Tag: Business Accounting

Accounting Jargon

Accounting Jargon: A Simplified Reference Guide

Posted on | by Renatta Luna | 1 Comment on Accounting Jargon: A Simplified Reference Guide
Accounting Jargon

The language that financial professionals use can be confusing. It is difficult to receive advice when you can’t understand their terminology. We’re here to translate the complex accounting dialect into plain English by Accounting Jargon.

Whether you’re a seasoned entrepreneur or have owned several businesses, this guide will decipher some of the most common (and essential) terms.  Let’s break down those barriers and make this accounting jargon something you can handle, not just something you hear during tax season or in board meetings.

Balance Sheet Terms in Accounting Jargon

Understanding the essentials of the balance sheet in accounting jargon helps clarify the financial standing of a business through assets, liabilities, and equity. Here are some important terms that are related to the balance sheet:

  • Assets: Assets are what the business owns. These resources power your venture, from the cash in the bank to the computers your team uses.
  • Liabilities: These are the IOUs your business has. Whether it is a loan you’ve taken out to spruce up your storefront or the credit card bill for your latest marketing drive, liabilities remind us of our financial responsibilities to others. This could be as simple as a loan you took out to renovate your office or store. 
  • Equity: This is what is left for the business owners after all the debts are paid off. It’s your piece of the pie, representing your claim on the business’s assets. If you have $100,000 in assets and $90,000 in liabilities (debts), you have $10,000 in equity. 

Income Statement Terms

Knowing the key components of the income statement is crucial for analyzing a business’s financial performance. Terms related to the income statement are given below

  • Revenue: Imagine every time you make a sale, the money is going straight into your bank account. Revenue is the total income your business earns. If you own a software company, your revenue may come from licensing and subscription fees. 
  • Expenses: To make money, you’ve got to spend money. Expenses cover everything from the rent for your shop to the salaries of your team, who make it all happen.
  • Net Income: This remains after you’ve settled all your bills. It’s the profit your business makes; ideally, it’s a positive number that shows you’re on the right track.
  • COGS (Cost of Goods Sold): These are the direct costs tied to what you’re selling. It’s the cumulative cost of the materials and labor required to produce a product or to deliver a service. 
  • Gross Margin: This metric tells you how much you make on each sale before other expenses are considered. It’s a key indicator of your business’s health and profitability. If you’re selling bags of coffee beans for $10 and it takes $4 to produce each one, then your gross margin is $6.
  • Overhead Expenses: These costs aren’t directly linked to making sales but are necessary to keep the business running, like internet service or utility bills. Think of the rent and utility bills you must pay regardless of how much you produce or sell. 

Other General Terms

Other general terms that are mostly used in Accounting Jargon are given below:

  • Cash Flow: It’s all about the cash coming in and going out. Positive cash flow means your business is liquid, keeping you in a solid position to cover your bills and invest in growth.
  • Debit and Credit: The backbone of double-entry bookkeeping. Debits and credits keep the books balanced, with each transaction affecting two accounts to keep everything in check. Debiting and asset accounts increase their value, and crediting decreases it. 
  • Accrual Basis Accounting: This method records income and expenses when earned or incurred, not necessarily when cash changes hands. It gives a more accurate picture of your business’s financial health. If you provided a service in January but are paid for it in February, it counts as January revenue. 
  • Balance Sheet: A snapshot of your business’s financial condition at a specific moment, showing what you own (assets(, what you owe (liabilities), and your equity.
  • Income Statement: This is commonly called a profit and loss statement. It details your revenue, expenses, and profits over a period, highlighting the financial performance of your business. If you earned $200 in revenue but had $160,000 in expenses, your net income would be $40,000.
  • General Ledger: It’s the primary record of any company that uses double-entry bookkeeping. Think of it as the master document of your company’s financial transactions and the foundation of your accounting.
  • Accounts Receivable/Payable: Money expected to come into your business from customers (receivable) and money your company owes to suppliers or vendors (payable).

FuseCFO

Understanding financial language helps you communicate with your accountant and provides you with an understanding of key concepts. With an accounting jargon guide, we hope you feel more confident discussing your company’s financials and making informed decisions.

Remember, finance isn’t just about numbers; it’s about the story those numbers tell about your business’s past, present, and future. Let’s keep the conversation going and turn those financial statements into strategic tools for growth. Schedule a free business analysis with us today.

corporate shield

The Importance of Your Corporate Shield—and 10 Foolish Moves to Avoid

Posted on | by mpitre72 | Leave a Comment on The Importance of Your Corporate Shield—and 10 Foolish Moves to Avoid

In every business, there is risk. To manage that risk, we create companies to protect.  Entities like LLC, INCs, and Partnerships are all meant to shield the owner (shareholders or partners) from personal liability with a strong Corporate Shield.  If you’re an accountant there’s malfeasance.  If you’re a doctor, there’s malpractice.  If you’re a limo company, there’s the chance of injury in an accident.

