Running a small business is no small task. You're juggling multiple priorities daily—from managing employees to growing sales. And in the background, the systems and processes that keep your business running constantly change. Staying informed is essential to keeping your business competitive and moving forward.
One of the most critical areas to understand is how your finances shape your business’s success. Even if you work with an accountant or bookkeeper, having a strong grasp of key financial and operational terms may help you make smarter decisions.
To give you a solid foundation, we’ve compiled this glossary of commonly used terms in small business finance and operations. Consider the following tips to help navigate the financial side of your business with confidence.
Accounts payable refers to money your business owes to creditors or suppliers for goods or services purchased on credit. Many business owners may opt to pay outstanding bills close to their due dates to improve cash flow.
Accounts receivable is money owed to your business by customers for goods or services you’ve provided. This is considered an asset since it represents funds your business is legally entitled to collect.
This accounting method records expenses and revenue when earned or incurred, not when cash is received or paid. For example, you would record revenue when a project is complete rather than when you get paid. Accrual accounting offers a more accurate long-term picture of your business's financial performance than cash accounting.
Amortization is the process of gradually paying off a loan over time through scheduled payments. These payments typically cover both interest and principal, and an amortization schedule helps track this progress.
An asset is anything of value your business owns, either tangible (like equipment or inventory) or intangible (like intellectual property). Business assets may be cash, cash on hand, accounts receivable, commercial property, equipment, inventory, and anything else that can be sold for cash.
A balance sheet is a financial statement that shows what your business owns (assets), owes (liabilities), and the value left over for owners (equity). It provides a snapshot of the financial health of your company at a specific moment in time and is an essential tool for understanding your business’s net worth.
A business credit score measures your company's creditworthiness, much like a personal credit score does for individuals. It’s based on factors like outstanding debt, payment history, and the length of your credit history.
A bookkeeper is responsible for recording your business’s financial transactions. They help maintain accurate financial records, which form the foundation for accountants to generate reports and file taxes.
Also known as the debt-to-equity ratio, business debt usage compares total outstanding business debt to annual revenue or total business assets. Your business debt must fit the lender’s criteria to qualify for a loan.
This percentage reflects the growth or decline in your business’s revenue over time. It’s a helpful indicator of your sales performance and overall growth. It illustrates how your sales have increased (or decreased) over your years in business.
Cash accounting records income and expenses only when money is received or paid. It’s a more straightforward method but may not provide a comprehensive picture of your financial health.
A cash flow statement tracks the movement of money into and out of your business over a specific period. It highlights cash generated from operations, investments, and financing activities, helping you manage liquidity.
This ratio combines your personal and business cash flow and compares it to your combined annual personal and business debts. It gives lenders a complete picture of your ability to handle financial obligations.
A CRE loan is used to purchase or refinance property for your business operations. These loans may help you acquire commercial space or lower payments on an existing property.
The direct expenses your business incurs to produce or purchase the goods you sell. This includes costs like raw materials, labor, and manufacturing expenses. COGS does not include indirect costs like marketing or administrative fees.
Knowing your COGS is important because it helps calculate your gross profit and explains how efficiently your business is operating. To improve profitability, many small business owners focus on strategies to reduce COGS without compromising product quality.
Creditworthiness is a valuation performed by lenders determining the possibility of a borrower defaulting on his debt obligations. It considers factors such as repayment history and credit score.
This type of loan allows you to replace high-interest debt with one at a lower interest rate, potentially saving money and improving cash flow.
Equity represents the ownership value of your business, calculated as the difference between total assets and total liabilities. It’s often referred to as the “owner’s share” of the company.
The FICO SBSS score is a credit score used by lenders to assess the creditworthiness of your business. FICO stands for the Fair Isaac Corporation, a leading company in credit scoring, while SBSS stands for Small Business Scoring Service.
Your FICO SBSS score is calculated using a mix of personal and business credit history, along with other financial data. Factors like the age of your business, revenue, assets, and number of employees may also influence your score.
The SBSS score ranges from 0 to 300, with higher scores indicating a stronger credit profile. A good score may help improve your chances of securing financing for your business.
Fixed costs are expenses that do not change regardless of your business’s level of production or sales. Examples include rent, salaries, and insurance.
Gross profit margin is a financial metric that shows the percentage of revenue after deducting the cost of goods sold (COGS). It indicates how efficiently your business produces and sells its products or services.
Liquidity measures how easily your business can convert assets into cash to cover short-term liabilities. Higher liquidity means your business is better positioned to handle financial obligations.
Net profit, also called net income, is the amount of money your business has left after deducting all expenses, including operating costs, taxes, and interest. It’s often considered the “bottom line” of your financial health.
Overhead refers to the ongoing expenses required to run your business that are not directly related to producing a product or service. These expenses include rent, utilities, and office supplies.
Your personal credit score is a number that represents your creditworthiness and tells lenders how likely you are to repay the money you’ve borrowed.
This ratio compares your total personal debt to the total credit available to you. It shows lenders how well you manage credit and may affect your ability to qualify for a loan.
A profit and loss statement summarizes your business’s revenues, expenses, and profits over a specific period. It helps you track performance and identify trends.
The Small Business Administration (SBA) is a government agency founded in 1953 and created to support entrepreneurs and small business owners in the United States. SBA programs support small businesses in all areas. Those include specialized programs for women, minorities, and veterans. SBA also provides loans to victims of natural disasters like flooding and wildfires and specialized help in international trade.
SBA loans are government-guaranteed small business loans designed to offer longer repayment terms and low interest rates. A common misconception is that the Small Business Administration (SBA) lends money directly to small businesses. In reality, the SBA typically does not make direct loans. Instead, it provides a guarantee to lenders, promising to reimburse them for a percentage of the loan if the borrower defaults.
This guarantee reduces the risk for banks and other lenders, making it easier for them to extend financing to small businesses across the U.S. Many lenders offer SBA loans, like the popular SBA 7(a) loan program, but processes, requirements, and fees may vary.
This score is one factor that helps lenders determine how likely your business is to make timely loan payments and ultimately repay the loan in full.
Working capital, or net working capital (NWC), is the difference between current assets and liabilities. According to the Small Business Administration’s website, current assets are the most liquid of your assets. Current liabilities are any obligations due within one year. Working capital can be positive or negative and represents the cushion of protection you can give your short-term creditors.
Here’s a conclusion for this type of article that aligns with your brand voice, offering encouragement while reinforcing the importance of understanding these terms:
Running a small business means wearing many hats, and staying on top of your finances is one of your most important responsibilities. Understanding the terms in this glossary can help you make more informed decisions, improve your financial management, and position your business for growth.
While learning the basics is helpful, remember that you don’t have to do it all on your own. Working with trusted professionals like accountants, bookkeepers, or financial advisors may provide the guidance you need to keep your finances on track.
Your business journey may come with challenges, but building a strong financial foundation can help set you up for long-term success.