When you’re looking to start a business, some terminology may be unfamiliar to you - whether you've hear it being used or not. And while you don't need a formal education to be successful in the business world, even if you’re great at what you do, it’s important to know certain basic business terms and concepts.

As we want to help in any way we can, our team have put together a quick-reference list of common business terminology you will come across on your journey to becoming a business owner. Understanding these 24 terms and phrases will help you manage your finances, organise your operations, and formulate your business strategy. Check it out!

1) Accounts payable

Accounts payable are short-term debts owed by a small business. These often include bills for utilities, inventory received, or services rendered. For every business owner, it's important to know how much money the business owes in the short term so cash flow can be managed to ensure all bills are paid on time.

2) Accounts receivable

For businesses that sell products or services on credit to their customer, the amount due would be classified under accounts receivable. Accounts receivable count as an asset, but it’s important to track total days a sale is outstanding. Watching this number closely helps determine which customers are paying in a timely manner and which accounts need extra attention.

3) Assets

These are the items a business uses to conduct business (such as equipment, inventory, and property). It's important to understand that not all assets are physical goods, things like patents and copyrights are also valuable parts of your business that are classified as assets.

4) Balance sheet

Balance sheets show the relationship between assets, liabilities, and equity as of a specific date. It breaks down the assets and liabilities into current and long-term items. Businesses strive to increase their assets and equity while reducing liabilities. Keeping your balance sheet up-to-date will helps current and future cash flow in every business.

5) Bootstrapping

You may have heard of a small business owner “bootstrapping” the funding of their business. This means that they invested their own money and used personal credit to pay for business expenses as it ramps up to be self-sustaining. This method is commonly chosen by business owners to avoid debt or because they are unable to get business financing.

6) Break-even point

A business' break-even point is when its total revenues equal its expenses. This is an important number for all small business owners to know so that they understand much revenue is needed before they start making a profit.

7) Business credit

Just like we have a personal credit report and score, so do businesses.  A business credit score becomes more important as the business grows and requests approval for things like building leases, larger business loans, and letters of credit. Business owners can find their business credit reports and scores are available from Experian, Credit Safe, Equifax, and Iwoca.

8) Cash flow statement

This document summarises the flow of cash in and out of a business during a specific period of time. The document shows the beginning and ending amount of cash available and uses categories of operations, investing, and financing. Business owners rely on the statement of cash flows to see where the money comes from and where it goes.

9) Cost of good sold (COGS)

For businesses that sell products, the cost of goods sold is the total cost associated with buying or building what they sold. This includes both the raw materials and the labor associated with manufacturing the product. The difference between sales price and COGS determines how much money is kept as profit.

10) Depreciation

When a business buys an asset (vehicles, real estate, computers, office furniture, intellectual property etc), the asset has a useful life expectancy before it must be replaced due to wear and tear. Instead of assuming that the asset retains the same value throughout its life, depreciation reduces the value incrementally each year. This kind of expense reduces the profitability of a business, even when no money is spent, to account for the reduction in the value of that asset. Accumulated depreciation is a balance sheet item that totals the amount of depreciation expensed over the assets lifetime.

11) Fixed costs

These are expenses that do not change over the short term. The fixed costs of a business are the expenses a business owner will incur whether they produce or sell items or not. Some examples of fixed costs businesses experience are things like rent, insurance and employee salaries.

12) Income statement

This is a statement that summarises the revenue, expenses, and net profit of a business over a specific period of time. This report is common given monthly, quarterly, and annually. Business owners can customise the report by categorises such as company division, geographic region, product type, or other criteria to analyse and compare the performance of business at that time.

13) Inventory

Inventory is the value of goods that a business has available for sale. The inventory is purchased from a supplier or manufactured by the business from raw materials. Inventory is recorded as assets on the balance sheet. When products are sold, they are removed from inventory, and counted towards the cost of goods sold (COGS).

14) Liabilities

Liabilities are the sum of all monies owed by a business. They are categorised as current (within one year) or long-term liabilities (loan payments, capital liabilities, deferred compensation, and deposits from customers). Business owners focus on these to prepare for payments coming up in the short-term and create long-term plans to repay debts into the future.

15) Limited Liability Company (LLC)

A limited liability company (LLC) is a corporate structure where owners are not liable for the company's debt. It is possible for an LLC to be owned by a person, corporation, other LLCs, and foreign entities, and they can elect to be taxed as a corporation, a partnership, or as part of the owner's personal tax return.

16) Net loss

Net loss occurs when a business' expenses are greater than revenue. It is very common for new businesses to have net losses due to startup expenses and efforts to grow revenue. If a business loses money, business owners make up the difference through business savings, borrowing, extending its accounts payable, or gathering more money from personal accounts. If the business continues to experience net loss, the business owner will need to re-evaluate the plan and strategy to determine if the company is viable.

17) Overhead

Overhead refers to the non-labour expenses required to operate a business. These expenses are not linked to the manufacturing of a business's products or providing services. Knowing how much overhead a business has helps to determine how much a business owner should charge their customers.

18) Owner equity

This is a representation of the business owner's net investment in the company since it began. Simply subtract liabilities from assets to calculate the value of owner equity. When the company makes a profit, the number increases or the owner contributes money or assets to the business, and it decreases when the company loses money or the owner makes a withdrawal from the company.

19) Personal guarantee

Although small businesses have their own credit report and score, a lender may require a personal guarantee from the owners in order to guarantee any loan. This is a guarantee that holds the owner responsible for a business debt in case the business is unable to make payments. In most cases, when a business credit card, loan, or lease is applied for, the business owner will personally guarantee the debt.

20) Profit margin

This is the measure of a business' profitability. Subtract all the expenses from the revenue to find the profit margin. If the number is positive, the company made a profit. However, if it is negative, the company operated at a loss. Business owners try to increase their profit margin by increasing prices, selling more items or services, and reducing expenses.

21) Return on investment (ROI)

The return on investment (ROI) measures how the investment into the business performs. It can be calculated by dividing a company's net profit by the total investment multiplied by 100%. For example, a $1,000 profit on a $10,000 investment would be a 10% return. It is important to track the ROI so the performance of the investment into the business can be measured and compared with alternative investments that could have made instead.

22) Sole proprietorship

This is one of the most common form of business here in the UK. Sole proprietor own 100% of the business and are responsible for all debts and obligations of the business. Often sole proprietors operate the business under their own name or do business under another name.

23) Target market

This is a group of people or businesses that a company aims to sell its products and services to. The better a business understands its target market, the more it can tailor the marketing campaigns of its products and service to those who want or need them, to increase sales. This can also help a business decide what types of products to create or services to offer to be more attractive to their customers in the future.

24) Variable costs

Variable costs are the expenses that increase and decrease based on the number of items produced or sold by a business (common examples include sales commissions, raw materials, labour costs, and utilities). Businesses that increase their volumes often benefit from economies of scale by being able to purchase larger quantities of goods at a lower cost (per item). This increases the profitability per item to grow net income or provides opportunities to reduce the sales price to undercut the competition and attract more custom.