The Terms

Accounting and Finance Terms Every Owner and Student Should Know

Each term below is taught by its real textbook name in Accounting and Finance for Small Businesses, Book 2 of Dr. Paul's Fabled Forest Business School Series. The tag under each definition shows the chapter that teaches it. Click it to see the full foundation on the small business accounting and finance guide.

Accounts Receivable
Money customers owe you for work already finished or goods already delivered. You earned it, but it is not cash until it lands in your account.
Chapter 12: Accounts Receivable →
Assets
Everything the business owns that has value: cash, inventory, equipment, and money other people owe you.
Chapter 5: Balance Sheet →
Bad Debt
Borrowing for something unproven, or for something that will never earn back more than the loan costs.
Chapter 17: Debt and Leverage →
Balance Sheet
A snapshot of the business on one day: what it owns, what it owes, and what is left for the owner. Assets always equal liabilities plus owner's equity.
Chapter 5: Balance Sheet →
Bank Reconciliation
Matching your books against your bank statement, line by line, until both balances agree. Do it every month, the day the statement arrives.
Chapter 6: Bank Reconciliation →
Bookkeeping
Writing down every dollar that comes into or goes out of the business, in one place, in date order.
Chapter 2: Bookkeeping →
Break-Even Analysis
Figuring out how many sales or jobs it takes just to cover a cost. Divide the fixed cost by what each new sale leaves after its own costs.
Chapter 19: Break-Even Analysis →
Budget
A plan for the money you expect to come in and go out over a period, usually a year split into months, written before the year starts.
Chapter 20: Budgeting and Forecasting →
Business Deduction
A legitimate cost of running the business that lowers the income you pay tax on. It only counts if you can prove it.
Chapter 10: Recordkeeping and Business Deductions →
Business Entity
The business treated as its own thing, separate from its owner, with its own money and its own records.
Chapter 1: Separate Business and Personal Finances →
Cash Flow
Money moving into and out of the business, and when it moves. A business can show a profit and still run out of cash.
Chapter 11: Cash Flow →
Cash Flow Forecast
A week-by-week list of the cash you expect in and out over the next few months, usually 13 weeks, so a short week shows up before it hits.
Chapter 11: Cash Flow →
Cash Reserve
Money set aside in its own account to keep the doors open through a bad stretch. A common target is three months of the costs it takes to stay open. Also called an emergency fund.
Chapter 13: Cash Reserve →
Chart of Accounts
The short list of named categories every transaction goes into: the kinds of money coming in and the kinds going out.
Chapter 3: Chart of Accounts →
Collections
Following up on unpaid invoices on a set schedule, and deciding ahead of time when to stop new work for a customer who has not paid.
Chapter 12: Accounts Receivable →
Contribution Margin
What a sale or job leaves after its own variable costs, to help pay overhead. Price minus variable cost.
Chapter 15: Discounting and Contribution Margin →
Cost of Financing
What it costs to use someone else's money: interest, fees, and everything else you repay beyond the amount you actually received.
Chapter 16: Cost of Financing →
Cost of Goods Sold (COGS)
What it costs to make or buy the things you sell, and nothing else: materials, packaging, and the labor that goes into each unit.
Chapter 7: Cost of Goods Sold →
Cost-Plus Pricing
Setting a price by adding up your full cost and adding a markup on top.
Chapter 14: Pricing Strategy →
Debt
Money you owe and will pay back over time.
Chapter 17: Debt and Leverage →
Deposit
Money a customer pays up front, before the work is done. It is cash in hand, but you still owe the work.
Chapter 11: Cash Flow →
Direct Costs
Costs that go into one specific unit you sell, such as the materials, the container, the label, and the time to make it.
Chapter 7: Cost of Goods Sold →
Discounting
Lowering your price to win a sale. Safe when the price stays above your floor. Dangerous below it.
Chapter 15: Discounting and Contribution Margin →
Documentation
Proof of a cost: a receipt, an invoice, or a bank record, with a short note about what it was for.
Chapter 10: Recordkeeping and Business Deductions →
Errors (Bank Reconciliation)
True mistakes found while reconciling, like an entry written twice or a number copied wrong. You correct them in your books.
Chapter 6: Bank Reconciliation →
Estimated Taxes
Tax paid in installments during the year, usually four times, instead of all at once after the year ends.
Chapter 9: Tax Planning →
Expenses
Money the business spends to operate, such as wages, rent, fuel, and supplies.
Chapter 3: Chart of Accounts →
Fixed Costs
Costs that stay the same each month no matter how much you sell, like rent or an equipment payment.
Chapter 19: Break-Even Analysis →
Forecast
A budget you keep updating as the year teaches you more. Keep the original plan, write the actual beside it, and write a new best guess for the months still ahead.
Chapter 20: Budgeting and Forecasting →
Good Debt
Borrowing for something that can reasonably earn more than it costs, when you can show how before you sign.
Chapter 17: Debt and Leverage →
Gross Margin
What is left from sales after direct costs, before overhead. It can be shown in dollars or as a percentage of sales.
Chapter 8: Overhead and Profit Margin →
Income Statement
One page showing what came in, what went out, and what was left over for a period, usually a month. Also called a profit and loss statement, or P&L.
Chapter 4: Income Statement →
Interest
What a lender charges for the use of its money, usually stated as a rate.
Chapter 16: Cost of Financing →
Invoicing
Sending the bill: what you did, when you did it, how much it costs, and when payment is due. Best sent the day the work is done.
Chapter 12: Accounts Receivable →
Lease vs. Buy
The choice between renting equipment over time and owning it outright. Run the numbers on both, plus a used option.
Chapter 19: Break-Even Analysis →
Ledger
The one place every transaction is recorded. Five columns are enough: date, who, what for, money in, and money out.
Chapter 2: Bookkeeping →
Leverage
Using borrowed money to do more than your own money could. It magnifies results in both directions.
Chapter 17: Debt and Leverage →
Liabilities
Everything the business owes to someone else, including unpaid bills, back rent, and loans.
Chapter 5: Balance Sheet →
Minimum Price
The lowest price you will accept for a job, set from your own costs. Also called your price floor.
Chapter 15: Discounting and Contribution Margin →
Net Margin
Net profit as a percentage of sales. $25 of profit on $800 of sales is a net margin of about 3%.
Chapter 8: Overhead and Profit Margin →
Net Profit
What is left after every cost, direct and overhead, comes out of sales.
Chapter 4: Income Statement →
Not Yet Recorded (Bank Reconciliation)
Real transactions the bank has that your books do not, like a monthly bank fee. You add them to your books.
Chapter 6: Bank Reconciliation →
Opportunity Cost
What you give up by choosing one option over another, including the money you never made because you did not act.
Chapter 18: Return on Investment →
Outstanding Items
Real transactions the bank has not caught up with yet, like a deposit still waiting to post. You note them and wait.
Chapter 6: Bank Reconciliation →
Overhead
Every cost of keeping the business open that is not part of making what you sell: rent, utilities, signage, and wages that do not go into one unit.
Chapter 8: Overhead and Profit Margin →
Owner's Draw
The owner's pay from the business, taken as a set amount on a set day, instead of whenever the account looks full.
Chapter 1: Separate Business and Personal Finances →
Owner's Equity
What the business is worth to the owner after everyone else is paid. What you own, minus what you owe.
Chapter 5: Balance Sheet →
Payment Terms
The due date and conditions printed on an invoice, such as due in 30 days.
Chapter 12: Accounts Receivable →
Pricing Strategy
How you set a price: from your full cost, from what the market pays, and from what the work is worth to the buyer.
Chapter 14: Pricing Strategy →
Recordkeeping
Keeping receipts and records in one place, labeled, so you can find them fast when the tax office or a lender asks.
Chapter 10: Recordkeeping and Business Deductions →
Reinvestment
Putting a business's earnings back into it, in equipment, people, or inventory, so it can earn more.
Chapter 18: Return on Investment →
Return on Investment (ROI)
How much a spending decision brings back compared to what it cost. ROI equals what it earns minus what it cost, divided by what it cost.
Chapter 18: Return on Investment →
Revenue
Money the business earns from customers for what it sells.
Chapter 3: Chart of Accounts →
Scenario Planning
Building more than one version of the plan: a bad year, an expected year, and a good year.
Chapter 20: Budgeting and Forecasting →
Separate Accounts
A business bank account kept completely apart from the owner's personal money.
Chapter 1: Separate Business and Personal Finances →
Tax Planning
Treating taxes as a known, scheduled cost and preparing for them all year long.
Chapter 9: Tax Planning →
Tax Reserve
A separate account where a set share of income goes every week, before anything else gets spent, so the tax money is already there when the bill arrives.
Chapter 9: Tax Planning →
Terms (Loan)
The rules of a loan: how much you pay, how often, for how long, what fees apply, and what happens if you pay late.
Chapter 16: Cost of Financing →
Timing
When money actually moves, as opposed to when it is earned or owed. Timing is why profit and cash are different numbers.
Chapter 11: Cash Flow →
Total Cost (Loan)
Everything you will pay back on a loan, minus everything you actually receive after fees. Compare loan offers on this number first.
Chapter 16: Cost of Financing →
Transaction
Any movement of money into or out of the business: a sale, a purchase, a bill paid, or an invoice sent.
Chapter 2: Bookkeeping →
Unit Cost
What one unit costs you to make. Total direct costs divided by the number of units.
Chapter 7: Cost of Goods Sold →
Value Pricing
Setting a price by what the work is worth to the buyer, not only by what it cost you to make.
Chapter 14: Pricing Strategy →
Variable Costs
Costs that come with each sale or job and rise or fall with how much you do, like fuel, materials, or a day's wages for the job.
Chapter 15: Discounting and Contribution Margin →
Variance
The gap between what you planned and what actually happened.
Chapter 20: Budgeting and Forecasting →
Working Capital
Cash plus money coming in soon, minus the bills due soon. Thin working capital means one surprise can stop you.
Chapter 13: Cash Reserve →
Accounting and Finance for Small Businesses book cover

