Common Finance Terms Used In Small Business Explained

Have you ever noticed how business seems to have its own language? Even small business owners seem to speak with a language that is all their own, and if you are new to the world of commerce, all that jargon can be daunting.

One of the biggest issues for small business owners, when it comes to incomprehensible terminology, is the jargon that is used to describe common finance terms. If you do not know your profit from your turnover, however, read on! In this article, I will give you a simple explanation for each of the common finance terms used in small business, and an idea of why they are important. Many of these terms are a part of my own formula for business success, so they are well worth understanding.

First, let us look at overheads. Every business, whether it is run from a home office, or from an office suite, or a huge building, has expenses. Those expenses, in the business world, are known as overheads. Overheads can be fixed (like your mortgage or rental, or the cost of equipment rental every month) or they can be variable (such as consumable items like stationary, or utility bills, or salaries for your staff.) In an ideal world, your overheads would only increase when your turnover and profits (that we will look at a little later in this article) do, but sometimes, that is not the case.

Next, there is your customer’s average dollar spend. In a nutshell, this is the amount of money your business makes, divided by the number of customers you have. So, for instance, if you make $2000 from twenty customers, their average dollar spend is $100. This is another common finance term that you will find in my business formula, and it is one of the things you can change if you want to make more profit from your business.

Another important term, both in my business success formula, and business itself, is turnover. This is one of those common finance terms that is often misunderstood – it is not the profit that your business makes, but rather, the total amount of money or revenue that you have brought in, before your overheads and expenses are deducted.

This brings us to margins and profit. Margins are essentially, the profit that your business makes, expressed in a percentage form. So, for instance, if your business has a 10% margin, your profit on $100 000 turnover would be $10 000. In order to make more money off your business, you need to increase your profit margins, either by increasing the cost of your products or services to your customers, or by reducing your costs or overheads.

Once you see common finance terms used in business like that, it’s a lot easier to understand what they mean, isn’t it? It is also easier to see how you can manipulate the various financial factors involved in financial success to increase your business’s profitability.

Let us assume that your business consistently makes $100 000 in turnover, but that your overheads are $50 000. That leaves 50%, or $50 000 as profit, which is pretty healthy. However, if you could find ways to reduce your overheads by 5%, your profits would increase to $55 000, without you having to sell any more of your products or services to your clients.

On the other hand, if your business is already operating on the minimum, in terms of overheads, then you will need to look at your turnover, if you want to increase your profitability. Adding another 5% to your turnover, bringing it to $105 000 in this instance would have the same effect as reducing your overheads and expenses, but it may cost you more money to find more customers.

The important thing, when it comes to business success, is to understand the basics when it comes to common finance terms used in business, and how to manipulate them to your advantage.

I teach my clients that there is a formula to success, and that formula is based on simple terms like these. My view is that if you understand how the basic financial ideas work in business, you can sit down and figure out where you can cut costs, and where you can increase turnover. If you can do both of those, and perhaps increase your number of sales, or average dollar spend, then you can make more money, without necessarily doing more work.

In business, it’s often not about how hard you work, but about how well you understand how business works that makes the difference. So don’t be scared of terminology like this – it is not as complicated as it seems, is it? Rather spend some time learning, and you should find that it becomes a lot easier to be more successful.