It is crucial for every small business owner to develop a firm grip on the business jargons like net working capital before starting a business – small or large.
It linguistically equips an individual to speak about their business and its pecuniary needs when representing their company more eloquently.
Furthermore, possessing a stronghold on the language of business allows an individual to develop concepts like working capital turnover ratio, which, in turn, accentuates their business acumen.
Therefore, learning business terms is not only essential as a means to ease business conversations, but also develop a strong understanding of the same.
Here’s a list of business terms that individuals need to learn before starting a business –
It is one of the essential terms of business. Capital refers to the aggregate wealth of an organisation – tangible and intangible – that represents the value of such a company. It usually includes the owner’s equity, intellectual property, land and buildings, etc.
- Cash flow
It refers to the total amount of money that ‘flows’ through business within a specified period. It includes both cash inflow – money that is coming in the business – and cash outflow – money that is going out of the business.
It is another critical concept in business. It indicates the value of assets that can be turned into liquid cash or equivalent within a short time. Liquidity denotes a business’s liquid financial standing that has a direct bearing on its ability to meet short-term financial obligations.
- Accrual basis
It is an accounting practice where both income and expenses are recorded when they actually take place. Most large-scale companies use this basis of accounting for bookkeeping purposes.
- Cash basis
As opposed to the accrual basis, in this accounting practice, income is recorded when a business receives the corresponding amount, and an expense is recorded when a business pays the corresponding amount. It provides information on the actual cash flow of a business.
- Working capital
It is one of the most crucial concepts related to running a business. Working capital refers to the amount required to carry out the daily operations in a business. Primarily, there are two types of working capital – gross working capital and net working capital.
The former only denotes current assets, while the latter represents the difference between current assets and current liabilities.
- Current assets
These assets are liquid in nature, i.e. they can be converted into liquid cash, or their market value can be realised within a short time frame, which usually extends to 1 year. Debtors and inventory are few of its examples.
- Current liabilities
It refers to those obligations that a business needs to settle within a short period, usually 1 year. A couple of its examples are creditors, short-term loans, etc.
- Working capital turnover ratio
It refers to the ratio between a company’s net annual sales and its net working capital. It represents how well a company is using its working capital to generate profit.
- Income statement
Also known as Profit and Loss statement, it shows the net income of a company in a specific accounting period. It acts as a crucial document for business owners to avail facilities like a business loan.
- Net income
It denotes the income of a company after deducting all necessary expenses for a specific accounting period.
It is one of the most creative methods of raising funds for small businesses to finance small projects or ventures from a large number of investors. It usually involves putting up the idea of a project or venture on crowdfunding networks where potential investors can provide funds.
It is a seed funding measure where small business owners pour in their savings to start a business. However, it is not a viable funding source in the long-run.
Nevertheless, these are a few terms that individuals need to learn before starting their business. Knowing these terms will enable individuals to convey their financial needs to lenders and investors more precisely and appropriately.
However, specific NBFCs like Bajaj Finserv provide pre-approved offers on financial products like business loans and personal loans that eliminate the hassle of approval and thus, ease loan availability.
Regardless, there is no end to learning business terms like net working capital that can broaden the horizon of individuals and open them to new concepts. Businesspersons can utilise these in their venture for efficient management and tracking.