Getting started with a business may involve some unfamiliar terminology. Even though you do not need a formal education to succeed in business, knowing some basic business terms is essential, even if you are great at what you do. A business glossary is a list of business terms and definitions organisations use when analysing data to ensure the same terminology is used across the company. Everyone in an organisation uses a business glossary as a common language.
This article is a quick-reference list of standard business terms. Your finances, operations, and strategy will be easier to manage, streamline, and formulate if you understand these twenty-three business terms. Keep reading to learn about the business glossary, business terms list and new business terms.
Did You Know? By understanding business terms, your business can increase efficiency, maintain consistency in brand voice, and save up to 20% on translation costs.
What are Business Glossary Terms?
Business glossary terms are collections of data-related terms outlined in plain language that everyone can understand. A business glossary ensures that organisations speak the same vocabulary by clearing up ambiguity in business terminology.
These definitions are part of business terminology, which helps organisations understand what different terms mean. As a result of this definition, entities are defined in a way that captures their relationship while being sufficiently open to accommodate potential interpretation differences.
Important Business Glossary Terms
Business terms describe concepts that people use in their field of business. Examples are annual leave, a customer, a purchase order, and a personal loan. Listed below are the essential business terms every manager should know to run their business effectively.
Small businesses owe short-term debts called accounts payable. Among them are utility bills, inventory received, and services rendered. To ensure your company pays its bills on time, you should know how much it owes in the short term.
Businesses that sell items or services on credit to customers fall into the accounts receivable category. Although receivables are assets, keeping track of how long a sale takes to settle is essential. If you own a close eye on this number, you will be able to determine which customers pay on time and which accounts require additional attention.
Expenses that vary with the item numbers sold or produced by your business are variable costs. The cost of raw materials, direct labour, and utilities are variable. Increased volume allows firms to purchase larger goods at a lower price per item due to economies of scale. Doing so can increase the profit per item and net income or reduce the sales price.
KPI stands for Key Performance Indicator ans=d is used to measure performance, and this metric aims to evaluate a project's success and the organisation. Understanding a business's values is key to setting effective KPIs. A manager must understand the business's long and short-term goals before selecting a good KPI to ensure that projects are aligned with the business's needs.
Businesses use assets to conduct business, such as equipment, inventory, and intellectual property. Business assets do not always consist of physical goods.
As of a particular date, a balance sheet shows the relationship between your business's assets, liabilities, and equity. Liabilities and assets are divided into current and long-term items. Companies should reduce liabilities. You will understand current and future cash flow better if you maintain an up-to-date balance sheet.
Bootstrapping is used to create confidence intervals for population parameters, such as the mean or standard deviation, when the population is not well understood or when a sample is not large enough to be representative of the population. Bootstrapping can also be used to generate new datasets for machine learning algorithms.
Cash flow statement
A cash flow statement summarises how much cash enters and leaves a business over some time. Using categories of operations, investing, and financing, the document shows the amount of money available at the period's beginning and end. Cash flow statements help business owners understand how their money is spent and how it is earned.
Cost of goods sold (COGS)
The cost of goods sold is the total cost of buying or building the product you sold. COGS includes the raw materials and labour used to manufacture the product. For example, a manufacturing company that produces bicycles in India may have the following costs:
- Raw materials: cost of steel, rubber, plastic, and other materials used in the production of the bicycles.
- Labor: wages and benefits of the factory workers who produce the bicycles
An asset has a useful life expectancy before it is replaced due to wear and tear when a business buys it.
The term "fixed cost" refers to an expense that does not change over time. Fixed costs are expenses a business will incur regardless of whether it produces or sells anything. The cost of rent, salaries, and insurance is an example of a fixed cost.
The income statement for your business summarises the revenue, expenses, and net profit. This type of report is typical for monthly, quarterly, and annual reports. Using this report, business owners can analyse and compare their company's performance by company division, geographic region, product type, or other criteria.
Inventory value refers to what a business has available for sale in the form of finished goods. A business purchases inventory from a supplier or manufactures it from raw materials—a balance sheet records inventory as an asset. Removing items from a list calculates the cost of goods sold.
Business owners aim to find the right balance between their inventory and sales. They must have enough lists to meet customer demands. However, too much inventory can go wrong, and become outdated, damaged, lost, or stolen. Businesses conduct inventory counts periodically to ensure that the stock matches the records.
Leases are contracts under which an asset is leased for a specified period. Businesses often lease office space, equipment, or software to run their operations. Since you must return the property when a contract ends, a lease usually pays less than a traditional loan.
Leasing an asset improves cash flow in the short term compared to buying an asset. Lease payment is also taxed differently than a loan for an asset purchase.
An organisation's liabilities are all of its debts. Current liabilities are those due within one year, while long-term liabilities are those due within five years. Deferred compensation, loan payments, and customer deposits are all long-term liabilities.
To prepare for payments due in the short term and repay debts over a long time, business owners focus on the company's liabilities.
Limited Liability Company (LLC)
The owners of a limited liability company are not liable for the company's debts. The owner of an LLC can be an individual, a corporation, another LLC, or even a foreign entity. Corporations, partnerships, and individuals can all file tax returns as LLCs.
Debts that are repayable over a more extended period are long-term debts. Businesses sometimes borrow over several years to finance more significant assets or take advantage of financing opportunities. Many types of long-term debt include commercial real estate loans, equipment leases, pension benefits, and contingent obligations.
When business expenses exceed revenue, there is a net loss. Business startups and efforts to grow revenue commonly result in net losses when they first open. An owner who loses money may borrow, extend accounts payable, borrow from personal savings, or contribute more money from private funds to make a difference. Business owners should re-evaluate their business plans if they continue to lose money in their businesses.
B2B is business-to-business transactions. In this type of transaction, one company transacts with another. Here is an example of B2B companies and their key performance indicators (KPIs) that they might track:
- Wholesale distributor: A wholesale distributor sells products to other businesses, such as retailers or manufacturers. They might track KPIs such as:
- Inventory turnover: How quickly they are able to sell their inventory
- Sales growth: How much their sales are increasing over time
- Gross margin: How much profit they are making on each sale
B2C is business-to-consumer transactions. The term refers to transactions between consumers and businesses. An example of B2C companies and their key performance indicators (KPIs) that they might track:
- E-commerce retailer: An e-commerce retailer sells products online to consumers. They might track KPIs such as:
- Conversion rate: How often website visitors make a purchase
- Average order value: How much consumers are spending per purchase
Sole proprietorships are the most common and straightforward type of business. Rather than a separate legal entity, it is an extension of yourself. Sole proprietors are 100% responsible for debts and obligations associated with their companies.
Return On Investment (ROI)
An investment's return on investment (ROI) measures how it performs. To calculate ROI, you divide the company's net profit by the total investment multiplied by 100%. The return on a ₹10,000 investment will be 10% if there is a ₹1,000 profit. To evaluate the ROI of your investment into the business, you should compare it with alternatives you could have made instead of investing in it.
An owner's equity represents their net investment in the business since it was founded. To calculate the owner's equity, subtract liabilities from assets. Whenever a company makes a profit or the owner contributes money or support, the number increases, and when the company loses money or the owner withdraws, the number decreases.
Understanding standard business terms will help to run your organisation more efficiently. You can have more productive discussions with your management team, lenders, and investors about your business performance and financing requirements as a result. Additionally, knowing what to focus on when evaluating your business' progress towards its goals can assist you in figuring out how to make money in your new business.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.