6 Essential Accounting Terms Every Business Owner Should Know

Hiring an accountant, finance business partner or CFO is a smart move for all business owners. But delegating financial tasks doesn’t mean stepping away from your company’s financial health. In fact, working closely with your accountant or financial advisor throughout the year can help you better understand your financial position and make informed decisions for future growth.

Looking to boost your accounting knowledge and have more meaningful conversations with your accountant or business advisor? Start here with six essential accounting terms that every business owner should know:


1. Cash Flow

Cash flow tracks the movement of money in and out of your business. If more cash comes in than goes out, you’re “cash flow positive.” The opposite? “Cash flow negative.”
Positive cash flow means you’re well-positioned to manage debts, handle unexpected expenses, and invest in growth opportunities. To monitor this critical metric, your accountant will provide a cash flow statement each quarter.


2. Profit and Loss Statement (P&L)

Also called the income statement, the P&L is a vital document that shows your business’s profitability over a specific period—typically every quarter.
This report details your revenues and gains alongside expenses and losses, providing the all-important bottom line: whether you’re operating at a profit or a loss. Think of the P&L as your business’s financial report card.


3. Gross vs. Net Profit

• Gross Profit: Revenue minus the cost of goods sold (COGS).
• Net Profit: Gross profit minus all operating expenses, taxes, and interest.
Both metrics are essential for understanding your business’s financial performance. While gross profit provides a high-level view of your profitability, net profit dives deeper to reveal the exact amount earned from sales after all expenses are accounted for.
These profitability ratios also help you benchmark your performance against competitors and industry standards.


4. Balance Sheet

A balance sheet offers a snapshot of your business’s financial health at a given moment. It lists:
• Assets: Cash, inventory, accounts receivable, equipment, etc.
• Liabilities: Accounts payable, taxes owed, salaries, etc.
• Equity: Shareholder capital or retained earnings.
In essence, it shows what your business owns and what it owes—critical for evaluating overall stability.


5. Accounts Receivable & Accounts Payable

• Accounts Receivable (AR): Money owed to your business by customers for goods or services delivered. This is an asset on your balance sheet.
• Accounts Payable (AP): Money your business owes to suppliers or creditors. This is listed as a liability.
Efficiently managing AR and AP ensures smooth cash flow and helps maintain healthy financial relationships with customers and vendors.


6. Bad Debt Expense

Bad debt occurs when customers fail to pay what they owe, leading to uncollectible receivables. Over time, these unpaid amounts might need to be written off as bad debt expense on your financial statements, resulting in a loss.
Tracking and minimizing bad debt is vital for safeguarding your revenue and improving financial forecasting.


Empower Your Business with Financial Knowledge

Mastering these six accounting terms will not only enhance your conversations with your accountant but also empower you to make smarter, more confident decisions for your business.

Understanding the language of accounting and finance is a small step with big benefits—it’s your key to sustainable growth and success. Learn more on about how Eleni Finance can help your business make better, faster financial decisions.