The Basic Tools of Organizing Business Finances | Merchant One

Not everyone who starts a business has had coursework or experience in finance. But every business deals with money, and it pays to have well managed and organized finances. If you’re a business owner who feels a little overwhelmed by dealing with finances, Merchant One created this guide for you as a primer on basic business accounting terminology and essential documents. Let’s get started.

Basic Accounting Terms 

For those without an MBA or other formal business training, business accounting buzzwords can sound like a foreign language. Let’s break down the language barrier:

Expenses 
Expenses are basically everything you need to pay to keep your business running. This means all operating costs, including rent and utilities, inventory, software and technology, production costs, payroll, and taxes.

Total or Gross Revenue
This is the total amount of money that you earn from running your business. It is your inflow of cash, the sum of everything you’ve received from customers in exchange for your product or services. Net Profit

Net profit—you may have called it net earnings or the bottom line—is basically your expenses subtracted from your revenue. When this number is positive, it means you’re making more than you’re spending, and your business is profitable.

Break Even Point
Many small businesses, especially in the beginning, operate at a loss—meaning they don’t make a profit, and it costs more to run the business than what it is making back. The point at which revenue overtakes expenses is called the “break even point,” and it is an important milestone to any business.

Cash Flow
Even if your business is making a profit, you need to have enough money on hand and available to cover your expenses. For example, if you are putting almost everything you earn back into developing and growing the business, you still want to have available cash to pay your electricity bill. The difference between available cash at the beginning of an accounting period and the end is referred to as “cash flow.” Cash flows in from sales, loans, and funds from investors, and it flows out to pay for expenses and growth.

Key Business Accounting Documents 

Paperwork isn’t pretty, but it is a key part of keeping your business finances organized. These are the four most important accounting documents that you should keep up regularly:

Balance Sheet
Business owners use this document to calculate the net worth of the business. It will list all the assets, equity, and liabilities your company holds, and offers a real-time look at your financial standing. Keeping this sheet “balanced” means that total assets (what your business owns) are equal to equity plus liabilities.

Cash Flow Statement 
Using this document to track your cash flow can make sure you have enough on hand to cover essential expenses. The cash flow statement shows your income inflow (sales and invoice payments) and expense outflow (payroll, marketing and production costs, etc.) over a financial period, such as a month or quarter.

Income Statement This document tracks your business revenues and expenses over a year, which allows you to calculate the annual net profit or loss. Keeping this statement updated and accurate will help you measure profitability and determine your break even point.

Revenue Forecast 
A revenue forecast helps you make decisions about what you can or cannot afford to spend money on in your business. It is an educated prediction that shows how much money your company is likely to make in the next year and what your profit margin will be. Use the revenue forecast to set goals, make purchases, and stay on budget.

Merchant One understands how important it is to stay organized with your business finances. You may benefit from investing in software or even an accountant to help you sort through your finances and stay on top of everything. As you gain more experience managing your finances and navigating the language and terms, you’ll become a more educated and versatile business owner.