Business Finance Basics Explained in 2 Minutes
A Quick Introduction to Business Finance
Nervous about the basics of business finance, accounting and all those complicated terms you’ve heard but weren’t sure about?
Well, understanding business finance basics can be easy, and we’re gonna bring you up to speed on the basics – fast. We’ll break down the essentials in 2 minutes, so you can juggle those financial terms and concepts like a pro.
Top 5 Business Finance Concepts You Need to Know
Revenue: The money a business earns from selling products or services. Think of revenue as the fuel that keeps your business running.
Expenses: The costs involved in running your business, building your products, paying salaries, rent, and marketing, etc. These are the things that eat away at your revenue, so keeping an eye on expenses is crucial.
Profit: The difference between your revenue and expenses. This is the sweet reward you get for running a successful business. More profit means more money to reinvest, save, or take home!
Cash Flow: The movement of money in and out of your business. Cash flow is like the heartbeat of your business – it’s essential for survival. Positive cash flow means more money is coming in than going out, while negative cash flow signals potential trouble.
Break-even Point: The moment when your revenue equals your expenses. Reaching the break-even point is a significant milestone because it means your business is no longer losing money.
Examples:
| Income Statement Term | What It Means (Plain English) | Simple Example |
|---|---|---|
| Revenue (Sales) | Total money coming in from customers before any costs | Sold 50 lemonades at $2 each → $100 revenue |
| Cost of Goods Sold (COGS) | Direct costs required to make the product | Lemons, sugar, cups cost $30 |
| Gross Profit | Money left after paying for the product itself | $100 − $30 = $70 gross profit |
| Operating Expenses | Costs to run the business (not tied to each unit sold) | Sign, table rental, permits = $20 |
| Operating Profit | Profit after running the business day-to-day | $70 − $20 = $50 operating profit |
| Other Expenses | Extra costs like bank fees, interest, or taxes | Small card-processing fee = $5 |
| Net Profit (Bottom Line) | What the business actually keeps | $50 − $5 = $45 net profit |
Comparison Table:
Key Financial Reports
These are the key financial reports you should know. They are really pretty simple once you “get” what they mean. 🙂
| Term | Definition |
|---|---|
| Cash Flow | The movement of money in and out of your business |
| Balance Sheet | A snapshot of your business’s financial position at a specific point in time. It shows all your businesses assets such as cash, stock and supplies on hand, office and work supplies, computers, furniture, vehicles, etc. |
| Income Statement | Also known as a Profit and Loss Statement, or a P & L. It’s a report that shows your business’s financial performance over a specific period of time |
Big Takeaways on Business Finance Basics
Understanding these core concepts is like learning the chords on a guitar – once you’ve got them down, you can start playing your favorite tunes or even create your own.
Keep these financial basics in mind, and you’ll be well on your way to mastering the art of business finance.