Mar 6, 2013

10 Key Small Business Finance Terms to Know

Let’s be real: there are a lot of financial terms to know when you’re a small business owner. Chances are – unless your small business happens to be in the finance industry – you know a lot about doing what your business exists to do, and you’ve had to learn everything else it takes to actually operate your company logistically. A difficult area to master can be finances, from loans to taxes. It is endlessly helpful when navigating these areas to be familiar with some of the key terms you’ll come across. On one level, it makes communicating with lenders, accountants, and tax attorneys much easier, but even more importantly, the process of learning financial vocabulary is likely to call your attention to fiscal details of your company that might not have previously even known needed tending. Since there are so many words and terms to learn as a financially savvy small business owner, let’s start with 10. (Don’t worry – we’ll do more lists like this in the future, to cover even more terms.) 1. Amortization Making regular payments on a loan or debt over time. This can be useful when it makes more sense to spread out large expenses over a longer period of time, rather than taking a big hit all at once. 2. Capitalization This is how a business has channeled funds into fixed assets. Assets can include physical buildings like warehouses, company vehicles, business-related equipment, and long-term contracts. “Cap sheets” outline long-term debt and equity. 3. Depreciation All of the assets your company possesses lose a little value every year, based on use and longevity. Knowing how your assets depreciate over time is important for tax purposes, since you’re able to deduct “annual loss in value” from revenue, thus lowering your taxable income. 4. Gross profit Simply, this is the difference between what it costs your company to produce a product, and what you sell it for. If your small business deals in services rather than tangible goods, your gross profit is the difference between what you charge a client for your services, and how much your labor costs are to provide it. 5. Marginal cost For every product you produce, or each time you render a service, there is a cost to your company. This amount is variable, depending on fluctuating labor and material costs. This is known as the marginal cost. Diligently tracking this amount will help you stay on top of any changes that need to be made to your fees or prices to keep your profits balanced. 6. MACRS Stands for “modified accelerated cost recovery system”. I know, it’s a mouthful. This is the method by which you determine how much of an asset’s value can be written off each year. This handy chart saves a lot of guesswork when it comes to writing off assets on taxes and trying to figure out depreciation on your own. 7. Break-even point This is always a great point to reach in your fiscal year! This is the point at which the number of units sold, or billable hours reached, that cover your overhead costs of operation. Everything sold or billed beyond this point is profit. 8. Liability Any debt that your company owes is called a “liability”. 9. APR Stands for Annual Percentage Rate. This is the total of all fees and interest on a loan for the year. You’ll see it expressed as a percentage. 10. Compound interest This is the interest that is calculated taking past accumulated interest into consideration, rather than just interest on the principal loan amount.