20 financial terms that every small-business owner should know and understand

They’re words or terms that are frequently used in business. Many of them you possibly already use or often hear. But do you know the actual meaning of them all?  

1 Accounting period 

This is the period to which a business’s financial accounts refer, which is usually 12 months. You can compare headline numbers from different accounting periods to assess how well your business is performing or developing.

2 Accounts payable

This is an accounts/bookkeeping record of money owed by a business to its suppliers. This is shown as a liability on a business’s balance sheet (see 4). “Accounts receivable” is a record of money owed to a business by its customers.

3 Assets

These are items of value that a business owns. They can be physical, tangible things, such as machinery, tools, vehicles, premises, computers, office furniture, etc, or non-physical, intangible things, such as intellectual property, brand identity, “goodwill” (ie reputation), customer base, in-house systems, etc. Both can be important when valuing a business for sale.

4 Balance sheet 

A balance sheet is a financial statement that shows a business’s assets and liabilities at a given point, while detailing shareholder equity (ie the amount shareholders would receive if a company’s total assets were liquidated and all debts repaid). Bottom line is the last line on a balance sheet that shows total profit or loss.

5 Cash accounting 

Cash accounting is an accounting method that records income when it’s received and expenses when they’re paid. The alternative is the accrual accounting method, which is where income and expenses are recorded when they’re earned/incurred, regardless of when cash actually enters or leaves a business. There are pros and cons to each.

6 Cash flow

Cash flow (or cashflow) describes the relationship between cash entering and leaving a business. Positive cash flow means more cash entering a business than leaving it. Cash-flow problems arise when you spend more than you make or when you don’t have sufficient cash to pay your short-term debts. Poor cash-flow management can kill even profitable businesses.

7 Credit control

Firstly, this requires managing which customers get credit from your business and how much they get. Credit control also involves monitoring customer accounts and prompting them when necessary to ensure that they pay their invoices when due. 

8 Creditor 

An accounting term used to describe a person or business to whom/which your business owes money. Your suppliers can be described as trade creditors. A debtor is a person or business that owes money to your business.

9 Double-entry 

A bookkeeping system whereby every time you detail a transaction it’s recorded in two places within your accounts, once as a debit and once as a credit. The double-entry system can make it easier to prepare accurate financial statements and identify errors.

10 Gross profit  

This is your turnover (see 18) minus your cost of sales and direct costs. Your gross profit margin/percentage = gross profit/turnover x 100. So, if your business made a gross profit of £30,000 on a turnover of £75,000, its gross profit margin/percentage would be 40%.

11 Income

This is money that you or your business receives in exchange for your labour or supplying goods or services. Income can also be earned through investment. Revenue is an alternative name for business income. Net income is income minus cost of goods/services sold, expenses, depreciation and amortisation, interest and tax.

12 Inventory

This is simply another word for materials or stock that a business buys to sell or make into products for sale. Inventory is reported as a current asset on a company’s balance sheet.

13 Markup

Margin is sale price minus the cost of goods/services sold. So, if you sell a product for £100 and it costs you £70 to make, your margin is £30 (or 30% margin percentage). Markup is how much you add to your costs to reach your selling price. So, a markup of £30 from your £70 cost gives a £100 price, but the markup percentage is 42.9%, which is the markup amount divided by your costs.

14 Net profit 

This is your gross profit (see 10) minus your indirect costs and expenses. So, if your gross profit is £30,000 and your indirect costs and expenses are £10,000, your net profit is £20,000. Your net profit percentage = net profit/turnover x 100. So, in this case, £20,000/£60,000 x 100 = 33.3%.

15 Overheads 

Overheads are your day-to-day running costs, such as rent, rates, etc. Sometimes these are called “fixed costs”, because they don’t change regardless of how much you make or sell. However, your “variable costs” will increase if you make or sell more. Raw materials are the most obvious variable cost.

16 Petty cash 

This refers to small amounts of cash belonging to a business that is kept for low-value day-to-day purchases, such as a bottle of milk, tea bags or jar of coffee. Obviously, petty cash purchases must be accounted for.

17 ROI

Return on investment. Basically, the financial rewards your business gets back from things it invests in, for example, a marketing campaign, new website or new item of equipment. The formula for working out ROI as a percentage is net profit/total investment x 100. Doing such calculation enables you to work out how effective an investment proved.   

