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Essential Business Terms Every Entrepreneur Should Know

You can’t run a healthy, successful business without having a basic understanding of business concepts. A little business acumen is essential for every business leader, from beginning managers to owner/operators. No matter where you are in your career, never stop learning —there’s always new problems to solve, new tools to master, and new vocabulary to understand.

Fortunately, you don’t need an MBA to master key business terms. Our glossary walks readers through the basic business concepts in easy-to-understand ways.

A glossary of terms for doing business

Accounts payable / receivable 

Account payable is the total money that your company will owe to the vendors. Account receivable is the total money that is owned by the company. Your customers may owe this debt when they buy any products or services from your company.

Accrual basis

The accrual basis is an accounting method of recording income when it’s actually earned and expenses when they actually occur. This is the most common approach used by larger businesses to record and maintain financial transactions.


“Assets” refers to a business’ cumulative financial holdings. These are further broken down into current, or short-term assets such as cash or inventory or fixed, or long-term assets, which can include property or equipment.

Conversely, Liabilities are debts a business owes another person or entity. Like assets, businesses will define liabilities as current or long-term.


Auditing is a review of financial or operational data to ensure accuracy and compliance of rules, standards, and statutory regulations. This includes transaction testing, understanding internal controls and assessing fraud risk.

Budget valuation

Business valuation is the process by which the overall financial value of a company is determined. There are a number of methods used in determining a business’ economic worth. There are also a number of different reasons why the value of your entity is good information for any business owner to have in their resource files.

Budget variance/analysis

The budget variance refers to the difference between the estimated amount of expense or revenue and the actual amount. Variances fall into two major categories: favorable variance, when actuals are better than budgeted (e.g., when revenue is better) and negative variance, where actuals are worse than budgeted (e.g., when revenue is worse). Budgets are only an approximation of what the future holds, and a little variance is to be expected. It’s when actuals deviate exceedingly from estimates that business leaders should take a harder look at the numbers to uncover fact from fiction. This is where variance analysis comes in.

Balance sheet

A balance sheet is a financial statement reporting the company’s total assets, liabilities, and also shareholders’ equity.


Bookkeeping is the general process of tracking all a company’s financial transactions, typically by entering or importing them into online accounting software or using a physical set of “books.” Proper bookkeeping helps an organization tally where it is spending money and where revenue is coming from.

See our guide to a bookkeeper role, costs and salary

Capital raising

Fundraising, or raising capital, is how you keep your company's cash flow steady during crucial stages of your business. It's an injection of funding meant to bolster your company's solvency. In other words, raising capital essentially means gaining money to grow your business.

Cash flow

Cash flow is the movement of money, including cash and also cash equivalents that are transferred into and out of an account. When your company can generate positive cash flows, you can maximize the long-term free cash flow or FCF. Businesses want a higher flow of income into the business than an outflow of expenses (e.g., a “positive” cash flow). A cash flow statement summarizes the cash transactions related to the company’s daily operations, investments, financing, taxes, interest, and any other significant exchanges.

Free cash flow

Free cash flow is the amount of cash available—after operating and capital expenses—from the income a business produces from operations.  To calculate this, use the following free cash flow formula:

Net Cash Flow From Operations – Capital Expenditures = Free Cash Flow

Having good free cash flow demonstrates a healthy business, which is likely to yield a nice return on investment.

Forensic accounting

Forensic accounting will involve some special skills, including accounting, auditing, and also investigative skills for examining certain businesses or individuals. It will provide a complete analysis that is required in any legal proceedings. Our team is ready to help you learn more about forensic accounting for your company.

Fractional CFO

They are experienced fractional CFO who works with organizations in an outsourced, part-time, retainer, or contract arrangement. This provides a company with the experience and expertise of a C-level finance executive without the in-house cost—salary, benefits, and more—of a full-time employed CFO.

Fractional COO

A fractional COO is essentially an outsourced professional who serves as your chief operating officer. They may come in once a week, once a month, or any level of frequency that you need them for strategic planning, process improvement, and other operations-related projects.

This provides a company with the experience and expertise of a C-level finance executive without the in-house cost—salary, benefits, and more—of a full-time employed CFO.


Liquidity is an organization's ability to raise cash when required. There are two primary determinants of a company's liquidity position: its ability to convert assets to cash to pay its current liabilities (called short-term liquidity) and its debt capacity.

Income statement

This is another important statement you need to learn for growing your company. Income statements will show you how profitable your company is in a certain reporting period. It details total income minus your expenses and also losses in your business.

See our guide on understanding income statements


In accounting, a margin refers to three specific calculation as a percentage of sales revenues: gross margin, operating margin and net profit margins. These margins are used by owners, creditors, investors, and analysts as indicators of a company's financial health, management's skill, and growth potential. Taken another way, margins gauge the degree to which an organization makes money.

Mergers and acquisitions (M&A)

M&A is a broad term used to refer to transactions between two companies combining in some form (acquisition, consolidation, buyout and/or merger). They are not simple transactions, nor are they quick. Negotiations, valuation, and other strategic planning are involved by the C-Suite including financial, HR and ownership interests.

"Monthly close"

This is the period when you are going to close the financial statements or other financial documents every month. You should review the financial statements regularly, so you can get the most updated statements for your company. 

Operation change management

Operation change management includes methods that redirect or redefine the use of resources, business process, budget allocations, or other modes of operation that significantly change a company or organization.

Operating plan

Operational planning is the process of planning strategic goals and objectives to technical goals and objectives. They link the strategic plan with the activities the organization will deliver and the resources required to deliver them.

Organizational alignment

Organizational alignment is the process of creating unity between a company's ultimate vision of success and the way leaders, teams and processes drive business results. This strategy nurtures the importance of teamwork and clarity in communication. 

Profit and loss statement (P&L)

This is a financial statement summarizing the costs, revenues, and also expenses during a specific period. It is usually checked in the fiscal quarter or fiscal year. A P&L provides information about whether a company can generate profit by increasing revenue, reducing costs, or both.

Resource allocation

Resource allocation is the process of managing and allocating assets to support an organization's strategic goals. These resources are anything from money and talent to software and equipment. For a business to be successful, a leader's primary focus must be on having the right resources to support these goals.


Scaling growth is about creating business models and processes to grow revenue faster than the cost of doing business. Scaling a business requires strategic planning, funding, the right procedures, advanced technology and staff. 

Succession or exit planning

A legacy or succession plan is one that prepares for the owner to eventually exit the business in one way or another. It answers all the business questions including financial, legal, and personal that are involved in the transitioning of ownership.

Total quality management (TQM)

Total quality management is an important aspect of operating a business. It will describe a good management approach for achieving long-term success via your customer satisfaction. All members of your company will participate in improving the whole processes, services, and products in their companies. 

Working capital

Working capital is the difference between the company’s current assets, for example, account receivable, cash, inventories, and also finished goods with the current liabilities, such as account payable. It can be used as a measurement of the company’s operational efficiency and liquidity. It will show short-term financial health in your company.

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