Want to have some insightful, informed conversations with your bookkeeper? Do you want to increase your bookkeeping knowledge?
Hiring a registered bookkeeper is considered good business practice in many industry circles. But just because you delegate your bookkeeping doesn’t mean that you should not be involved in the running of your business. On the Contrary, it is recommended that business owners work closely with their bookkeepers to better understand the finer points of their business finances and make plans for their future financial growth.
Start now with 5 of our essential bookkeeping terms for small business.
Do you have more money coming into your business than you have going out in to cover payroll cost & tax obligations?
Congratulations – you are cash flow positive.
If the opposite is true the cash flow statement will show “cash flow negative” meaning that you have more expenditure than you have cash flow.
Excess cash on hand means you are in a better position to keep up with debt, cover costs easier, be able to invest in your business and cover any unforeseen expenses.
Your Bookkeeper can generate cash flow statements regularly to keep tabs on this KPI (Key performance Indicator).
Profit & Loss:
The Profit & Loss statement (also known as Income Statement or Statement of Financial Performance) is an integral indicator to determine the profitability of your business.
The P&L lists revenues and gains as well as expenses and losses over a certain period. It also calculates your all important “bottom line” so you know if you are operating profitably or not.
The Balance Sheet (also known as Statement of Financial Position) is a “snapshot” of your overall position at a particular period in time.
It lists assets (cash, inventory, Accounts Receivable, Equipment) Liabilities (Accounts Payable, Tax, Super, Loans and Credit Cards) and Shareholder Capital
Simplified – The Balance Sheet shows what you own and what you owe.
Working capital is money that a company has available to pay bills or reinvest. It is equal to the value of all current assets minus liabilities and is considered a key measure of the health of the business.
Depreciation occurs as business assets such as vehicles and equipment decline in value over time due to use or obsolescence. Depreciation is an important tax deduction – a percentage of the original value of the asset can be written off every year based on the rate of depreciation.
Equity (Also Known as Owner’s or Shareholder’s Equity):
Equity is the amount of money invested in the company by the owners (shareholders) minus any money taken out in the form of draws (not salary).
And there you have it 5 key bookkeeping terms to help you build your vocabulary. Join in conversation with your bookkeeper and empower yourself around your finances and make more informed business decisions.
If you would like more information on how to read your P&L and Balance Sheet reports, see our E-shop for a downloadable booklet on how to become more insightful with your finances.