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Financial Fitness Terms for Small Business Owners

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3 Sets of 10: Financial Fitness Terms for Small Business Owners

As adults, and especially as small business owners, we need to build specific vocabulary and new behaviors to maintain financial health. We have to set up good systems to track our money so that we don’t bounce checks or miss bill due dates. These systems can also help us to leverage opportunities, like completing loan applications to borrow money or taking eligible tax exemptions and credits. Whether your accounting is done by an employee, department, or outsourced professional, developing a strong understanding of financial terms will help you to communicate with your accountant or bookkeeper. Let’s workout some key accounting concepts to boost your financial fitness! 

Set 1: WARM UP: Related to Records 

Stretch your fiscal knowledge with these words about important financial records that small business owners should keep.

  • General Ledger: complete record of every accounting transaction that the business has ever done.

  • Journal Entry: note in the General Ledger for each individual business transaction, should include the date, amount, and which accounts to be debited and credited.

  • Inventory: available goods a business sells, whether raw materials or ready to be sold.

  • Accounting Period: time period included in a financial statement, typically 1 month, 1 quarter, or 1 year. 

  • Bank Reconciliation: comparison of General Ledger entries and bank account balances to add bank charges and catch bank posting errors, recommended to complete monthly.

  • Employer Identification Number (EIN): 9-digit number assigned by the Internal Revenue Service to identify business tax accounts.

  • Financial Statements: performance reports on a company’s financial health; the 3 most important financial statements (according to THE MOTLEY FOOL). 

  • Balance Sheet: record of a company’s assets, liabilities, and stockholder equities at a specific point in time.

  • Cash Flow Statement: report of the amount of money a business brings in and pays out over a specific time period; an important indicator of a company's financial health, revealing whether a business is making enough money to pay its bills “A lack of cash flow is one of the top reasons brands go out of business, with 82% of small businesses reporting cash flow problems as the reason they shut their doors.“ (SOURCE: Better Business Bureau)

  • Profit and Loss Statement: Often called P&L or Income Statement, it shows whether the company made money (profit) or lost money (loss) over a specific time period.

Set 2: CARDIO: The Ups & Downs of Money

These commonly used words about your (company’s) money can make your heart race, whether with excitement or fear. 

Profit: how much income is leftover after paying expenses. 

Bankruptcy: legal status of a person/business entity that cannot pay its debts.

Asset: anything of value owned by a company, such as cash, property, equipment, products, and intangible things like trademarks.

Liability: any debt that a company owes to another entity, like credit card bills, mortgages, and payroll. 

Capital: Sometimes referred to as funds or cash, capital is the money (or credit) available to start and expand a business.

Depreciation: decreasing the value of an asset over time based on how much of it has been used. 

Collateral: property or assets that can be used as to secure a loan.

Lien: a legal claim against a business's property, which prevents the company from selling or transferring the property without the lien holder's permission. When a lien is placed on a business's property, it means that the lienholder has the right to seize the property and sell it to pay the debt that was incurred. The IRS issues nearly 1 million liens each year on businesses. (SOURCE: Better Business Bureau)

Equity: the owner’s stake in a business 

Net Worth: a business’s total assets minus its total liabilities

Set 3: BALANCE: This or That? 

These pairs of terms are related, often opposites. Get clarity on what they mean so you understand how they work together.

PAIR # 1

  • Certified Public Accountant (CPA): Not all accountants are CPAs. This professional title can only be used by someone who meets the educational and experiential requirements, including passing a state-administered exam and maintaining ongoing training. CPAs must uphold a code of ethics because they handle sensitive personal information and may provide influential financial advice to their clients. 

  • Bookkeeper: Not all bookkeepers are accountants, but many are or have some accounting training. This job title typically refers to the person who performs the record-keeping and other administrative functions for a business’s daily financial transactions. 

PAIR #2

  • Expense: the cost of doing business, including materials, insurance, salaries, and rent

  • Revenue: the income from performing regular business activities 

PAIR #3

  • Accounts Receivable (AR): the money owed to a company for the goods/services that it provided; also the name of the department within a company that handles collecting this debt from customers

  • Accounts Payable (AP): the money owed to creditors; also the name of the department within a company that handles purchasing and paying these bills

PAIR #4

  • Fixed Expense: predictable cost that occur on a regular basis with known amount, like rent

  • Variable Expense: irregular cost with amounts that are subject to change at any given point of time, like gas prices

PAIR #5

  • Direct Expense: Also called Cost of Goods Sold (COGS), this is the cost to directly produce items for sale, such as labor, materials, or costs to purchase items for resale. 

  • Operating Expense: Also called Overhead, this is any cost of doing business that doesn’t directly create the company’s main products/services, such as advertising costs and administrative staff. 

BONUS ROUND: 

  • Accrual Accounting: record keeping method used by most businesses (and required if they have employees) that dates financial transactions when they are earned, not when the payment is made or received

  • Cash Accounting: record keeping method that marks payments when they happen, not when they’re incurred, best for sole proprietors 

Did you break a sweat testing your financial fitness? We hope this vocabulary workout gives you confidence to take responsibility for your money behavior.