When first opening your business, getting your head around the financial side of things can be daunting. After all, having improper accounting could land you in hot water with the IRS, and nobody wants that!

A good place to start is by learning the different financial terms that you will likely encounter in your business. From COGS to ROI, understanding the financial jargon will help you complete your accounting and scale your pet care business effectively. 

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50 financial terms that every small business owner should know.

Whether you hire a bookkeeper or use a business software tool, the below 50 financial terms are a great place to start when making decisions about your business’ finances. 

1. Annual percentage rate (APR).

When considering a loan for your small business, it’s important to look at the APR associated with the loan. The APR of a loan will show you exactly what you will pay back including interest rates, fees, and other charges associated with the loan. 

2. Accounts payable.

Accounts payable is an account within your business’ general ledger that shows the money that is owed to suppliers/consultants/contractors for products or services that you purchased for the business. 

3. Accounts receivable.

Accounts receivable is an account within your business’ general ledger that shows the money that is owed to you from your clients. If your client doesn’t pay for their service on the day, but instead you invoice them, the amount due will be recorded in accounts receivable. 

4. Accrual basis accounting.

Accrual basis accounting is an accounting method that records revenue and expenses when they occur, even if money hasn’t been exchanged. 

If you look after a client’s dog once a week, but receive payment once a month, accrual basis accounting means you would record your revenue per dog daycare visit even though you haven't received payment for it yet. 

5. Assets.

Assets are any items of value that your business owns. These can be tangible items such as buildings, tools, and inventory or intangible items such as intellectual property. 

6. Balance sheet.

A balance sheet is a snapshot in time of a business’ financial position. It is a financial statement that shows a business’ assets and liabilities at any particular time.

7. Capital gain.

A capital gain is an increase in an asset's value when it is sold. If you sell an asset for more than what you bought it for, a capital gain has occurred. 

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8. Cash basis accounting.

Cash basis accounting, in contrast to accrual basis accounting, is an accounting method that records revenue and expenses when cash is received or paid out.

9. Cash flow.

Cash flow is the money that moves in and out of your business. The goal is to have enough cash flowing in from clients to cover the cash flowing out from expenses. 

Having a strong cash flow is especially important if you have a pet care business that is affected by seasonal fluctuations such as dog kennels. 

10. Cash flow statement.

A cash flow statement is used to analyze the cash that flows in and out of your business. It is a financial statement that reports where the cash comes into your business and where it goes out to.

A cash flow statement is different from an income statement because it only accounts for cash and not non-cash accounting such as the depreciation of an asset. 

11. Collateral.

If you take out a loan for your small business, you may be asked to provide something of value as collateral. This item will be taken by the bank or lender if you are unable to make the repayments of your loan. 

12. Cost of goods sold (COGS).

For pet care businesses that sell pet products on the side, COGS is an expense that is recorded in your business’ financial statements. To calculate COGS, take the cost of the starting inventory, add the cost of any additional inventory, and subtract the cost of the ending inventory to get the cost of goods sold.

For example, if you start off the accounting period with dog collars that cost you $1000, buy additional dog collars for $2000, and end the accounting period with $500 in dog collars, your cost of goods sold will be:

$1000 + $2000 - $500 = $2500 COGS

13. Credit.

In accounting, a credit is an entry that increases liabilities (how much you owe) and decreases assets (what you own). It is the opposite of a debit and is used in double-entry bookkeeping.

14. Creditor.

A creditor is an accounting term that is used to describe anyone your business owes money to. This can include another business, bank or credit union.

15. Debit.

In accounting, a debit is an entry that increases assets (what you own) and decreases liabilities (how much you owe). It is the opposite of a credit and is used in double-entry bookkeeping.

16. Depreciation.

If one of your business assets loses value over time, this is known as depreciation. Depreciation accounts for long-term assets losing value and the subsequent loss in value to the business’ finances.

17. Double-entry bookkeeping.

Double-entry bookkeeping uses two entries per one transaction. For every debit, there is a credit, and vice versa. For example, if you buy a dog grooming product, you would enter a credit into your cash account and enter a debit into your asset account to reflect this one transaction of purchasing the dog grooming product. 

18. Equity.

Equity has different meanings depending on the context, but in business, equity refers to the amount of money an owner or investor puts into a business.

19. Expenses.

Expenses are any costs that businesses incur while running the business to generate revenue. Common expenses include COGS, employee salaries, rent, and utilities.

20. Financial statement.

Financial statements are documents that report how a business is performing. The three main types of financial statements are the balance sheet, the cash flow statement, and the income statement. 

21. Fiscal year.

The fiscal year is an accounting period, usually 12 months that businesses use for accounting and budgeting purposes. Unlike the calendar year, the fiscal year does not have to end on December 31st but can end on any day of the year based on the business’ needs. 

22. General ledger.

The general ledger is the central hub of your business’ finances. Here is where you record all the financial transactions of your business and organize them into their necessary accounts including assets, liabilities, expenses, and revenue. 

23. Gross profit.

Gross profit is the money your business makes from sales, minus the cost of goods sold associated with those sales. This shouldn’t be confused with net profit.

24. Income.

Income is the money that flows into a business from selling services, products, or investments. Certain forms of income will be subject to income tax. 

