6 Essential Bookkeeping Terms for Small Businesses
Hiring an bookkeeper is widely considered best practice for small business owners. But delegating your bookkeeping doesn’t mean you should not be involved in the process to some degree, or not have a handle on your financial performance and position. On the contrary, it’s recommended that business owners work closely with their bookkeeper to better understand their financial position, and make smart plans for future growth.
Want to increase your bookkeeping knowledge so you can have more informed, insightful discussions with your bookkeeper? Start right now, with our list of six essential bookkeeping terms for small business owners.
Bookkeeping Terms # 1: Cash Flow
Do you have more cash flowing into your business each month than you pay out to cover costs and expenses? If so, that’s fantastic and you’re “cash flow positive.” If the opposite is true, your cash flow statement will reveal that you’re “cash flow negative.”
Having excess cash on hand means you’re better equipped to keep up with debt, cover unforeseen expenses, and invest in growth opportunities. Your bookkeeper can generate a cash flow statement regularly to keep tabs on this key performance indicator.
Bookkeeping Terms # 2: Profit and Loss Statement
The Profit & Loss statement (also known as the Income Statement or Statement of Financial Performance) is one of the most important documents used by bookkeepers and accountants to determine the profitability of your business.
The Profit & Loss statement lists revenues and gains as well as expenses and losses over a certain period of time. It calculates your all important “bottom line” so you know if you’re operating at a loss or turning a profit.
Bookkeeping Terms # 3: Gross vs Net Profit
Gross profit is what remains when you subtract the cost of goods sold (COGS) from your total revenue. Net profit, on the other hand, drills deeper. It reveals your profit after also allowing for your operating expenses.
Gross and net profit are both profitability ratios, and are key for measuring business performance.
Bookkeeping Terms # 4: Balance Sheet
The Balance Sheet (also known as Statement of Financial Position) offers a snapshot of your overall financial position at a particular moment in time. It lists the assets (such as cash, inventory, accounts receivable, and equipment); liabilities (such as accounts payable, tax and super payable, loans payable); and shareholder capital. In a nutshell, the balance sheet shows what you own, as well as what you owe.
Bookkeeping Terms # 5: Accounts Receivable & Accounts Payable
Simply put, accounts receivable is money your business is owed by customers for goods or services sold. It is considered an asset on your Balance Sheet. Accounts payable is money you owe suppliers and any bills you have yet to pay, so it’s listed as a liability on your Balance Sheet.
Bookkeeping Terms # 6: Bad Debt Expenses
Bad debt happens when you can’t collect payment from your customers. Long term outstanding accounts receivable could be listed on your balance sheet as “bad debts”, and if they’re never collected, may have to be written off as a loss.
And there you have it – six key bookkeeping terms to help you build your accounting vocabulary, join the conversation, and empower smarter business decision-making.