For many busy small business owners and sole traders, managing day-to-day finances and accounting tasks can be time-intensive and, at times, overwhelming. Add to this the plethora of growing financial terms and jargon thrown around, and the whole process can put off even the most innovative entrepreneur. In this article, we break down some common financial terms every small business needs to understand.
Accrual is the incremental recording of all business transactions as and when they occur, regardless of when cash is exchanged. Accrual refers to the process of individual entry recording of the revenue or expense, which traditionally was done manually but increasingly completed digitally through cloud-based accounting solutions such as QuickBooks Online.
Allowable expenses are those that are claimable against your taxable income, such as office rental and business travel. Software applications such as QuickBooks Online can take the hassle out of this by linking to your bank account and tracking all expenses.
A balance sheet is a financial statement that shows the value of your business at year-end, including a company’s assets, liabilities and any shareholder equity. An accurate balance sheet is critical for businesses keen to show potential investors the strength and value of their company.
Put simply, cash flow is the net amount of money or cash equivalents coming in and going out of your business. Positive cash flow indicates growth and means that a company’s assets are increasing and liabilities decreasing. Negative cash flow means a company’s assets are on the decline, and debt and liabilities could possibly be growing. To maintain an accurate and up-to-date record of your company’s cash flow, use a reliable cloud-based solution like QuickBooks Online.
Capital Expenditure versus Revenue Expenditure
Capital expenditure includes the purchase of fixed assets, which a business owner anticipates will have long-term benefits for growth. This can include large-scale machinery, premises, fittings or specialist equipment. Revenue expenditure is money spent on an ongoing basis such as raw ingredients and material, salaries and rent.
Specifically speaking, the term financial accounting refers to the record keeping of all transactions and financial statements by a business. It’s a more formal term that is relevant to accounting processes for businesses that should be shared with third parties, such as the tax office.
A fiscal year is any period of 12 consecutive months a business chooses for preparing its accounting statements. This does not necessarily have to be a calendar year or a tax year, however businesses whose fiscal year is not in line with the tax deadlines may need to make the necessary adjustments come tax time.
This is a tax term that stands for ‘pay as you earn’ and refers to the system of income tax where staff tax and other deductions such as superannuation are deducted prior to payment of wages. These payment breakdowns appear on the employee’s fortnightly or monthly payslip and can be easily and accurately prepared using software like QuickBooks Online.
This is the percentage difference between a business income derived from all sales and the cost of those sales. Because profit margins are expressed as a percentage, they are an indication of how much out of every dollar of sales a business retains as company earnings.
Turnover refers to the annual net of all sale volume, including all discounts and sales taxes. It can also refer to the amount of times a particular company asset such as inventory is replaced during a particular accounting period.
To find out more about how you can stay on top of your finances and accounting, check out the tutorials at Money In.