By Levi King
Starting a business is a great way to grow up in a hurry. Even if you believe you’re thoroughly prepared, there’s bound to be an adjustment period as you learn to navigate the actual day-to-day of entrepreneurial life.
One of my earliest business lessons involved adjusting to the sometimes surreal idea that I was now responsible for the livelihoods of living, breathing employees. It seemed like just yesterday that I was being ordered around by parents, bosses, and teachers—now I was the one calling the shots.
The fact that the people who worked for me were my seniors by a considerable margin made things even weirder. If I failed in my obligations, I’d do so knowing that along with letting myself down, I’d be upending the lives of grown men and women with serious responsibilities of their own.
As a business owner, you’re not just overseeing your project, your goals, your dream. As your success increases, you’ll slowly build your team, and each member will look to you for leadership. If you do things right, your dream will become their dream; their worries your worries.
Learning the Ropes, One Strand at a Time
I wouldn’t want to go to work every day if I didn’t love my coworkers. One of the main reasons that I share their friendship and respect is that they trust me not to let them down.
Young entrepreneurs need to master the basics right out of the gate. If you don’t have the back end of your business set up correctly and running smoothly, or understand how money comes and goes, or know the building blocks of business management, it doesn’t matter how many new clients you attract or the number of employees you hire. Ultimately, you’ll be setting yourself up for failure.
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Key Business Terms Entrepreneurs Need to Know
A knowledge of key terms from the business lexicon is a must for any entrepreneur.
1. Cash Flow
Cash flow refers to the movement of money in and out of your business. The goal you’re aiming for here is positive cash flow, which means that more money is coming in than going out.
Positive cash flow means you’ll be able to cover operational expenses, invest in growth, and cover unexpected costs. Keeping an eye on your cash flow statement is one of the best ways to gauge the health of your business as well as make informed decisions.
2. Profit and Loss Statement (P&L)
Also known as an income statement, the P&L is a financial document that summarizes your business’s revenues, costs, and expenses over a specific period. It shows whether you’re operating at a profit or loss, and is essential for assessing your company’s financial performance.
3. Gross Profit vs. Net Profit
Gross profit is the difference between your total revenue and the cost of goods sold (COGS). Net profit is what remains after subtracting all operating expenses, taxes, and interest from your gross profit.
Both metrics are important for measuring profitability and comparing your performance against industry benchmarks.
4. Balance Sheet
A balance sheet provides a snapshot of your business’s financial position at a specific point in time. It keeps track of your assets (what you own), liabilities (what you owe), and shareholder equity.
This overall picture will assist greatly when it comes time to formulate strategy and long-term plans.
5. Accounts Receivable and Accounts Payable
Accounts receivable represents money owed to your business by customers for goods or services provided. Accounts payable is money your business owes to suppliers or creditors.
Effective management of these accounts kills two birds with one stone; it helps with the maintenance of both cash flow and your relationships with customers and suppliers.
6. Cost of Goods Sold (COGS)
COGS represents the direct costs associated with producing the goods or services your business sells. This includes raw materials, labor, and any other expenses directly tied to production.
Understanding your COGS is essential for pricing your products or services correctly and calculating your gross profit margin.
7. Return on Investment (ROI)
ROI measures the profitability of an investment relative to its cost. It’s calculated by dividing the net profit from an investment by its cost and is expressed as a percentage.
ROI helps you evaluate the effectiveness of different business strategies and make informed decisions about where to allocate resources.
8. Break-Even Point
The break-even point is the level of sales at which your total revenue equals your total expenses, resulting in neither profit nor loss. Knowing your break-even point is crucial for setting sales targets, designing pricing strategies, and understanding how many units you need to sell to start making a profit.
9. Gross Margin
Gross margin is the difference between your revenue and COGS, expressed as a percentage of revenue. It’s a key indicator of your business’s efficiency in producing and selling goods or services. A higher gross margin generally indicates better profitability.
10. Working Capital
Working capital is the difference between your current assets and current liabilities. It represents the funds available for day-to-day operations and short-term obligations.
Maintaining adequate working capital is essential for ensuring your business can meet its financial obligations and invest in growth opportunities.
11. Equity
Equity represents ownership interest in your business. For small business owners, this could be your personal investment in the company or shares held by investors.
Understanding equity is important when seeking investment or considering bringing on partners.
12. Debt Financing
Debt financing involves borrowing money to fund your business operations or growth. This can include bank loans, lines of credit, or other forms of borrowed capital.
Understanding the terms, interest rates, and repayment schedules of debt financing is crucial for managing your business’s financial health.
Mastering Key Business Terms Will Set You Up for Success
These are terms that, going forward, you’ll use a lot—sometimes on a daily basis. Learning them inside and out will boost your confidence and lay the foundation for an entrepreneurial education that’ll take you as far as you have the courage to go.
About the Author
Levi King is CEO, co-founder, and chairman of Nav.com. A lifelong entrepreneur and small business advocate, Levi has dedicated over ten years of his professional career to increasing business credit transparency for small businesses. After starting and selling several successful companies, he founded Nav both to help small business owners build their credit health and to provide them with powerful tools to make their financing dreams a reality.
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