Entrepreneurs are a talented bunch.
Whether they’re blessed with creativity, leadership or selling-skills – or perhaps all three – you tend find a lot to admire in those who choose to break the mould and set up their own businesses.
However, financial know-how isn’t necessarily seen as a pre-requisite to launching a business venture – and arguably with small-business specialist accountants widely available, it doesn’t have to be.
Despite this, whether or not you are working with an accountancy firm, it’s important to have a basic grounding in business finance – especially regarding tax. To support this you may find the Government’s guide to self-assessment helpful.
Each year we get numerous requests for help as the end of the financial year draws near, and the dreaded tax return remains firmly anchored to many a new – and experienced – entrepreneur’s to-do list.
Lacking knowledge of the core terminology around tax fills many with unnecessary worry and makes tax management a whole lot scarier.
With this simple guide to some business-finance jargon, we hope to ease anxiety around tax.
Read on four finance and tax terms every entrepreneur should know.
1. Assets
These are the economic resources a business has. What does that mean? Well a business’ economic resources may include the products it has for sale, the office furniture and equipment – including business vehicles, supplies purchased for use, and any trademarks or copyrights it owns.
All these things count toward a business’ value as they could be sold if the business was facing financial difficulties.
2. Liabilities
Liabilities include any and all debt accrued by a business at any stage whether that is starting out, growing or maintaining its operations. The most common types of liabilities we often see include bank loans, credit card debts, and monies owed to vendors and product manufacturers.
You’ll find that liabilities are generally split into two major types: current, which refers to immediate debts (such as, money owed to suppliers), and long-term debt, which refers to liabilities (e.g. loans and accounts payable).
3. Capital (also called equity)
There’s a rule of accounting we can use to neatly define capital: Assets = Liabilities + Capital.
Put your algebra hat on and you can see that we can subtract liabilities from assets to calculate capital. Good to know – right?
4. Expenses
Expenses are the costs that a business incurs in order to operate and generate revenue.
Unlike assets and liabilities, expenses are related to revenue, and both are listed on a company’s income statement (more on statements later).
Expenses are a company’s running costs, while liabilities are the obligations and debts a company owes.
Expenses may include office rent, administrative and marketing and development payroll, telephone and internet bills – in essence, those things a business pays for but doesn’t resell.
NB: Tax and interest are also expenses
5. Profit
We can use a formula again, here. Profit is calculated as revenue (total business income) minus expenses.
Profit is the end goal for any business and will be denoted on your income statement, commonly referred to as the P&L (profit and loss).
Your profit and loss statement reflects your financial performance over a certain period of time. It includes all revenue and expenses and any net profit or net loss over the same period.
If you aren’t regularly looking at or talking about your P&L – get onto an accountancy firm who can help you. We couldn’t stress this enough.
6. Financial reports and statements
A financial report is a comprehensive account of a business’ transactions and expenses, created to give a business oversight of its financial matters. You may need a financial report for your business if you are looking for investor funding.
A financial statement is similar in terms of what it covers, but is generally a more formal document – not usually one that would be used internally.
You may find your accountant talking about balance sheets. A business’ balance sheet gives an overview of the company’s financial situation at a given moment. This includes the cash it has on hand, the notes payable it has outstanding and owner(s) equity in the business. It’s worth you or your accountant keeping this as up-to-date as possible.
7. Deductions
Deductions are items or expenses subtracted from your income to reduce the amount of income that is subject to being taxed. It’s well worth discussing deductions with your accountant as they offer the potential to take a chunk off your tax bill.
Takeaway
A grasp of the above terms will stand you in good stead when it comes to starting or running a business – and are crucial if you intend to complete your own tax return or manage your business’ finances in full.
Please note: The above should purely serve as an introduction to the jargon surrounding business finance and tax and cannot substitute the expert advice of your own personal accountant.
Do get in touch with Howlader and Co for more information on their small business services.