Small business owners need to know a little bit about many things – business development, marketing, pricing, operations, strategy, and…..gulp…accounting.
In larger businesses not many people have exposure to budgets and strategic plans. For the nonprofit organization, if there is no money, there is no mission. Program staff and other can benefit through a better understanding of strategy, “production” costs for programs and tradeoffs.
In honor of tax day, Roo created a short list of accounting terms described in language an everyday person can understand. I encourage you to use this as a springboard discussion in a team meeting. Ask your team to think about a grocery store. What would the current assets be? What about fixed assets? What might cause the store to experience a loss on the income statement? Next, bring the discussion around to your business. What are the costs to produce your product or service? What about the value of intellectual capital? What drives revenue and what creates cost?
I hope this brief introduction sparks good conversation. If you are interested in learning how to help teams better understand strategy, team cohesiveness and financial acumen, ask me about bringing the Simdustry business simulation to your organization.
In larger businesses not many people have exposure to budgets and strategic plans. For the nonprofit organization, if there is no money, there is no mission. Program staff and other can benefit through a better understanding of strategy, “production” costs for programs and tradeoffs.
In honor of tax day, Roo created a short list of accounting terms described in language an everyday person can understand. I encourage you to use this as a springboard discussion in a team meeting. Ask your team to think about a grocery store. What would the current assets be? What about fixed assets? What might cause the store to experience a loss on the income statement? Next, bring the discussion around to your business. What are the costs to produce your product or service? What about the value of intellectual capital? What drives revenue and what creates cost?
I hope this brief introduction sparks good conversation. If you are interested in learning how to help teams better understand strategy, team cohesiveness and financial acumen, ask me about bringing the Simdustry business simulation to your organization.
Accounting Terms for everyday people
A
Accounts Payable: money you owe to others (suppliers and vendors) for goods or services purchased
Accounts Receivable: money others owe you for goods or services provided
Amortization: the loss of value over time of an intangible asset (something you cannot touch or see). Ideas are worth less over time. Examples would include the decreasing value over time of a technology or patent. Amortization is a reduction of the value of an intangible asset on the balance sheet. It is not a cash payment.
Assets: what you own that creates current or future economic value. Examples include cash, investments, accounts receivables, inventory, buildings, and equipment.
Current assets: assets that can be converted to cash within 12 months
Fixed or long term assets: assets that can be converted to cash over a period of time longer than 12 months
B
Balance Sheet: The balance sheet compares your current assets (what you own) with the current liabilities (what you owe) + equity (the value left over). The balance changes every time you pay a bill or receive money.
C
Capital: funds available for the organization to use for business transactions
Cash Flow Statement: shows the money coming into the organization (revenue) and leaving out of the organization over a period of time. It is critical for organizations to monitor cash flow in order to pay wages, buy materials, and pay bills.
Current assets: items of value that can be converted to cash, sold or used within 12 months (cash, materials, etc.)
Current debt: money you owe to others within the next 12 months (line of credit advances, interest payments on long term debt)
D
Debt: payments owed to others
Current debt: debts that must be paid within 12 months (material costs, salaries, interests on loans)
Long-term debt: debts that extend beyond one year. Mortgages, long-term loans, etc.
Depreciation: Things lose their value over time due to wear and tear, outdated technology, etc. Depreciation represents the age and use of machinery, buildings, etc. Depreciation is a reduction of asset value on the balance sheet. It is not a cash payment.
Direct costs: the costs required to produce a good or service. This typically consists of a combination of materials and labor.
E
Equity: This is the difference between assets (what you own) and liabilities (what you owe). Think of owning a house worth $250,000 (this is the asset). You owe $150,000 on the mortgage (the liability). The remaining $100,000 is equity.
F
Fixed Assets: the value of physical items an organization owns – machines, buildings, vehicles, etc. Their value goes down over time. These items cannot be easily converted to cash. Also called property and equipment (P&E)
I
Income Statement: This is also called a Profit and Loss Statement (P & L). The income statement compares revenues and expenses over time. The capital left over is profit. Companies can experience a gain (if you bring in more money than you spent) or a loss (if you spent more than you earned).
A gain increases the equity on the balance sheet.
A loss reduces the equity on the balance sheet.
