6 Financial Terms Every Entrepreneur Should Know
In order to fully understand the business world that surrounds them, beginner entrepreneurs need to learn long list of business and financial terms. In this article we explain some of the most confusing and useful terms entrepreneurs often need to cope with, when reading financial statements, signing contracts with business partners and doing all kinds of financial calculations.
1. Revenue growth
Let’s start with good things! Revenue growth enables you to splash more funds on your expense in order to save more money for rainy days or to invest it in opening another branch of your business. Although revenue growth is considered a good thing, you should always keep an eye on it. For example, if you are running an aspiring business that had a 100% of revenue growth in 2014 fiscal year, but you ended 2015 with no more than 50%, it is advisable to inspect the reasons that stand behind this drastic revenue growth change. Don’t get me wrong, 50% is a very healthy growth, but its decrease can have deeper reasons that can slowly kill off your business growth in the long run.
2. Gross margin
If you are new to economy, you probably hearing this term quite often, and it probably sounds utterly confusing . Gross margin is similar to profits, but it is expressed in percentage and represents the percent of total sales revenue, which is kept by the company after all production costs are subtracted. Higher gross margin percentages mean that company keeps more on each dollar they earn through sales. Gross margin separates ’the wheat from chaff’ in terms of business and high percentage means that an entrepreneur chose a very profitable business niche.
3. Surety bonds
Surety represents a third-party guarantee, which ensures an obligee that contractor will finish the contract in a timely-manner and in accordance to the signed contract. There are several different kinds of surety bonds.
Surety is very useful to entrepreneurs because it guarantees that their business partners and contractors will meet all of their obligations in accordance to the contract or government standard in the field. These bonds also protect contractors’ interests. They guard them from capital claims and allow them to invest all of their assets in finishing contracted project.
Should you put all eggs in one basket? Of course not! In financial language this statement means you should diversify your portfolio. We often hear this word from stock broker, but its is also useful for any entrepreneur that has some funds that they want to invest. For example, people who invested all of their funds in tech companies in the end of nineties went broke in just few years because of the Dot.com Bubble burst.
But how should you diversify your portfolio? Here are the two magic words (and another important financial term): asset allocation. You should invest money in different asset classes, or if we are talking about an entrepreneurship, then you might consider offering several different services and products that are targeting more than one consumer group.
Leverage is another term that is used in both business and financial world. For entrepreneurs, leverage represents the amount of debt they can use for financing their company, or, if we want to put it even more bluntly, it is the amount of money you borrowed in order to run your business. When it comes to leverage, it is important that entrepreneurs strike the right balance of leverage and equity because highly leveraged businesses are considered risky to most investors.
6. Cost of sales
This represents the sum of raw materials and assembly costs in service, production or retail niches. Actually, if you think about it, these are costs that are necessary for some product or service to be sold, which is from where ‘cost of sales’ name was coined. In retail these costs represent the price store paid for certain item, while in transportation it represents the sum of gasoline and maintenance costs required for a running truck, transportation van or a taxi cab.
Knowledge is entrepreneur’s most valuable asset. By familiarizing with all financial and business terms you secure yourself from frauds and bad financial decisions. That’s why every entrepreneur should learn financial terms and procedures before starting their project. You can do it on various on- and offline finance courses, including a number of free courses from top universities offered on open courseware websites.