimates.

Balance Sheet

The balance sheet shows what the assets a company owns and how they are financed; either through debt (liabilities) or investment from the owners (owner’s equity). The total value of liabilities and owner’s equity will always equal the value of the assets.

We explain these terms in more depth below:

Below is an example of a balance sheet:

balance sheet example
Further reading: 5 Simple Ways to Create a Balance Sheet

Profit and Loss Statement (P&L)

Also known as an income statement, a profit and loss statement details revenue and expenses over a period of time. Investors want this information in order to make decisions; either on reducing costs or figuring out ways to increase revenue.

Below is an example of a profit and loss statement:

Revenue $1,000
Expenses --
Salaries 300
Utilities 100
Insurance 50
Tax Expense 50
Administrative Expense 10
Net Income $490

Having control of your financials is essential and the only way you'll be able to make confident business decisions. Having a budget and sticking to it will also ensure you have money for future projects and can make payments on time.

Strengthen your financial knowledge by downloading the Financial Terms Cheat Sheet below so you spend more time on your business and less time with your head in a dictionary.

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