Knowing the word is step one. Using it is the book.

Every term here shows up in the book inside a real money problem: a payroll that will not clear, a price set too low, a loan that looked cheap. 20 foundations, a Nutshell for each, and the Owner's Scorecard. Book 2 of Dr. Paul's Fabled Forest Business School Series.

Get the Book →

Put the Terms to Work

Start With the Foundation You Need

A definition helps you follow the conversation. A foundation helps you fix the number. These are the ones owners ask about most.

Foundation 11Cash FlowFoundation 04Income StatementFoundation 05Balance SheetFoundation 19Break-Even AnalysisFoundation 14Pricing StrategyFoundation 01Separate Business and Personal FinancesFoundation 02BookkeepingFoundation 07Cost of Goods SoldFoundation 15Discounting and Contribution MarginFoundation 18Return on InvestmentFoundation 20Budgeting and ForecastingFoundation 13Cash Reserve

All 20 are on the small business accounting and finance guide, with a free self-check and a sample chapter. More subjects are in the Small Business Education Center.

Written by Dr. Paul Borosky, DBA, MBA, business consultant and author with an MBA focused in finance. Want someone to read your numbers with you? See Dr. Paul's fractional CFO services.

This page is for general educational purposes only. It is not legal, financial, tax, accounting, or lending advice. Tax rules change by place and by year. For decisions about your own business, consult a qualified professional.