Sometimes, business terms can sound complex and might even be a little confusing but knowing some of these important business terms is crucial to helping you to understand and oversee your financial situation. Here are certain basic business terms that you must know:
- Invoice
An invoice is a document issued to a customer by the seller with comprehensive information on the goods sold or services provided. It is used to collect payment. In other words, an invoice is a document issued from the seller to the buyer that gives details (products sold, quantity, price) about a sales transaction.
- Loan
A Loan is a company or business request for a sum of money from a bank or any other financial institution. Usually, the lender (the bank or any other financial institution) and the borrower(the company or business) agree on repayment terms (date, interest rate and any other financial charges) before the money is lent out.
- Interest
Interest in business is a payment from a borrower to a lender of an amount above the payment of the initial sum at a particular rate. Simply put, it is the extra money received by the lender from the borrower over a particular period. The interest rate at charged at a percentage of the loan.
- Compound Interest
This refers to the addition of interest to the principal amount of a loan. This simply describes the interests that a business earns on previous interests over a period of time. Debts with compound interest grow at a faster rate than those with simple interest
- Account Payable
This is a debt owed by a business to its suppliers for goods or services received on credit. It is reflected as a liability in the business record.
- Account receivable
This is the money due to a business from a customer for goods or services received that haven't been paid for. They are booked as assets to the supplier's business.
- Credit
Credit is the ability of a buyer to receive goods from a supplier based on trust, with the agreement that payment can be made at a later time. Credit cards are the most common examples of credit buying.
- Assets
These refer to resources with positive economic values owned or monitored by a business. They can be tangible (I.e material things like cash or machinery ) or intangible (nonphysical objects with value like trademarks or documents). Types of assets include: Current/liquid assets (assets that can be easily converted to cash, especially within a year) and Fixed assets (assets that take a longer period to liquidate like machinery and property)
- Liabilities
They are financial debts leading to losses of economic benefits by a business, caused by past transactions. Current liabilities are debts due within a year while non-current liabilities are long-term.
- A bill of sale
A Bill of sale is a formal document that details the transfer of property or sale of goods from the seller to the buyer. It is similar to a receipt as it shows proof of ownership in a situation where goods are transferred.
- Capital
This describes the money invested in (used to finance the growth of) a business that gives value to the owner. Capital is used to keep operations running and ease the economic growth of a business.
- Cash
It refers to money in a physical form of currency that can be used to exchange goods and services. Managing cash in business is very important as this allows a business pays its bills.
- Cash flow
It refers to the total amount of cash (real or virtual) being transferred in and out of a business. It simply refers to the movement of cash or cash equivalents in a business. If more money flows into the business then the cash flow is described as positive.
- Collateral
This is also known as security. It refers to an asset that a borrower pledges to a lender to secure the repayment of a loan. It can take the form of real estate or any other kind of asset. In a case where the borrower defaults on the agreed repayment terms, the lender has the right to seize or repossess the asset.
- Crowdfunding
This involves the process of funding a business or project by raising small amounts of capital from a large number of people. It is commonly done via the Internet. A very typical company is GoFundMe
- Debt
This is a due owed. It is an obligation that requires the debtors to pay money (or any other value agreed on) to the creditor. This comes about when a business makes a large purchase of goods that they under normal circumstances would not purchase.
- Equity
This is the sum of assets left in a business after the debts associated with each asset have been subtracted. It is the amount of capital invested by the owner of a company. This is also referred to as a business's net worth.
- Factoring
It is a financial transaction where a business sells its account receivable (invoice) to a third party ( a factor) at a discount. It is also known as invoice financing.
- Financial Statements
These refer to written documents that detail the financial activities of a business. They also reveal the financial position of the company and record cash flow.
- Inventory
An inventory refers to the total amount of goods and products that a company has available for sale to earn a profit. It refers to goods, merchandise and materials. It can also refer to the recording of items, raw materials or other parts used during production.
- Line of credit/Credit line
A line of credit is a flexible loan extended by a bank or any other financial institution to a business that the customer can access as needed and repay as long as the line is open.
- Net assets
They refer to the total amount of assets of a business minus its total liability. The amount of the net assets is usually equal to the owner's equity.
- Profit
This is the amount of money a business gains when the customer pays the supplier more than the cost he incurred during the production and sales of the goods and services. Profit can also be termed the "income" of the business.
- Return on Investment
This is popularly known as ROI and it refers to the amount of money gained by an investor from the input of financial capital into a business. Investors use ROI to analyze their investments.
- Working Capital
This refers to the current assets of a business. It is the amount of available capital that a business can use to finance existing short-term debts. Your business needs to run properly.
Want to find out more about these terms and see them used in more business contexts? Check out our other blog posts at Bridger.