Financial terms for entrepreneurs explained

Key financial terms

What is a Balance Sheet?

The balance is an overview of what you own (assets) and what you owe (liabilities) at a specific time.

What does Assets mean?

Assets are property or rights that represent value to your business, such as machinery, buildings, debtors, stocks and cash.

What does Passiva mean?

Liabilities represents your company's debts or liabilities, such as loans, creditors and taxes.

What does turnover mean?

The turnover is the total amount your business generates by selling products or services before costs and taxes are deducted.

What are costs?

Cost are the expenses your company incurs to run its operations, such as purchasing raw materials, paying salaries, rent and utilities.

What does profit mean?

Profit is the amount remaining after all costs have been deducted from sales. It is a measure of your company's financial performance.

What does cash flow mean?

The cash flow is the money coming in and going out of your business. It shows how much liquidity you have available to meet your ongoing business obligations.

What does liquidity mean?

Liquidity refers to how quickly you can turn your assets into cash to pay debts or expenses. Higher liquidity means you have more flexibility to cover unexpected expenses.

What does solvency mean?

Solvency measures your company's ability to service its long-term debts. A high solvency ratio means your company is financially sound and able to repay its debts.

What does gross profit margin mean?

The gross margin is the difference between sales and cost of sales. It is expressed as a percentage and gives an indication of your company's profitability.

What does net profit margin mean?

The net profit margin is the percentage of sales remaining after deducting all costs, including taxes and interest. It gives an indication of how efficient your business is in generating profits.

What does gross margin mean?

The gross margin is net sales minus the cost of goods sold. It is often expressed as a percentage of net sales.

What does ROI or Return on Investment mean?

Return on Investment (ROI) measures the efficiency of an investment. It is calculated by dividing the net profit of an investment by the cost of the investment.

What does EBITDA mean?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. It is a measure of a company's operational profitability.

Conclusion

Understanding and monitoring these terms can help you measure and improve your business performance, manage budgets more effectively and make more informed decisions about future investments and growth. By familiarising yourself with these terms, you will be better prepared to run your business successfully.