Feb 27, 2024
Starting a business involves understanding key financial concepts like financial models, cash flow statements and financial projections. Making sure you know each term used in these is crucial for managing your startup's finances, securing funding from angel investors or other sources, and making informed decisions about your business.
Account Payable: A total of all unpaid short-term (less than 12 months) money owed by a company to its creditors or suppliers.
Account Receivable: A total of all short-term (less than 12 months) money owed to customers (debtors).
Assets: Resources owned by a company that have economic value (things that can be turned into cash, such as laptops, vehicles, etc.)
Balance Sheet: A financial statement of a business on a specific date, showing assets, liabilities, and equity.
Bonds: Investments in the form of a debt, which has a fixed interest rate maturity date. Buying a bond means that a corporation or government can borrow the individuals money and the corporation repays the investors with interest.
Bookkeeping: A record of a business’ financial transactions.
Break-even point: The level of sales at which total revenue equals total costs.
Burn Rate: The rate at which a company uses up its cash for expenses.
Capital Cost: A one-off payment acquiring or maintaining physical assets, like property or equipment.
Capital Gains: Profits earned from the sale of assets or investments over time.
Capital Growth: Increase in the value of assets or investments over time.
Cash Book: A record of all cash transactions which include receipts and payments, maintained by a company.
Cash Flow: The movement of cash in and out of a business, indicating its liquidity position.
Chart of Accounts: A list of all accounts used by a company to record financial transactions.
Cost of Goods Sold (COGS): Includes the costs directly associated with producing the goods or services sold by a company, such as raw materials, direct labor, and other direct production costs.
Commercial Bill: A short-term debt instrument issues by a company to finance its immediate cash needs, typically with a maturity of less than one year.
Compound Interest: Interest calculated on the initial principal and also on the accumulated interest from previous periods.
Depreciation: The gradual decrease in the value of tangible assets over time due to usage or wear and tear.
Earnings Before Interest, Taxers, Depreciation, and Amortisation (EBITDA): A measure of a company’s operating performance, indicating its profitability before non-operating expenses are deducted.
Equity: The ownership interest in a company’s assets after deducting liabilities.
Expenses: The costs incurred by a company in its normal operations to generate revenue.
Gross Profit: The difference between revenue and the cost of goods sold, representing the profit before deducting operating expenses.
Gross Profit Margin: The percentage of revenue that exceeds the COGS, indicating a company’s profitability.
Income Statement: A financial statement summarising a company’s revenues, expenses, and profits over a specific period.
Interest: The cost of borrowing money or the return on invested capital.
Investment: Allocation of funds with the expectation of generating income or profit in the future.
Liabilities: Financial obligations or debts owed by a company to its creditors or other entities
Liquidity: The ease with which assets can be converted into cash without affecting their market value.
Net Income: The total profit earned by a company after deducting all expenses, taxes, and interest from its revenue.
Return on Investment (ROI): A measure of the profitability of a business. This comes from subtracting the initial cost of the investment from its final value.
Revenue: The total income generated by a company from its normal business activities, including sales of goods or services.
Runway: The total time a a startup has before they run out of their cash reserves.
Solvency: The ability of a company to meet its long-term financial obligations.
Stocks: Ownership shares in a corporation that entitle the shareholder to a portion of the company’s assets and earnings.
Valuation: The process of determining the economic value of a company, asset, or investment opportunity.
Unit economics: The direct revenues and costs of a particular business measured with each individual customer, user, or product.
Now you know ;)