25. Income statement.

If the balance sheet is a snapshot of a business’ financial position, then the income statement is the movie. It is a financial statement that summarizes the revenue and expenses of a business over an accounting period and is also referred to as the profit and loss statement.

26. Inflation.

Inflation is when the price of an item you routinely use in your business increases, even though the item is exactly the same as before. Inflation is when the purchasing power of money decreases over time which means more money is needed to buy the same item as before. 

27. Intellectual property.

Intellectual property is a business asset that is legally owned to prevent others from using it without the owner's permission. Intellectual property includes patents, trademarks, copyrights, and any other intangible asset that is legally protected.

28. Interest payments.

Interest payments are money that a borrower has to pay to a lender for using their money. A financial institution will loan money (principle) to a business and charge interest on top of that, usually a percentage of the original amount loaned.

29. Inventory.

Inventory is any product that your business buys for future sales. This can include raw materials, such as fabrics to make dog collars, in-process goods, and finished goods such as dog toys. 

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30. Journal.

A journal is a bookkeeping tool that records the raw transactions of a business in sequential order of when they happen. This is different from the general ledger which tracks the main accounts of a business such as the assets, liabilities, revenue, and expenses accounts. 

31. Liabilities.

Opposite to assets which are valuables your business owns, liabilities are all the debts your business owes. This can include loans, mortgages, unpaid bills, and unpaid invoices.

32. Line of credit.

A line of credit is a set amount of money that can be borrowed as and when is needed. Unlike a loan which is a lump sum given up front and paid back periodically, a line of credit allows you to borrow as much or as little money as required, up to your predetermined credit limit. 

33. Liquidity.

Liquidity is the ease with which a business can convert its total assets into cash. Liquid assets are cash in the bank, cash on hand, and any assets that can be easily converted to cash such as stocks, bonds, and mutual funds.

34. Loan.

A loan is an amount of money that is borrowed from a bank or any other financial institution and paid back.

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35. Markup.

Markup is the amount of money added to the cost price of a product to determine its selling price. Selling products that are marked up is a common practice for businesses to cover expenses and generate profit. 

36. Mutual fund.

A mutual fund is an investment that pools together multiple investors' money to buy stocks and bonds. A mutual fund is considered a liquid asset. 

37. Net profit.

Net profit is the money your business earned after subtracting all of the expenses the business incurred. Unlike gross profit which only subtracts COGS, net profit subtracts COGS and all other business expenses to get the final net profit. 

38. Overheads.

Overheads are the operational expenses a business incurs for the general day-to-day running of the business. These expenses are not specific to individual services or products, but rather the general costs of running the business. 

Overhead expenses can include:

• Rent/mortgage
• Utilities 
• Software
• Marketing
• Insurance 

39. Payroll.

Payroll is the process by which a business pays its employees. It includes employee wages, bonuses they have earned, and deductions such as taxes, insurance, and Roth IRA investments.

40. Petty cash.

Petty cash is the small amount of cash kept on hand in a business to look after small purchases such as milk or coffee. 

41. Profit and loss.

Profit and loss is calculated after all the business’ income and expenses are accounted for. Profit occurs when income is greater than expenses and loss occurs when expenses are greater than income. 

42. Profit and loss statement.

The profit and loss statement is also referred to as the income statement and is a summary of the income and expenses of a business. 

43. Revenue.

Revenue is all the money that comes into a business from the sale of goods or services. Revenue can also include any interest earned on loans, or rent received from other businesses that use your property. 

44. Return on Investment (ROI).

Return on investment is a metric used to determine whether an investment is profitable or not. It takes the net gain or loss of an investment and divides it by the initial investment to determine whether the ROI is positive or negative. 

45. Shareholder.

A shareholder is someone who legally owns a portion of your business. If you accepted an investment, in exchange for a part ownership in your business, that person would be considered a shareholder in your business. 

46. Supply chain.

A supply chain is the network of people that a product has to go through until it arrives at your door. From the raw materials to your shelf, the pet care products that you sell have moved through a whole supply chain before they are available to sell to your customers. 

47. Tax deduction.

A tax deduction is an expense that you can deduct from your business’ taxable income to lower the income tax your business has to pay. Tax deductions can include meals, educational books, travel, and any other expenses that were incurred as a result of running your business. 

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48. Turnover.

For small businesses, turnover refers to the total amount of revenue coming into the business from sales of goods and services.

For large businesses, turnover can also refer to the turnover of staff and how well a business can retain its employees.

49. Working capital.

Your business’ working capital is calculated by subtracting your current liabilities from your current assets. This is a good indication of your business’ financial health and its ability to pay off any short-term debts it has.   

50. Year-end.

Year-end refers to the end of the fiscal year; it marks the end of an accounting period. If you sell products in your business, the remaining inventory at year-end will be used to calculate the COGS. 

Commonly asked questions.

How to create and manage financial statements for small businesses?

Bookkeeping is required when creating financial statements. This can be performed with a simple spreadsheet. For businesses with employees, inventory sales, or multiple services, a pet care business software that can export to an accounting software will likely be more beneficial. 

What are some common accounting challenges faced by small businesses?

Knowing and understanding the different financial terms can be very challenging for small businesses tackling the accounting process. Lack of time and keeping track of incoming and outgoing money can also make accounting difficult. 

To learn more about how PetExec can help with the accounting for your pet care business, book a free demo today!