Understanding money talk
You don’t have to be an accounting expert to run a successful small business. However, understanding financial terms will give you a head start on making smarter business decisions.
A–Z of small business finances
Accounts payable: Bills your business has to pay.
Accounts receivable ageing: A report you can run from your accounting software to see which customers pay invoices on time and who you’re chasing up.
Accounts receivable: Money owed to you by customers.
Accrual accounting: An accounting method that tracks money coming in and out based on sending invoices or receiving bills (instead of when an invoice is paid, or you pay a bill). For example, if you send an invoice on Friday, you record it then as revenue, even if it’s not paid until Tuesday.
Aged accounts payable: A report you can run from your accounting software to see if you’re paying your bills on time.
Asset-based borrowing: Using a business asset to secure a loan, like a truck or building.
Assets: Things your business owns, including vehicles, property, machinery and inventory.
Audit: A review by an outside (and impartial) auditor or accountant to assess your financial records, compliance and business performance.
BAS: Business activity statements must be completed every quarter and submitted to the ATO.
Cash accounting: An accounting method that tracks money coming in and out based on when cash is spent or received (instead of when an invoice is sent or bill received). For example, if you send an invoice on Friday, you don’t record it as revenue until it’s paid on Tuesday.
Cash flow: Money you take in minus operating expenses.
Cash flow loan: A short-term loan to support business growth, take advantage of a business opportunity, buy new equipment and more.
Prospa tip: Cash flow loans can be a lifeline for small businesses. They can cover operating expenses through the year if a business relies on seasonal income.
Chart of accounts: A list of all accounts your business uses to record your financial transactions. It categorises your income and expenses so you can see where money is coming and going and run a smart business.
Credit history: The record of your business debt and repayment history that helps lenders decide if they should lend you money.
Credit score: Also known as a credit rating, a credit score rates your reputation as a borrower based on your business credit history.
Debt consolidation: The bundling together of your debts into a single loan for a better interest deal or more efficient repayments.
Depreciating asset: Something that declines in value over time and has a limited life. For example, a computer or cash register.
Depreciation: The decline in value of an asset over time, which can be claimed on eligible assets as part of your tax return.
Equity: Your business worth (assets) minus what you owe (debts and liabilities).
Expenses: Money your business spends.
Financial statement: A summary of your business finances, usually for a year, including profit and loss and cash flow statements.
Financial year: From 1 July to 30 June in Australia.
Fixed asset: A physical asset you use to run your business – like a coffee machine or tractor.
Fixed interest rate: A rate set at the start of a loan that doesn’t change if official interest rates go up or down.
Gross income: Your business income before you deduct expenses.
Gross profit: Your sales minus the costs of making those sales.
Instant asset write-off: A type of depreciation deduction where your business can claim the total depreciation on an asset when you buy it, not over time.
Interest rate: A percentage you pay on money you’ve borrowed. The official interest rate is set by the Reserve Bank of Australia – banks and financial institutions use it as a guide for their rates.
Inventory: Goods or materials your business has on hand for sale. For example, all the shoes you have on display and in storage ready to sell in your shoe shop.
Line of credit: Cash you can draw on from your bank account. It’s like a short-term loan with interest.
Mark-up: The amount you add to the wholesale price of your goods to set a sale price.
Prospa tip: Mark-up doesn’t include the operating expenses of the business that contribute to profit.
Net income: Business earnings after tax and deductions.
Net profit: Total gross profit minus all business expenses.
Overheads: Fixed business operation costs like rent and utilities.
PAYG instalments: Regular payments towards your expected tax bill for the year, reported through your BAS.
Principal: The original loan amount (or remainder yet to pay off) not including interest paid or owed.
Profit and loss statement: Similar to a cash flow statement, this shows your operating expenses and revenue over a longer period (like a month or the financial year). It also includes things like depreciation, receivables and inventory.
Profit: Total business revenue minus total expenses.
Refinance: Taking out a new loan to pay off an existing one.
Prospa tip: Refinancing may be used to get a better interest rate or consolidate debts in one place.
Revenue: Money taken in before deducting expenses and tax.
Secured loan: A loan protected by an asset or collateral, like a vehicle or property. Not paying the loan can mean losing the asset you’ve used to secure the loan.
Stocktake: A physical count of your merchandise and supplies to check against inventory reports.
Tax invoice: An invoice required to claim GST credits on your BAS.
Unsecured loan: A loan not backed by an asset or collateral. It may be based on an assessment of your business performance.
Prospa tip: Prospa assesses a business’s health to determine your credit risk, and for loans up to $100,000 won’t ask for assets like the family home to be put at risk.
Variable cost: An expense that changes based on demand and business performance. For example, the bakery bill for your café is variable depending on how many catering orders you have for the week.
Variable interest rate: A rate that may change based on rates set by your bank or financial institution.
H3: Know your business story
Understanding your finances means knowing your business story – where you’ve been and where you’re headed.
For help with your small business cash flow, call 1300 882 867 or apply online for a small business loan.