When it comes to finances, as an entrepreneur you should be able to speak the language. You will encounter some of these terms when interacting with bankers, peers and clients. Make sure you can speak intelligently by understanding these key terms, which will get you started into the world of financial terminology.
In the Red
In the past, negative numbers were written down in red ink on accounting ledgers. When a person references the term “in the red”, they are referring to being in the negative or showing a financial loss.
In the Black
In the past, positive numbers were written down in black in on accounting ledgers. Therefore “in the black,” references showing a profit.
The bottom line is a reference to the amount of money your business has left over once income is added and expenses are deducted.
These expenses are the ones that exist in your business even if you are not making a sale or closing a contract. Examples of these types of expenses include rent for your retail or office space and expenses for your weekly payroll.
These expenses are the ones that will change depending on your amount of sales or contracts closed. Examples of these types of expenses include marketing, raw materials that go into creating your product, shipping charges and sales commissions.
The “burn rate” references the amount of money that is spent each month. This will include your fixed costs like payroll and rent, as well as variable expenses and equipment costs.
Revenue is the total amount that is received from sales in your business.
Income is the total amount that is received from any source. This can include the revenue from sales, but can also include things like business grants and loans.
There are two types of profit: gross profit and net profit. Gross profit is the amount left over after cost of goods sold are deducted, but before general and administrative costs are deducted. Net profit includes deductions made for cost of goods sold and general and administrative expenses.
Understanding the basics of financial terminology will give you a basis for future conversations and negotiations. It will also help you to make informed decisions about the financial direction of your business. With the above terms as a basis for your knowledge, you will be able to speak and perform as an experienced businessperson.