7 Essential Accounting Terms All Entrepreneurs Should Know

7 Essential Accounting Terms All Entrepreneurs Should Know 7 Essential Accounting Terms All Entrepreneurs Should Know

If you are thinking of starting your own business or if you are already running your own business, then being familiar with some basic accounting and finance terms will help you running your business easier and above all more profitably.

The list that is included below is far from complete but it is definitely a good start!

1.Fixed costs: Fixed costs are costs that do not change when the number of units that a company produces increases or decreases. For example, the rent that you are paying is fixed and will not change based on how many clients you serve. Other fixed costs include payroll, insurance costs, lighting and heating etc. Broadly speaking, a cost that is not fixed will be variable. Variable costs change based on the number of products that a company produces. Variable costs include manufacturing costs, raw materials, delivery costs etc.

2.Credit Limit: Credit limit refers to the maximum amount of supplies (in monetary value) that your suppliers allow you to buy on credit. The higher the credit limit, the more credit worthy you are. It is considered as highly beneficial for every company to negotiate high credit limits as it will help you maintain a healthy working capital.

3.Finance Cost: Finance Cost or Finance expense is the interest that your company is paying for the debt raised. To be more specific, finance cost will include the interest paid for bank loans, accounts receivable factoring, overdraft facilities and corporate bonds.

4. Opportunity Cost : Opportunity cost is the cost that is forgone from choosing among two or more mutually exclusive projects. Let’s say that your company is currently producing product A and you are thinking of launching a new product. If the new product is launched, then product A will have to be discontinued as your company does not have the necessary capacity and means to manufacture both products. Therefore, manufacturing product B has an opportunity cost which will be equal to the profit that product A currently generates.

5. Return on investment: Return on investment (or ROI) is a financial ratio that is widely used to assess how attractive and profitable a project is. You can calculate the return on investment ratio by dividing the net gain from the investment by the cost of the investment. The net gain from the investment can be calculated as the income generated from the investment less the cost.

6. Mark up: Mark up is one of the two most widely used pricing methodologies (the other one is the margin). The mark-up which represents your desired profit from selling a product or delivering a service is basically a percentage that is added on top of the cost that your company incurs to manufacture and sell a product.

7. Accounts Receivable Days: Accounts Receivable Days is another accounting ratio that shows how long it takes for your credit customers to pay any outstanding invoice. Keeping tha accounting receviable ratio as low as possible should be one of your top priorities as having a lot of outstanding invoices reduces the cash that your company has available and increases the likelihood of facing bad debt.

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Author Bio: Mike Richards is an accountant and owner of financialmemos.com where he spends his evenings writing about anything that relates to accounting and finance.

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