You may experience confusion while managing your business’s finances if you are not accustomed to basic accounting. To thrive in the industry, it is crucial to know basic accounting principles. To ensure smoothness in business operation and your finances, consult Aventura bookkeeping services.
Some of the most critical accounting terms
- Cash Flow
Cash flow contains details like the time and amount of cash flowing in and out of the business enterprise. It calculates all the transactions involving the business’s investments, financing, and operating expenses.
Monthly and annual review of cash-flow statements helps identify trends and predict ups and downs in the finances and allows the company to set goals and achieve them. It gives an estimate of the business’s financial health and facilitates the creation of backup in unfavorable circumstances.
- Cash-Flow Forecast
The comparison of past cash-flow statements with potential income and expenses allows the estimation of money that will be moved throughout the business. This forecast helps determine the right time for investments or paying off debts. It must be done at least once a year to promote the financial stability and growth of the business.
- Marginal Cost
This cost refers to the difference gained in profit by selling one more product. It can be found by dividing the total cost of production by the number of items you are willing to produce. Furthermore, the marginal cost helps in determining whether the production of more items will be profitable for the business or not.
- Income Statement
It contains the net profit made by the company in a certain period. It is calculated by subtracting all the expenses from the revenue generated by the business. It helps set a standard for business performance and understand the company’s potential.
- Financial Statement
It is an accumulation of all the reports entailing the financial transactions made by the company. It involves the balance sheet, income statement, and cash flow statement. Moreover, financial statements help in determining the exact condition of the business.
- Gross and Net Profit
Gross profit is the profit made after subtracting the direct cost of making a product. On the other hand, net profit refers to the final amount of income earned by the company after paying off all the expenses like wages, rent, debts, phone charges, and other operation costs. Awareness of the difference allows business owners to set suitable prices for their products and ensure that it enables the business to profit.
