This is a rewrite of an older post, but it seems like a good one to repeat. You don’t have to be an accountant or an MBA to do a business plan, but you will be better off with a basic understanding of these six essential financial terms. Otherwise, you’re doomed to either having somebody else develop and explain your numbers, or not having your numbers correct.
It isn’t that hard, and it’s worth knowing. If you are going to plan your business, you will want to plan your numbers. So there are these six terms to learn. I’m not going to get into formal business or legal definitions, and I will use examples:
1. Assets: cash, accounts receivable, inventory, land, buildings, vehicles, furniture, and other things the company owns are assets. Assets can usually be sold to somebody else. One definition is anything with monetary value that a business owns.
2. Liabilities: debts, notes payable, accounts payable, amounts of money owed to be paid back.
3. Capital (also called equity): ownership, stock, investment, retained earnings. Actually there’s an iron-clad and never-broken rule of accounting: Assets = Liabilities + Capital. That means you can subtract liabilities from assets to calculate capital. Read more.....