6 Financial Terms to Know In Order to Make Your Life Easier

As a business owner (entrepreneur, solopreneur, or whatever you choose to call yourself!), there are a few financial terms you need to know in order to understand your finances (and to more easily read a profit and loss statement!). I’m going to break them down and explain them in plain English. Because jargon is no fun at all, and really, they aren’t difficult to understand.

Gross Income

Gross income is the amount of money you bring into your business in any given time frame. (Usually in a month, quarter or year.) It’s ALL the money you bring in, whether it’s for services, products, affiliate income, or anything else you can think of! (Except money you' collected for sales tax. That’s different.) It’s the money you bring in before expenses and taxes.

Gross income is also sometimes called “revenue”, but you don’t need to remember that if you don’t want to.

Why the word “gross”? I don’t actually know. I researched it a bit and came up flat, and my interest in it only goes so far. If you happen to know (or have better Googling skills than me), definitely get in touch!

Net Income

Net income is what you’re left with from your gross income after you take out business expenses. Bascially, it’s your “take home pay” at the end of the month. THIS is the number you really want to focus on when you’re figuring out sales goals for your business. Because it’s all very well and good to bring in, say, $50,000 for the year, but if you have $40,000 in business expenses, your net income (ie (take home pay!) is only $10,000.

For a quick memory jog, I think of “net income” as what’s caught in a net after your expenses have fallen away. (kinda weird and lame, I know, for college economics classes you gotta do what you gotta do!)

Expenses

Next up on our hit parade of financial terms you need to know is “expenses”. This one is pretty much a no-brainer, so consider it a gimme! You know what expenses are. The day-to-day costs of running a business. Anything from Stripe fees and Facebook ads to the cost of traveling to a business conference.

(For the record: there’s a difference between business expenses and deductible business expenses, but that’s a different blog post for a different time.)

Receivables

This is a fun one! A “receivable” is money that you’re owed. That invoice you sent to a client that she hasn’t paid yet? That’s a receivable. So, if you have two outstanding $2500 invoices, you have $5000 in receivables.

So, while not quite as good as money actually in your bank, receivables are a good thing.

Liabilities

While receivables are funds that people owe you, a liability is money that you owe other people. It’s the $2000 invoice from your web designer that you haven’t paid yet and the credit card bill you’re going to pay next week.

In plain English? Liability = debt.

Owner’s Draw

I’m saving the best for last! An owner’s draw is you paying yourself for your hard work. At its most simple, it’s you transferring money from your business account to your personal account (because you’re keeping your business money separate from your personal money, right?). It’s how you, as a sole proprietor or LLC pay yourself.

It can get a liiiitle more detailed/intricate (like, if you accidentally use your business debit card for a personal purchase, you’d tag it as an owner’s draw), but for the most part, an owner’s draw is you reaping the benefit of your business, and giving yourself a paycheck.

And those my friends, are the 6 basic financial terms you need to know as a business owners. Once you’ve wrapped your head around those, the rest is gravy. (Get it? Gravy? Gravy train? I crack myself up!)

Know them. Love them. Wrap yourself in money goodness. You’re doing great.