• New Wave Accountants

6 Basic Accounting Terms Every Small Business Should Know

Every business owner must know their accounting terms. Although some business owners hate the thought of having to manage numbers and pieces of paper, these accounting terms are a small price to pay for your success. Read through this article and you'll find that these small details are very important in the long run.


Before you mess up your company’s ledgers, here are six accounting terms you need to memorise:


1. Cash Flow


Cash flow means the movement of cash. It includes the money you collect from your customers, the cash you use for everyday expenses, and the cash you put aside for future use. Unless you properly track your cash flow, you could confuse high sales figures for high profit margins. This is why it’s necessary to pinpoint where your money goes, from the moment you receive it from your customers till it goes to your separate accounts.


2. Gross Profit Margin


This is the difference between your price and your cost. For example, if you sell a product at $100 with your cost being $80, this puts your gross profit margin at $20.


You need to have a gross profit margin of at least 20 per cent. Even though your gross profit margin may seem small, you must be able to pay for your business expenses, labour, and your products.


3. Net Profit Margin


The net profit margin is the difference between your total sales and your total cost.


For example, if you sell products for $100 and your cost is $80, your net profit margin is 20 per cent. Ideally, if you have a net profit margin of 20 per cent, you are in a good position to start making changes, like increasing your prices and making your products better.


Also, this gives you enough money to spend on growing your business by possibly adding more products and services.


4. Balance Sheet


The balance sheet tells you how much money you have and how much money you owe. It also gives you an idea of your financial status.


For example, if you have $1000 in cash and you owe $1500, your net position may be a loss of $500. You should have a positive net position of at least $500.


It's crucial to ensure that your net position is always positive, since it’s a good indicator that you're doing a great job managing your business and your finances.


5. Burn Rate


The burn rate is the amount of money you spend on expenses each month. You want to try to keep your burn rate as low as possible so you can save money. Look for ways to cut corners on expenses. So make sure that you're always spending money wisely.


6. Equity


The equity is how much money you personally have invested in your business. In order to be a successful business owner, you have to have a certain amount of money in your business. That way you'll have enough assets to keep your business afloat when times get tough. For this reason, you must make sure you have enough assets to keep your business going and for your future business endeavours.


Keep Track of Your Business Finances


Growing your business means having to be on top of your finances. These terms are the most important basic accounting terms you'll need to use when running a business and a good way to stay on the right track.


There’s no harm in asking for help with your finances; in fact, it’s one of the best things you can do. An accountant in Gold Coast can help you stay on track. Contact us here at New Wave today.


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