As a small business owner, you are responsible for all facets of the business. Even though there are areas where you will need to call in other members of a professional body – such as accountants – to support you, you do need to have a basic understanding of some accounting terms, particularly when it comes to keeping a good set of records and knowing what can or cannot be set down as your operating costs or fixed assets, for example. So let’s start with a few of the most generic terminology used in accounting.
Assets and depreciation
Accountants will refer to your fixed and current assets, and an asset is basically anything that is owned by the business. This goes from items of stock and office equipment up to buildings or vehicles, as well as copyrights and patents. A fixed asset is as it sounds, linked to a “non-moving” resource such as a building or land or a piece of equipment. A current asset is an item that is much more fluid in nature, such as cash or inventory. Fixed assets are shown as the cost of the asset minus what is known as depreciation. Depreciation is the fall in value of an asset due to wear and tear.
All businesses, whether large or small, have obligations that they are required to meet, and these can be long term or current liabilities. Current liabilities are those obligations that the business needs to pay back in under a year, so credit cards or accounts payable fall into this category. Long-term liabilities are those that last for over a year, such as a business mortgage, for example.
Unless the business owner makes a surplus between what it costs the company to source a product or service and what they get back from selling it to their customers, the business will not be profitable. The gross profit margin is the difference between the sales price of the goods or services, and the amount of revenue you actually receive.
Operating profit margins
Any costs incurred as a result of normal business operations, such as staff wages and running costs, are known as operating costs. Operating costs plus the cost of the goods sold are taken from your sales revenue figure to give you an “operating income figure”. This profit (or operating income) is divided by the sales income to give you an operating margin. The higher this figure is, the better it is for the business.
Obviously there are lots of other accounting terms when it comes to small businesses, but these are among the most basic, and as a small business owner, it is essential that you know and understand them.