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Don’t be daunted by the unfamiliar terms your accountant uses. Here's a list of common accounting terms used within Hello CASHFLOW that we think will boost your confidence to read and understand your numbers.
The list below is grouped as they appear in your Hello CASHFLOW reports. This is because this is generally how they appear in the financial statements you receive from your accountant. Revenue, Expenses, and Profit terms come first, and then Cash Flow terms. Note that many of the Cashflow terms are similar to those used by your accountant on your Balance Sheet.
Revenue, Expenses and Profit Terms
1. Profit and Loss Statement: A report that shows the business’s Revenue less its Expenses, demonstrating the business’s financial performance over a period of time. It can also be referred to as a Statement of Income and Expenses, especially if you are running a small business by yourself.
2. Revenue: The total income generated from normal business operations, such as Sales of goods or services before any Expenses are deducted.
3. Direct Costs/Cost of Goods Sold: These are the Expenses directly tied to creating a product or service, including Purchase of Materials, Freight, and Subcontractors.
4. Overhead Expenses: The costs incurred by your business to generate Revenue, including Rent, Electricity and Administration Salaries.
5. Profit: In many businesses there is an important difference between Gross Profit and Net Profit
5.1 Gross Profit: The amount of money left over after all the Direct Costs, (such as Materials and Subcontractors), have been deducted from Revenue. This number is important because it tells you if you are charging and making enough money to pay the rest of your Overhead Expenses.
5.2 Net Profit: The amount of money left over after all expenses are subtracted from Revenue and Gross Profit. It is also sometimes called Net Income. This is most often the number your income taxes will be calculated on.
Balance Sheet and Cash Flow Terms
6. Cash Flow: The total amount of money being transferred in and out of a business..
7. Balance Sheet: A financial statement that provides a snapshot of a company’s Assets, Liabilities, and Owner’s Equity at a specific point in time.
8. Assets: Things your business owns that have value, like Cash, Stock on Hand, and property.
8.1 Current Assets: Resources available to your business in the short term such as your Bank Accounts, Stock on Hand, and Accounts Receivable.
8.2 Fixed Assets: Physical items a business owns and uses for its operations and have a useful life of more than one year. They include things like buildings, machinery, or vehicles. They're not meant for sale and are essential for the business to function.
9. Liabilities: What your business owes to other people, such as Bills to Pay, Hire Purchase Loans, and Bank Mortgages.
9.1 Current Liabilities: Debts your business owes to others in the short term, typically less than one year. These may include Bank Overdrafts, Credit Card Debts, Accounts Payable and Sales Tax collected by your business but not yet paid to your government tax department.
9.2 Long Term Liabilities: Debts your business owes to others in the longer term, typically longer than one year. These are most often Hire Purchase Loans and Bank Mortgages.
10. Equity: The net of the business assets, after deducting liabilities. Essentially, it is the net worth of the business or what would be left over for the owner if everything was sold up today.
11. Working Capital: Working capital is the money a company has available to fund its day-to-day operations. It's calculated by subtracting Current Liabilities, (like bills and payments due soon), from Current Assets, (like cash and accounts receivable).
12. Accrual Basis Accounting: A method of accounting that records Revenue and Expenses when they are earned or incurred, regardless of when cash is received or spent.
Many of these terms are used throughout the Hello Cashflow software and definitions can also be found in our “Tell me what this means” on each of the Reports sections.
An understanding of these terms form the basic vocabulary of business accounting and financial management which will give you insights into your business's financial health and performance.
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