Financial Vocabulary for People Who Hate Numbers
You are not alone.
Almost everyone has an irrational fear or two, whether it’s snakes, dentists or small enclosed spaces. Usually not too big a deal… except when you’re an entrepreneur with a numbers phobia.
But figuring out how much money you’ll need is a necessary evil. You wouldn’t buy a house without knowing if you could afford it, would you? Well, startups aren’t any different.
Words help tell part of your story. The other part – the numbers – need to support that story. That means figuring out how much money you’ll need to launch, of course, but it also means figuring out what you’ll need to keep the doors open until you become profitable.
Making the scary parts… Not. So. Scary.
If you’re new to the world of financial projections, the vocabulary can seem kind of intimidating. You wouldn’t be the first to break into a cold sweat hearing “revenues minus expenses.”
So today’s goal is to make all the lingo a lot less scary, a lot less complicated and a lot more understandable. By the time you’re done reading this, I guarantee you won’t hyperventilate when you see the words “cost of goods sold.” Sound good?
Making the numbers your b*tch.
People throw around terms like “net income” as if everyone knows what they’re talking about. But the truth is, most people don’t. In fact, it’s perfectly understandable considering that most people have never had an accounting or finance class.
Even so, you’re not off the hook.
If you’re going to start a business (and especially if you already have one), it’s your responsibility to understand everything that affects your business financially. That way, when you make decisions of any kind, you’ll understand how it will affect your bottom line.
While it’s fine to hire professionals and delegate tasks, there’s just no getting around the fact that when it comes to your business the buck stops with you. That means it’s time to stop being scared of the numbers.
Not to worry; I’m going to help you and it won’t hurt a bit.
First step: vocabulary.
Before you can understand financial projections, you’ve got to understand the vocabulary. I admit that financial terms can seem intimidating and even overwhelming, but, that’s why I’m here.
In the interest of not getting overly technical, I’m going to keep my explanations as simple as possible. Everything will be in plain English, I swear.
Let’s get started, shall we?
Common financial terms people throw around.
Today we’ll start with the basics – a few of the most common financial terms you may be hearing.
Since I want you to understand what people are talking about – and what I’m talking about when I start using them in future posts, I’m going to explain them here.
Breakeven means that you’re selling just enough to cover the exact amount of your expenses – no more and no less. In other words, you’re covering your expenses without making a profit or taking a loss.
Cost of Goods Sold is the cost of buying or making the goods you sell.
If you own a bakery, your cost of goods sold will include expenses such as ingredients and the wages you pay the people making the baked goods you’re selling (but not wages paid to the bookkeeper).
If an employee does double-duty, spending 40% of the time as a bookkeeper and 60% of the time helping out with the baking, then only 60% of that employee‘s wages are included in the cost of goods sold (COGS).
Equity refers to ownership interest in a business.
If you own 20% of a business, you have 20% equity in that business.
Fixed Costs are expenses that stay the same no matter how much you sell (sales volume), such as rent and insurance premiums.
Gross Profit (or gross margin) refers to the amount of money left after selling a product and subtracting the costs associated with buying or making it and selling it. Keep in mind, though, that it doesn’t include costs such as operating expenses and loan payments. That would be net profit.
Gross Profit = Revenues – Cost of Goods Sold
Net Profit (or net income) is a company’s total earnings after subtracting all of its expenses from its total revenues during a specific period of time.
Net Profit = Revenues – Expenses
Net Worth (or net assets) is a way to measure the value of a company.
Net Worth = Total Assets – Total Liabilities
Operating Expenses are expenses your business has no matter how much or how little you sell (sales volume).
Other Expenses (or non-operating expenses) are expenses that aren’t related to the operation of your business, such as the interest expense on your loans, mortgages and lines of credit.
Variable Costs change depending on how much you sell (sales volume). Examples include cost of goods sold, credit card fees and commissions.
Working Capital refers to the operating liquidity of your business – in other words, how much cash you have on hand to pay your bills at a specific point in time. “On hand” can mean money in the cash register or, more likely, money in your bank account.
Working Capital = Current Liabilities – Current Assets
A word on spreadsheets.
Starting a business requires two things: an idea and money. The money part means preparing financial projections that support your idea, which requires showing them in a standard format. For those of you who may be unfamiliar with financials (which is many people), I want to take a moment to explain what that means.
Spreadsheet software is the standard tool used for creating financial projections. Examples include Microsoft Excel, Google Sheets and Apple Numbers. The software lets you type numbers into columns and rows that enable you to perform mathematical calculations. Basically, the software acts like a two-dimensional calculator. Even if you purchase my Business Plan Kit, you’ll need spreadsheet software in order to use the financials template and take advantage of the formulas and formatting that I’ve built in.
Here at Startup Distillery I make sure that every client understands their financials. Any professional you hire should be happy (eager, in fact) to walk you through your financials step by step, explaining any vocabulary that’s new to you.
In the end, you should feel comfortable explaining your numbers to investors, partners—even your accountant (no kidding!). Anyone who tries to make you feel stupid for wanting to learn is not someone you want to trust with your company’s financial health.
Tight budget? Check out my DIY Kit.