If you are looking to start a business, or improve your business knowledge you are at the right place.
knowing about the basic business terms is very important for anyone, be it an entrepreneur, or merely a student. Knowing the fundamental business terms is the first step to building your business empire. You will be much better equipped to plan your business’s financial future once you become familiar with these terms, which will be a crash course in business economics. Quoting Benjamin Franklin “ An investment in knowledge pays the best interest”. So buckle up for the most important investment of your life.
A business asset is a valuable item that a business holds. There are several types of business assets. Vehicles, real estate, computers, office furniture, and other fixtures are examples of tangible products, whereas intellectual property is an example of intangible goods.
Assets are resources that may be sold, converted into cash, or used to create value in accounting terms. Inventory, bank balances, accounts receivable, prepaid costs, and so on. Cash, buildings, equipment, and inventory are all examples of commercial assets, as are automobiles, patents, and office furniture.
Assets can be classified in basic terms based on their nature and kind. Assets can be classified into one of two categories based on their ability to be converted into cash:
- Current assets are those that have a short life period and can be readily converted to cash.
- Fixed assets are assets that are designed to be used for a long time and are unlikely to be converted into cash fast.
The debts of a business are referred to as business liabilities. When a company borrows money, it takes on debt. Short-term liabilities, such as sales taxes and payroll taxes, and long-term liabilities, such as loans and mortgages, can be incurred by businesses.
Liability accounts are used by businesses to keep track of overdue sums owed to vendors, customers, or workers. Payments, products, or services are typically used to settle liabilities. Your company’s assets, or what it owns or owes, should always outnumber its liabilities. If not, your business may face financial difficulties.
The following are some examples of liabilities:
Money owed to suppliers
- Bottom line
A company’s net income, or the “bottom” figure on its income statement, is known as the bottom line. The bottom line, more specifically, is a company’s profit after all expenditures have been removed from revenues. Interest on loans, general and administrative expenditures, and income taxes are all included in these costs. The bottom line of a business is also known as net earnings or net profits. The earnings per share (EPS) profit is frequently referred to as the bottom line for stockholders. In a company’s income statement, the bottom line percentage may be found. It is a percentage of sales, often known as a profit margin, rather than a number. A company’s low-profit margins indicate that it is not functioning properly.
Traders and investors can use a company’s bottom line to determine how effective its strategy is and, as a result, the potential for future growth. Traders might get a competitive advantage by doing detailed fundamental studies.
The entire amount of income earned through the sale of goods or services connected to the company’s principal operations is referred to as revenue. Because it lies at the top of the income statement, revenue, also known as gross sales, is sometimes referred to as the “top line.” A company’s overall earnings or profit is defined as income, or net income.
The following items can be found in a business’s revenue:
Sales of goods or services
The simplest straightforward way to calculate revenue is to multiply the number of units sold by the average price. Assessing the revenue of your firm may help you understand how well it is operating in comparison to past years. Revenue can also help your business figure out which items and services clients like. This might help the business enhance its product development process, resulting in more revenue.
6. Burn rate
The burn rate is a term that describes how quickly a startup spends its venture funding on costs before turning a profit. It’s a metric for cash flow that’s been negative. The burn rate is commonly expressed as a monthly amount of money spent.
A decent burn rate is one that allows you to keep running at the same pace for at least 12 months. This implies that if you’re losing -Rs.500,000 a month, you need to have at least Rs.6 million in cash on hand right now to cover those losses for the next year.
The fact that 82 percent of companies fail due to cash flow issues demonstrates how cash flow is often taken for granted by fledgling enterprises. Understanding burn rate is critical for both identifying areas for improvement and preparing for the future in your firm.
7. Cash flow
The current cash rate is The overnight interest rate that banks pay to borrow cash from other banks in the money market. The cash rate represents the market interest rate on ‘overnight’ funds, which are money that banks lend to one another to satisfy their daily cash needs over night.
The cash rate, however, is more than simply a gauge for insiders; it acts as a benchmark rate for everything from mortgages and savings accounts to the exchange rate, making it a crucial instrument for directing national monetary policy.
When the RBA adjusts the cash rate, it has an impact on many of the economy’s moving elements, including expenditure, investment, employment, and inflation.
As a result, when the economy is robust and high demand is driving up the cost of commodities, the RBA may opt to hike the cash rate to calm things down a bit.
Marketing is a wide term that refers to a variety of actions with the end purpose of increasing sales. Although B2B and B2C are both business marketing formats with sales as the end-result, they are not the same. B2B is for Business to Business, and it is a sort of commercial transaction in which two business houses buy and sell items, such as one company sending material to another for production, or another firm offering services to another. Tires, batteries, electronics, hoses, and door locks, for example, are often made by different businesses and supplied directly to automakers.
Another form, known as B2C, is where a company sells its products and services to the end user. B2C firms are those whose products and services are directly consumed by the end customer. Amazon, for example, is a B2C business.
9. Profit margin
Profit margin is one of the most often used profitability indicators to determine how profitable a company or business is. It represents the profit margin as a proportion of revenue. The profit percentage indicates how many cents of profit the firm made per dollar of sales.
“Profit margin is significant because it reveals how much of every revenue dollar goes to the bottom line,” Wentworth Financial Partners’ Ken Wentworth explained. “It can instantly identify price issues.”
A greater gross profit margin indicates that the corporation has more cash available to cover indirect and other expenditures such as interest and one-time fees. As a result, it’s a significant ratio for business owners and financial specialists to use when evaluating a company’s financial health.
GAAP are fundamental accounting principles and guidelines that serve as the foundation for more extensive and comprehensive accounting regulations, standards, and other industry-specific accounting practices. The Financial Accounting Rules Board (FASB), for example, utilises these concepts as a foundation for developing its own accounting standards.
Financial statements are created in India using accounting standards established by the Institute of Chartered Accountants of India (ICAI) as well as the legislation outlined in the relevant statutes (for example, Schedule III to the Companies Act, 2013 should be compulsory followed by all companies). The ICAI also issues guidance notes on a variety of topics from time to time to assist in the accounting process and give clarity.
When a business uses the International Financial Reporting Standards (IFRS), it must make a disclosure in the form of a note stating that it follows the IFRS. The publication of the statement, however, is not required by Indian GAAP.
We hope this article helped you brush up on your business terminology. Don’t forget to comment down below if you’d like to share any new terms, also share this article with anyone stepping into the business world.