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Becoming part of the world of business is a professional experience like no other. It entails a wealth of tasks and responsibilities to keep operations running on a day-to-day basis. It’s fair to say without competent professionals to do their job, a business will eventually crumble.
Business professionals prepare financial statements, attend client meetings, impress a potential partner, and fulfill other functions. While getting the best education to prepare you for the business setting, you are expected to learn as much information as you can to meet your obligations as a future expert.
As a fundamental requirement, business students must be acquainted with basic business vocabulary. Almost exclusive to business communication, specific terminologies enable parties to hold a clear conversation without having to explain or elaborate what they mean or verify that the information is understood.
Here are ten essential business terminologies that every business student should become familiar with.
Return on Investment
The term “asset” refers to any resources with an economic value that a business owns. It may also point to finances and other valuables that belong to an individual or a particular company. An asset can help generate revenue, increase business value, and facilitate business operations. Simply put, an asset can be converted to cash.
An asset can be classified into tangible and intangible. Tangible assets include buildings, currencies, and equipment that have a physical substance. Intangible assets can consist of copyrights, trademarks, franchises, and tradenames. In business transactions, assets are part of the accounting equation and the balance sheet, which are expressed in the following format:
Assets = Liabilities + Owner’s Equity
As you identify your assets, it is crucial to evaluate the net worth of your business. Doing this helps business owners to determine whether to sell their business or file for bankruptcy.
In business, Liabilities are the opposite of Assets. They are debts and financial obligations owed to another person or entity from a past transaction. In their account title, it can be commonly labeled as “payable.” Your liabilities are reported in a balance sheet and separated into two categories: current liabilities and long-term liabilities. Current, or short term, liabilities are immediate debts that need to be repaid within one year, which includes taxes, wages, and accounts payable. Meanwhile, long-term liabilities can be repaid over a year, such as mortgages, business loans, and pension obligations.
Liabilities are an essential aspect since they are used for operations to finance the overall enterprise. They are also used to pay for business growth and expansions. For example, when an outsourced company is supplying goods to your business, the outstanding bill that you owe to the outsourced company is considered a liability. In contrast, that company can consider the bill it is owed as an asset on their end.
The overall movement of your business finances each month, including income and expenses, is called cash flow. The cash flow for a company is divided into three parts. Operating Cash Flow refers to those from internal activities of a company such as a employees’ salary. Investment Cash Flow involves the business’ fixed assets, such as the finances to buy a piece of new equipment. Finally, for the business’ financing transactions such as payment of dividends and issuance of stock, it is called Financing Cash Flow.
“Positive” cash flow reflects a higher flow of finances into the company rather than an outflow of expenses from the company. When customers purchase your products directly, cash flows into your business. On the opposite side, cash flows out of your business (negative) to pay for taxes, rent, and utilities.
An outflow of cash and other assets from one company to another is called Expenses. It is the ordinary and necessary costs that are incurred to run a business or trade. Expenses can be applied to small companies or large entities. It can also be defined as either capital or an income, depending on the interpretation of its use.
In business, expenses are part of your statement of income. These are the finances that are needed each month for the company to operate. It includes legal costs, worker’s salary, marketing costs, and rent. It is recommended for a business to keep their expenses as low as possible to stabilize the financial status of a company. An expense report documents the costs incurred in the business operation.
A profit of a company after deducting the costs of making a product or providing a service is called Gross Profit. It is sometimes referred to as gross income or sales profit. This can be computed after subtracting the cost of goods sold (COGS) from revenue (sales) and will be available as your company’s income statement. This measures a company’s financial performance on managing demand and supply of goods and services associated with the production and sales of products and services.
As presented in an income statement, if the constructor has net sales of $40,000 and its cost of goods sold is $15,000. Henceforth, the constructor’s gross profit is $25,000 ($40,000 minus $15,000). The gross profit ratio or gross profit percentage is 63% (gross profit of $25,000, divided by net sales of $40,000).
Revenues are the lifeblood of any business. It is the income generated from business operations of selling goods and services to customers in a given period. Revenue is commonly referred to as sales and can be received in the form of cash or cash equivalents. Because it is the money brought into the company, it is critical early to get positive revenues in the initial start-up of any business.
In an income statement, revenue appears first, where net income is at the bottom line. Thus, it is expressed as revenues minus expenses since there is a profit when revenues are higher than the expenses. If a business does not have enough revenue, then it needs to use an existing cash balance.
When the current price of an asset exceeds its purchase price, it is called Capital Gain. This can be attributable, but not limited to, shares, stocks, and mutual funds. A capital gain can be considered either realized or unrealized gain. The gain from the final sale of an investment or asset is called realized gain. If unsold, it is treated as Unrealized Gain.
In any business venture, it is vital to have an idea of how your profits will be taxed. As an example, if you bought a $300,000 real estate and sold it for $650,000, your total capital gain is $350,000. However, it varies on the length of time the asset was acquired, specific investment, and rate of your personal tax income.
An indicator of your company’s profitability, whether increasing or decreasing, is called net income. Also referred to as net profit, it reveals how much revenues are left after all business expenses have been paid. It is calculated as sales minus cost of goods sold, tax interests, and all other operating expenses. Since it appears at the bottom of the income statement, businessmen refer to this measurement as the bottom line.
Being a proper measurement of the business’ financial standing, many people tend to pay attention to net income calculation. This can give them an idea if their investment continues to appreciate, can pay off its debt, and able to pay salaries of employees.
Return on Investment (ROI)
A standard indicator of an investment’s performance is the Return on Investment (ROI). By definition, it is the ratio between net profit relative to its cost of investment. It is used to assess the performance of investment portfolios wherein higher ROIs are potential candidates for new investments. With higher financial returns, new funds are allocated. Conversely, negative ROIs means a net loss.
If, for example, you invested $2,000 in a Southern Fried Chicken Company in 2018. You should get your stock shares for $2,200 after a year. To compute for your ROI, you would divide your profits ($2,200 – $2,000 = $200) by the investment cost ($2,000), for a ROI of $200/$2,000, or 10 percent. With this, you can value your investment not just for financial return but also the long term profitability.
For a business to be financially stable, it must generate more revenue from the sale of its product and service. An INCOME STATEMENT is also known as a Profit and Loss Account. It is a financial statement showing a business’ revenues and expenses in a given period. Usually, it is expressed either in a fiscal year or a full calendar year. This is done by taking all revenues and subtracting all operating and non-operating expenses.
Because it plays a vital role in the company’s performance reports, it highlights four essential items- revenue, expenses, gains, and losses. It also conveys a detailed insight into the business’ internals and success parameters in comparison to other companies and sectors. With income statements, upper-level management can make business decisions to increased production capacity, expand to a new location, or terminate product sales. As a bottom line, through this, the financial performance of the company can be gauged if they can be able to generate profit.