Establishing and running a new business in Singapore or anywhere in the world, means knowing a lot of things that you were not aware of before. One of the leaps for new business owners is in the field of accounting. The biggest challenges that new businesses face fall under financing, including, cash flow, managing accounts receivable, tax preparation, paperwork, and bookkeeping. There are many accounting concepts and terms to know and it can be a big task to know all these terms if you are not a financing expert.
Every business owner might not enjoy talking about financing but it is imperative to know about the basic concepts so as to succeed. Some of the important accounting terms or concepts, which every business owner should know are listed below:
Accounts Receivable and Accounts Payable
In simple terms, accounts receivable is the money that you are expected to receive. To maintain healthy cash flow, it is essential to manage your collections process and accounts receivable. Accounts payable indicates the money that you have to pay to somebody.
Assets are the property of the business and can be transferred into cash. Business assets can also be used as collateral while clearing business loans. Assets can either be intangible (intellectual property) or tangible (accounts receivable, equipment, vehicles).
The balance sheet of a business summarizes the financial data including the owner’s equity, assets, and liabilities. Balance sheet assists the business owner to identify the net value, accounts receivable, accounts payable, long-term debts, current debts, earnings, and other things.
Break Even Point
Different industries have different profit margins. However, the break-even point assists the business to identify when your business would reach a positive cash flow. You break-even when your business revenue equals the overheads or business cost.
Cash flow is the movement of cash out of your business or in your business. Cash flow is a balancing act that gets disrupted by unexpected expenses, the late paying customers and a lack of capital access.
Cash Conversion Cycle
To manage cash flow, it is important to know the cash conversion cycle. Simply put, the cash conversion cycle is nothing but the time it takes a business for selling the inventory.
Cost of Goods Sold
Cost of goods sold is a simple calculation of all costs involved while producing and selling a product. Knowing your cost of goods sold will help you identify how to price the product profitability.
From trade credit to line of credit, to credit cards and to your business and personal credit score, it is a part of the business to access and extend credit. You need to educate yourself about why credit is important for you.
Expenses are nothing but the costs incurred while running a business. It can include but is not limited to, rent to marketing, training, vehicle mileage etc. Expenses can be variable and accrued expenses.
Liabilities are nothing but financial or legal debts that your business carries such as accounts payable, wages, credit card debt, office or warehouse rent etc.
This is the term which each business owner or even an individual is familiar with. The business runs on profit with a view to earning maximum profits. So what is profit? When you notice that your organization’s cash flow is positive, you can say that your organization is profitable. When your organization’s cash flow is positive, you can say that your cash inflows are higher than the cash outflows. In order to be profitable, your organization needs to have more cash inflows.
Profit and Loss Statement
Profit and loss statements will indicate the performance of your business. A P&L statement breaks down the expenses incurred and revenue generated. The P&L statement will identify how much money your company is left with. It is important for each business owner to know if the business is making a profit or incurring losses so that the necessary steps can be taken to either improve the situation or grow the business to a next level.
Can you think of any other regularly used terms so let us know and we will add it to this list?