10 Accounting Terms Every Startup Founder Should Know
Although the concepts behind these accounting terms are important to the financial health of a business, many entrepreneurs and new business owners are not necessarily familiar with the terminology. Of course, most owners didn't get into business to be bookkeepers or accountants; nevertheless, these terms and principles are a clear-cut indicator of how well a business is doing, and therefore should be understood on a basic level.
Here are 10 commonly used accounting terms every startup founder should know:
"Assets" include anything with monetary value that a company owns outright and that serves as a potential source of future financial benefit. Assets usually include cash, equipment, office space, inventory, vehicles, computers, etc. "Liabilities" encompass anything related to money a business owes and that must be paid back in full, i.e., debts, notes payable, accounts payable, etc.
2. Operating Expenses
This refers to costs incurred by a business for such things as rent, utilities, phone bills, tax, and interest.
3. Equity vs. Debt
By and large, startup founders rely on outside funding to get their businesses going. "Equity"—ownership in your business—is what you sell to banks or investors in order to obtain the cash you need for equipment, operating expenses, etc. "Debt" refers to loans from banks that you must repay, with interest, at a later date.
"Equity versus debt is a critical decision for any entrepreneur," noted Jed Simon, CEO of FastPay, "and it is important to know the difference as the future of your business may depend on it."
4. Gross Revenue vs. Net Income
"Gross revenue" is how much money clients and customers pay to a business. "Net income" refers to money that remains after a business has paid its expenses.
5. Gross Margin
This is the percentage of total sales revenue a business earns after deducting the costs of the production of goods or services. A higher percentage represents a greater amount a business retains on each dollar of sales.
6. Variable vs. Fixed Costs
Just as it sounds, "variable costs" describe expenses that go up or down, depending on the volume of sales. These costs (also known as "cost of goods sold" or "cost of revenue") includes supplies and raw materials, sales commissions, the services of independent contractors, and so on. By their nature, variable costs are often difficult to calculate ahead of time.
"Fixed costs," on the other hand, stay the same regardless of how much you sell of your goods or services. These "operational costs" usually include employee salaries, business insurance, rent, utilities, insurance, advertising and marketing. Such costs aren't linked to an individual sale.
Some, if not most, business assets decrease in value over time. An office printer, for example, loses value for each year of physical and operational deterioration. Accountants use depreciation to assess the amount of business expenses that can be taken out of tax obligations.
8. Cash Flow
The money you generate and the amount spent during a given time-frame is called "cash flow." Because it reflects the ability to pay operational expenses (based on how much cash a business has on hand), it's a commonly used metric for the state of a business's financial well-being.
9. Accounts Payable/Receivable
These terms refer to the amount of money you have to pay out in terms of bills and the money you have yet to receive from the sales of your goods or services.
10. Accounting and Bookkeeping
The terms "accounting" and "bookkeeping" are often interchangeable in the minds of business owners. A bookkeeper records financial data. Accountants take that data and use it to forecast the best future opportunities for that business. There's some overlap from time to time, but entrepreneurs should understand the differences between these two services.
It's not necessary to be a financial wizard to succeed as a startup business. But not knowing basic financial terms could cause issues for entrepreneurs now or in the future.