When your entity is set up correctly, money from the business can flow through to the owner, but the risk and liability stay with the company.  That “corporate veil”, or corporate liability shield, protects owners from legal attacks on their personal and family assets.

But not all companies do what is required to keep the liability shield strong.

In a recent diyCFO conversation with Lori Hager, ESQ, we talked about the importance of maintaining the corporate shield and some business moves that might put owners at personal risk.

In short, owners whose business activities are not fraudulent, intentional, or grossly negligent should be shielded from liability. But smart business owners are even more vigilant—especially when it comes to company finances. Clear separation between business and personal assets and finances is one key to maintaining a strong corporate shield.

corporate shield

Separate the Business Account from Personal Bank Account

Perhaps you’ve heard the adage: “Do not commingle company and personal funds.”  To properly separate and protect the owner’s assets, the owner should ensure the company has a separate identity, separate finances, separate accounts, and adequate capital.

Hager encourages owners to invest in the company from the very start with a reasonable buy-in. Building some equity in the company then gives the company some cushion, in case issues arise, but also proves to the court (in case of a legal problem) that the company is standing on its own as an entity and not reliant on the owner.

Many highly invested company owners see themselves and the company as the same… a single, fused entity. However, creating clear boundaries is critical. If something happens and the business experiences a major liability event—bankruptcy, a lawsuit, an injury, or another catastrophe—a weak corporate shield could put the business or owner’s personal and family assets at risk.

Foolish Moves Threatening Your Corporate Shield

Keeping clear boundaries sounds simple, right? Maybe.  Have you made any of these 10 foolish moves that could endanger your corporate liability shield?

  1. Going shopping with the company credit card: Are all purchases business-related and documented with a receipt?
  2. Taking a “business trip” for a week at a resort or vacation spot:  Is this trip normal for the business, and was the purpose for travel 100% business-related?
  3. Barter/self-dealing: Barter agreements shouldn’t be personal on one side and business-related on the other. Was everything in the barter arrangement business-related goods and services?  And even though no money changed hands, did you fully report the value of the barter?
  4. Paying personal loans and expenses with business accounts:  Are personal housing or vehicles paid for out of the business bank account?
  5. Pledging corporate assets for personal reasons: Defaulting on a personal loan could put your business assets at risk if the business assets are listed as collateral in a personal loan.
  6. Buying company goods with personal credit cards: If you need to use a credit card in your name, is there a clear line between business expenses on one card and personal expenses on a separate card account?
  7. Not taking a salary: If you do not have a reasonable and documented salary, but instead take what you need out of the business (or worse, have clients deposit funds into your account), you’ve blurred the lines between business and personal.  Make sure all business revenue goes into a business account before paying employees and owners.
  8. Not paying salary to working family or paying salary to non-working family:  Do family members log time? Is it clear what roles family members play in the business?
  9. Loaning company money to family:  Just as the company should not be your personal bank account, your business account should not act as a bank account for your family members either.
  10. Discussing company issues via text or messaging platforms like WhatsApp or Slack: It sounds odd, but documentation of key issues could be impossible to retrieve from texting applications. Is there too much formal business communication happening outside of email or storage drive platforms?  Get a “corporate resolution” form and document every major decision properly.

Advanced Steps to Secure Your Business Foundation

When you’ve got a good foundation of banking, payroll, and accounting established, take the next step by documenting everything properly. Maintaining the details and formalities might seem cumbersome, but good habits can save you in a crisis.

Avoid Cash 

There’s nothing harder to document than how you used the company ATM card. If you cannot avoid using (or receiving) cash, try to make it a habit to collect receipts, and document every step of handing the cash whenever possible.

Keep Board Minutes

A company that is truly independent of its owner will have formal board meetings with minutes that document significant business transactions and decisions.  (And by the way, this is required by law!)  

File Annual Reports

Keeping your business in current standing with your secretary of state displays your knowledge and adherence to government guidelines. Examples of basic corporate documentation include the articles of incorporation, your operating agreement, any partnership agreements, and the company bylaws.

Get Insured

Business insurance protects owners from the worst. Insurance creates peace of mind and kicks in at the time of unexpected accidents and liability claims.  But remember, as Lori Hagar says, “Insurance is a safety net, not a hammock”.

Take a Moment to Take Stock…Then Take Action!

If you’re reading this and questioning your own lax banking habits, insufficient corporate insurance, or lack of corporate documentation, don’t fret. But DO take action to protect your business, yourself, and your family.

Start by reviewing our earlier mentioned list of foolish moves and ensuring your personal and business finances don’t overlap. Then check your insurance coverage. If you’re not doing the right things and someone pierces your corporate veil, your personal assets are at risk.

Fuse CFO supports our clients in making smart financial decisions every day. If you need help with accounting and other financial decision-making, we’re here to help.