Indirect Costs: the costs required to operate an organization that are not directly tied to production of the good or service. Examples include IT, HR, Finance, Marketing and Administration. This is also called Sales, General and Administrative Costs (SG&A)
Interest: the fee a lender charges to borrow money; typically an annualized percentage fee of the total dollars borrowed.
Inventory: the raw materials, work in process (WIP) and finished goods that have not yet been sold. Inventory is a current asset.
L
Liabilities: money you owe to others (suppliers, vendors)
Long-term debt: debts that extend beyond one year. Mortgages, long-term loans.
P
Principal: the amount of money that is borrowed and must be paid back to a lender over time.
Pro Forma financial statements: a projection of future financial results
Profit and Loss Statement: see income statement
R
Revenue: the money generated from the sale of goods and services
W
Working capital: the money an organization has to run the day-to-day business. Cash, lines of credit, etc.
Working capital = current assets – current liabilities
A
Accounts Payable: money you owe to others (suppliers and vendors) for goods or services purchased
Accounts Receivable: money others owe you for goods or services provided
Amortization: the loss of value over time of an intangible asset (something you cannot touch or see). Ideas are worth less over time. Examples would include the decreasing value over time of a technology or patent. Amortization is a reduction of the value of an intangible asset on the balance sheet. It is not a cash payment.
Assets: what you own that creates current or future economic value. Examples include cash, investments, accounts receivables, inventory, buildings, and equipment.
Current assets: assets that can be converted to cash within 12 months
Fixed or long term assets: assets that can be converted to cash over a period of time longer than 12 months
B
Balance Sheet: The balance sheet compares your current assets (what you own) with the current liabilities (what you owe) + equity (the value left over). The balance changes every time you pay a bill or receive money.
C
Capital: funds available for the organization to use for business transactions
Cash Flow Statement: shows the money coming into the organization (revenue) and leaving out of the organization over a period of time. It is critical for organizations to monitor cash flow in order to pay wages, buy materials, and pay bills.
Current assets: items of value that can be converted to cash, sold or used within 12 months (cash, materials, etc.)
Current debt: money you owe to others within the next 12 months (line of credit advances, interest payments on long term debt)
D
Debt: payments owed to others
Current debt: debts that must be paid within 12 months (material costs, salaries, interests on loans)
Long-term debt: debts that extend beyond one year. Mortgages, long-term loans, etc.
Depreciation: Things lose their value over time due to wear and tear, outdated technology, etc. Depreciation represents the age and use of machinery, buildings, etc. Depreciation is a reduction of asset value on the balance sheet. It is not a cash payment.
Direct costs: the costs required to produce a good or service. This typically consists of a combination of materials and labor.
E
Equity: This is the difference between assets (what you own) and liabilities (what you owe). Think of owning a house worth $250,000 (this is the asset). You owe $150,000 on the mortgage (the liability). The remaining $100,000 is equity.
F
Fixed Assets: the value of physical items an organization owns – machines, buildings, vehicles, etc. Their value goes down over time. These items cannot be easily converted to cash. Also called property and equipment (P&E)
I
Income Statement: This is also called a Profit and Loss Statement (P & L). The income statement compares revenues and expenses over time. The capital left over is profit. Companies can experience a gain (if you bring in more money than you spent) or a loss (if you spent more than you earned).
A gain increases the equity on the balance sheet.
A loss reduces the equity on the balance sheet.
Indirect Costs: the costs required to operate an organization that are not directly tied to production of the good or service. Examples include IT, HR, Finance, Marketing and Administration. This is also called Sales, General and Administrative Costs (SG&A)
Interest: the fee a lender charges to borrow money; typically an annualized percentage fee of the total dollars borrowed.
Inventory: the raw materials, work in process (WIP) and finished goods that have not yet been sold. Inventory is a current asset.
L
Liabilities: money you owe to others (suppliers, vendors)
Long-term debt: debts that extend beyond one year. Mortgages, long-term loans.
P
Principal: the amount of money that is borrowed and must be paid back to a lender over time.
Pro Forma financial statements: a projection of future financial results
Profit and Loss Statement: see income statement
R
Revenue: the money generated from the sale of goods and services
W
Working capital: the money an organization has to run the day-to-day business. Cash, lines of credit, etc.
Working capital = current assets – current liabilities