18 Turnover 

This is one of the most common words in the business lexicon. Turnover simply means the total value of sales made, usually in a year. Sometimes the word revenue is used, but it has the same meaning. A small price increase can make a big difference to your turnover.

19 Working capital 

This is the amount your business needs to operate day to day. It’s easy to work out how much working capital you need. You simply take your current liabilities (accounts payable – how much you owe) away from your current assets (ie your available cash, accounts receivable, inventory and short-term investments).

20 Year-end 

This refers to the end of a company’s accounting or financial year. It is known by the alternative name of accounting reference date (ARD) and is on the last day of the month during which the company was registered with Companies House (although it can be changed).

• Read the Companies House guide to accounting reference dates and periods.

Are business plans a total waste of time?

A survey carried out by business software provider Exact suggests that more than a third of the UK’s 4.9m SMEs don’t have a business plan and “they could be missing out on an extra 20% of profit as a result”.

Of the 34% of respondents who didn’t have a business plan, 68% said they didn’t see the need for one, while 23% were “too busy” to prepare one, 8% “didn’t have anyone to help them” and 5% “weren’t comfortable with numbers”.

Should we be surprised by these findings and are business plans as essential as some start-up experts would have you believe?

Some experts would tell you that start-up business plans aren’t worth the paper they’re written on

Waste of time

Some experts believe start-up business plans aren’t worth the paper they’re written on. Author Paul B Brown, wrote a piece for Forbes.com called Why Business Plans Are A Waste Of Time., after he came up with the idea for a new book that sought to offer insight from the original business plans of highly successful US entrepreneurs.

But there was a problem. As Brown explained: “Most of the business plans had nothing to do with what the businesses eventually became. People who said they were going to specialise in developing new computer hardware ended up in software, for example. In a surprisingly high number of cases, what was in the business plan ended up having very little to do with what the company ultimately became.”

After writing about entrepreneurs for more than 30 years, Brown believes that creating a “painfully detailed business plan really doesn’t make much sense. The first time you encounter something you didn’t expect, the plan goes out the window. Things never go exactly the way you anticipate.”

Some of the heroes of today’s would-be entrepreneurs, such as Steve Jobs, Bill Gates and Michael Dell, did not have business plans when they embarked on ventures that changed the world

Business plan myth

A few years ago, (“former banker, small-business investor and veteran entrepreneur”) Kate Lister wrote a piece for Entrepreneur.com called Myth of the Business Plan. She highlighted research from Babson College (“regarded as having one of the top entrepreneurship programs in the country”), which found “no statistical correlation between a startup’s ultimate revenue or net income and the supposedly requisite written business plan”.

The study found that: “”Some of the heroes of today’s would-be entrepreneurs, such as Steve Jobs, Bill Gates and Michael Dell, did not have business plans when they embarked on ventures that changed the world”.

Great business plans may earn you an A in business school, but in real life you only get As for achievement

Lister said she was “all for having a business plan in the verb sense. I’m just not a big believer in the noun form”. She continued: “Writing a formal business plan invites the paralysis of analysis. It distracts the entrepreneur from slaying dragons and thinking big thoughts. And it’s largely a waste of time. The result usually is a long-winded missive that’s out of date almost the moment the ink dries. Great business plans may earn you an A in business school, but in real life you only get As for achievement. So stop dotting your i’s and crossing your t’s and go out there and slay something.”

Success Plan

Andy Fox is the founder of “award-winning independent car service and repair specialist” iAutoUK. He wrote an article for the Huffington Post called “Why You Don’t Need a 40-Page Business Plan to Launch a Successful Company” (sic).

“I’ve never had a business plan,” he admits. “Despite this, in three years my company has reached a turnover of over £1m, with £100,000 annual profits. For your business to thrive you instead need a ‘Success Plan’. This is an evolving strategy consisting of three elements. No 40-page business plan needed. In fact, you can write a Success Plan on one sheet of A4.

Look at companies such as Comet, Blockbusters and Jessops. I’m sure their business plans didn’t include going into administration!

“Firstly, you must understand your market place and how your business is distinct from competitors. Secondly, the Success Plan must have ‘Leader’s Objectives’ and you must communicate them to your staff. The final element is to make sure you make money! You must have a system that provides you with daily earnings information, and which can monitor cash in the bank and in the pipeline.

