Did you hate numbers and maths in school? Remember those “I will never use maths and algebra in life” comments? Well, the joke is on you because you want to be an entrepreneur and entrepreneur kinda use maths every day. Of course, the maths is financial and these terms get thrown around in conversions daily in the circles of entrepreneurs. To avoid having experiences, where it sounds like people are speaking in Greek to you, here are some important terms you should understand as an entrepreneur.
A simple definition of an asset is a thing of value. For business purposes, an asset can be best defined as something that puts money in your pocket. You can read this article here for an in-depth understanding of what an asset is. Assets can also be classified intangible (physical or valued assets) and intangible such as brand name. Or classified as current (expected to be used within 12 months) non-current (fixed, expected to have a life beyond 12 months).
Liabilities like assets are contentious as well but ultimately in plain language, they take money out of your pocket. The International Financial Reporting Standards define a liability as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of the entity’s resources. These can also be classified as current and non-current as with assets by the same logic.
Margin refers to the residual amount after subtracting the costs of supplying a product from the amount received for it. Essentially the money you make. Gross margin refers to the margin from subtracting direct product costs (materials) while net margin refers to margin after subtracting direct and indirect costs.
Cost of sales
This is the direct costs that go into providing a product. While it can be as simple as materials and labour it may also include items such as transportation (to get the product to you), delivery (if you are paying for it) and other costs to get the product to a saleable condition that are being covered by you.
Equity refers to the stake the owners have in the overall business. Essentially calculated by subtracting your liabilities from your assets it shows the ordinary value of the business.
This is a concept that can get pretty complex. But to keep it simple forget margins and profit for a minute and think strictly in terms of how cash moves in and out of your business. In simple terms, if you are keeping more cash than before you will have the cash to pay for tomorrow’s expenses. If you are keeping less cash than before you may soon run out of cash to pay for expenses. Therefore cash flow is critical.
Not all expenses are created equal. Capital expenditure refers to expenditure on items of an enduring benefit. Machinery, vehicles, productive assets and so forth. This does not form part of your expenses for accounting purposes when calculating annual profit and loss.
Working capital refers to money and its equivalents that are used in the day to day obligations of running a business. Things such as supplying customers, paying Bills and smaller incidental expenses are all services by working capital.