Ever watched Dragon’s Den and been confused as to what they’re talking about? Gross profits, patent protection, equity stakes, and so on. Although seemingly complex, many of these financial terms are relatively simple to understand once you’re accustomed to them.
For new business owners, we’ve put together a simple glossary of financial terms that can help turn business-speak jargon into clear, concise language.
Income, Expenditure and Profit Margin
Starting simple, income is defined as money received in exchange for the goods and services your business provides, whilst expenditure is any cost incurred to run or grow the company. Together, they result in your profit margin which will determine how successful the business is. It’s advised to maintain a balance sheet to document these figures.
A financial asset is defined as an item with any economic value that can provide future benefit to the company, predominantly in the shape of cash, stocks and other investments. Tangible assets are those which have a physical form, such as property, equipment and vehicles, whilst intangible assets include patents, intellectual property and monies owed.
Liabilities are the legally binding obligation of the company, usually needed to pay for goods and services to grow the business. Common examples include loan repayments, staff wages, marketing expenses and various other accounts payable to suppliers.
This is calculated as the cost of providing goods or services deducted from total revenue, i.e. your net sales minus the cost of goods sold. For example, if you generate £50,000 in sales but spend £35,000 producing these products, this puts your gross profit at £15,000.
Net profit is different as it includes all the costs of making and selling the product. In other words, it’s the company’s total revenue minus the total expenses for the given accounting period. Unlike gross profit, it includes such expenses as tax, interest and depreciation costs.
Cash flow is the ongoing cycle of money ‘flowing’ in and out of the business, hopefully in a positive nature. You can use a cash flow forecast to pay suppliers and make investments with more certainty, knowing you’ll be receiving income on a certain date.
Return on Investment
Your ROI is the income received relative to its cost. It can be measured via various factors and not simply the profit made before tax. As a formula, return on investment is calculated as net profit divided by cost of investment and then multiplied by 100 to produce a percentage.
Intellectual Property and Patents
Intellectual property, or IP, seeks to prevent others from plagiarising your idea. it’s commonly linked to copyright issues such as company names and logos. A patent is more robust and grants sole rights to the owner, preventing others from using the invention without permission. They can be very valuable and provide control over a specific market.
Even if you’re not business minded, it still helps to learn basic financial terms so you can communicate with customers, competitors and lenders with added clarity. For help with more complex terminology, such as EBITDA, compound interest and encumbered assets, as well as tricky tax calculations, specialised accountancy advice is recommended.
Another term you might not be familiar with the flat VAT rate. Don’t worry, we have an article explaining what the flat VAT is and if it can help your business.
If you’d like a chat about clearing up some terms, or some advice, feel free to get in touch.