“Such a Success Plan is a short, relevant, real-world document. I believe a Success Plan is more appropriate than a traditional business plan.” Dryly he adds: “Look at companies such as Comet, Blockbusters and Jessops. I’m sure their business plans didn’t include going into administration! Had they had a Success Plan, perhaps their futures may have been different.”

• This blog was commissioned by Atom Content Marketing and appeared originally on the Start Up Donut website.

Why your accountancy firm needs its own client enewsletter

Most of us have signed up to receive email newsletters – the good, the bad and the ugly. We look forward to receiving the ones we like and value, but soon unsubscribe from those crammed with irrelevant content or a blatant barrage of sales messages.

Just when they looked to be all but dying out, about three years ago enewsletters underwent a renaissance. Everyone was doing them again; some were superb and they helped brands to build better customer relationships. Enewsletters can be a particularly effective marketing tool for accountants and other service-based businesses.

“Enewsletters can be a particularly effective marketing tool for accountants and other service-based businesses”

Why are email newsletters popular?

Email marketing is where you send out pure sales-related content, for example, information about your latest offers. But enewsletters contain news, features and other content designed to inform recipients – to increase their knowledge.

The key reason why people sign up to enewsletters is they want to learn more about things they’re interested in. Many of us love enewsletters and those that national newspapers send out every day are now among the most popular. Your average enewsletter design is now far better and enewsletters are much easier to read on smartphone, which has also helped to boost their popularity, because you can read them wherever you are (almost).

If someone has signed up to receive your enewsletter, it’s less likely to be spam-filtered. And research suggests that the average enewsletter open rate is high, providing you have a good subject line and the recipient recognises the sender. Pick a good mix of high-quality, relevant, timely content and your click-through rates can also be high.

“If you provide valuable information that benefits subscribers, they’re more likely to know, like and trust you – and buy what you’re selling”

Highly effective

When well written, produced and distributed, email newsletters are a highly effective way to reach prospects and existing customers, ensuring that you remain in their thoughts (or occasionally pop into their heads, at least).

If you provide valuable information that benefits subscribers, they’re more likely to know, like and trust you – and buy what you’re selling – the ultimate aim, of course. In a business context, your enewsletter information should enable recipients to increase their knowledge, solve their problems, save time, money or otherwise become more profitable and successful.

Having your own enewsletter can make your small accountancy firm appear bigger and more professional – and more interested in its clients – which can really set you apart from your competitors. Adding value to your customer relationships in this way can ensure that your customers remain loyal.

“Latest news, tips, updates and key-date reminders are all common enewsletter content, but longer-from content can also prove popular ”

Question of balance

Latest news, tips, updates and key-date reminders are all common enewsletter ingredients, but longer-from content can also prove popular. You can tell recipients about latest developments, whether in their sector, the small-business world or at your business (don’t overdo this). Sharing your insight via enewsletter is a good way to underline your credibility as an expert, while competitions and giveaways are also popular. Research suggests that subscribers are happy to hear about new offers or latest deals via enewsletters (but limit this also). Think “tell, tell”, rather than “sell, sell”.

Some businesses send out weekly enewsletters, while others send them out every two weeks, each month or quarter. Many accountants send out Budget specials, of course, while many have sent out special enewsletter to explain the latest Covid-19-related changes. Frequency is key, because you mustn’t bombard recipients, you simply want to keep them connected, engaged and informed.

“Part of email marketing’s attraction is it offers a great return on investment – some believe a £42 ROI for every £1 you spend”

Return on investment

Enewsletters can be created for very little cost, even if you buy content. Part of email marketing’s attraction is it offers a great return on investment (ROI) – some believe a £42 ROI for every £1 you spend (source: Direct Marketing Association). That’s a pretty compelling claim.

Testing and analytics enable you to quickly find out what works best, whether that’s your subject lines, content type or when to send your enewsletter. Setting up and managing a customer enewsletter is relatively straightforward, but if you just don’t have the time, knowledge or inclination, paying someone else to do it for you could prove a wise investment.

In my next post, I’ll provide a step-by-step guide to setting up an enewsletter for your accountancy firm, together with some important legal considerations.

• With 15 years’ experience as a leading writer of small-business content, Mark Williams is the founder of Dead Good Content, which specialises in writing readymade and bespoke content for accountancy firms and others that want to market their services to small businesses.