Starting your own business means that there’s a whole new language and terms you should learn. First, you need this understanding in order to run your business—even a small one—well. Second, you will need to know these terms so you’ll know what other business people are saying to you!
But it’s not hard, and you probably already know many of these, or at least have heard them used.
Here’s a quick rundown of the most important terms you should get acquainted with:
Accounts payable: What your business owes to lenders, suppliers, or creditors. If you owe $127.46 to a fabric store for supplies for the products you are making to sell, that amount is in your accounts payable. Your total accounts payable is considered a liability.
Accounts receivable: What others owe to your business. If you shipped out an order of stuffed animals to a customer, and have not received payment yet, that amount is in your accounts receivable. Your total accounts receivable is considered an asset.
Assets: Anything your business owns and that has value. This includes cash, equipment, inventory, supplies, real estate, and accounts receivable.
Cash flow: Cash flow is a measurement of the money that flows through your business, in and out. Cash is coming in from customers who are buying your product or service. Cash is flowing out as you pay your business expenses: loans, supplies, etc.
Consignment: A shop may be willing to carry your products on consignment, meaning that they are not paying you upfront for your products, but will pay you an agreed-upon percentage of the sale price after your product has sold.
Expense: Money that you spend on your business supplies, equipment, etc.
Fictitious business name: The name your business operates under, unless you just use your own name. If you are planning on calling your business something other than your name, you will need to file a Fictitious Business Name (or DBA—doing business as). In Hawaii, go here. In other states business names are registered with the county clerk, and a standard DBA ad is run in a local newspaper.
Inventory: The amount of your products that you have on-hand and unsold: finished products, raw materials, and work in progress.
Net profit: The amount of money you have left after all expenses have been taken out.
Overhead: The cost of running a business, excluding the cost of products. For example: electricity, telephone, insurance.
Personnel: Staff or employees
Point of purchase: Where the sale takes place, usually at a register in a shop. In a retail store, this is key placement for impulse purchase products.
Profit margin: How much profit you keep relative to total sales. Profit margin is calculated by dividing the profit (revenue minus costs) by the revenue.
Retail price: The price a product sells for in a shop to consumers.
Return on investment (ROI): This calculation is a common profitability ratio. The number shows how much you gained or lost on a business investment. You can calculate ROI by dividing the net profit by the cost of the investment. Let’s say you started a new line of stuffed animals. You invested $200 in materials and time, and you sold 20 of the new stuffed animals for $25 each, and your out-of-pocket expenses were $100. Your return on investment would be net profit ([20 x $25= $500] – expenses of $100) divided by your investment($200). Your ROI would be a ratio of 2. Now multiply that 2 x 100 to get the percentage increase: 200% return on your investment of $200.
Returns: Product returns can come from either (or both) customers or retailers. Make sure you have return policies in place for both—perhaps a time limit, or condition, and whether you will give them a credit or a refund.
Revenue: This is your gross business income in a given time period. If you sold 20 stuffed animals for $10 each in one month, your business revenue for that month would be $200. Expenses are not deducted from this figure.
Terms: Terms refer to the purchase understanding or contract you have with a retailer, usually a business customer who is purchasing for resale. Let’s say you have a customer who is ordering 10 stuffed animals for their gift shop. The payment terms you offer them can include: Immediate payment from your customer via a credit card or cash; invoicing your customer upon shipment or delivery, with a set time in which they are required to pay you (examples: 10 days/30 days/90 days).
Trademark or Service Mark: A word, phrase, image, or symbol that represents your company or product. You’ll need to make sure no one else is using it, and then file for a trademark with the government.
Wholesale: Selling products in larger quantities to retailers. A wholesale discount is usually 50%, and a minimum purchase amount is usually required.