Small Business Financial Terms in Plain English

The movement of money in and out of your business over a specific period. Cash flow is not the same as profit — you can be profitable on paper and still run out of cash if your customers pay slowly or your expenses hit before revenue arrives. Cash flow is what keeps the lights on.

Check your cash flow weekly, not monthly. Most small businesses that fail do so because of cash flow problems, not a lack of profitability. A simple weekly habit of reviewing what came in, what went out, and what is coming next can prevent most cash crises.

A financial report that shows your revenue, costs, and expenses over a period — typically a month, quarter, or year. The P&L tells you whether your business actually made money or just felt like it did. Revenue at the top, expenses in the middle, profit (or loss) at the bottom.

Read your P&L monthly at minimum. Focus on three numbers: total revenue (is it growing?), gross margin (are you pricing right?), and net profit (is anything left after all expenses?). If those three numbers trend the wrong direction for two months in a row, investigate immediately.

A snapshot of everything your business owns (assets), everything it owes (liabilities), and what is left over for you (equity) at a single point in time. While the P&L shows performance over time, the balance sheet shows your financial position right now.

The balance sheet answers questions your P&L cannot: How much cash do you actually have? How much do customers owe you? How much debt are you carrying? Lenders and investors look at your balance sheet to assess financial health and risk.

Money your customers owe you for products or services already delivered. Accounts receivable is revenue you have earned but have not collected yet. Until the cash hits your bank account, it is just a promise — and promises do not pay bills or make payroll.

For small businesses, high AR usually means you are too lenient with payment terms or too slow to follow up on late invoices. Implement a simple collection process: invoice immediately, follow up at 7 days, call at 14 days, escalate at 30 days.

Money you owe to your vendors, suppliers, and service providers. Accounts payable is the flip side of accounts receivable — it is what other businesses are waiting for you to pay. Managing the timing of AP payments is one of the most basic but effective cash flow management tools.

Do not pay bills faster than you need to, but do not damage vendor relationships by paying late. Use the full payment terms available — if a vendor gives you net-30, take the 30 days. That cash in your account for an extra two weeks is free working capital.

Revenue minus the direct cost of delivering your product or service, expressed as a percentage. If you sell something for $100 and it costs $40 to produce, your gross margin is 60%. Gross margin tells you how much of each dollar of revenue is available to cover your overhead and generate profit.

If your gross margin is too low, no amount of sales volume will make the business profitable. Fix pricing and direct costs first. Many small business owners are afraid to raise prices, but a 10% price increase with no cost change can increase gross margin by 15-20%.

The percentage of revenue that remains after all expenses are paid — COGS, overhead, salaries, rent, marketing, everything. Net profit margin is the ultimate measure of whether your business model actually works. A 10% net margin means you keep $0.10 of every dollar earned.

Healthy net profit margins vary by industry: services businesses often target 15-25%, retail 5-10%, and manufacturing 5-15%. Know your industry benchmark, but focus on your trend — improving from 5% to 8% margin matters more than hitting an arbitrary target.

The exact level of revenue where your total costs are fully covered — no profit, no loss. Below break-even, every month costs you money. Above it, every dollar of additional revenue contributes to profit. Knowing your break-even number removes the guessing from business decisions.

Calculate your monthly break-even: total fixed costs divided by gross margin percentage. If your fixed costs are $20K/month and your gross margin is 50%, you need $40K/month in revenue just to break even. Every dollar above $40K contributes to profit at a 50% rate.

Current assets minus current liabilities — essentially, the cash and near-cash available to fund day-to-day operations. Positive working capital means you can pay upcoming bills. Negative working capital means you may struggle to cover short-term obligations without borrowing or selling assets.

Working capital needs grow as your business grows. More sales usually means more inventory, more AR, and more expenses — all before additional cash comes in. Many profitable small businesses fail because they grow faster than their working capital can support.

Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA strips out financial decisions (how you fund the business), tax situations (which vary), and accounting treatments (depreciation methods) to show core operational profitability. It is the most common metric used to value small businesses.

If you ever plan to sell your business or take on investors, your EBITDA multiple determines your valuation. Small businesses typically sell for 3-6x EBITDA. A business making $500K EBITDA at a 4x multiple is worth approximately $2M.

How fast your business spends cash each month, regardless of revenue. For small businesses that are not yet profitable or are investing in growth, burn rate determines how long the money lasts. Even profitable businesses should track burn rate to understand their baseline spending.

Small business burn rate creeps up gradually — a new software subscription here, a vendor price increase there. Review all recurring expenses quarterly and ask: is each one still necessary, and is it still the best deal? Many businesses find 10-15% in savings just by auditing subscriptions.

Current assets divided by current liabilities. A current ratio of 2.0 means you have $2 in short-term assets for every $1 in short-term debts. Above 1.0 is generally healthy; below 1.0 means you may struggle to pay upcoming bills without generating additional revenue or borrowing.

Banks and lenders look at your current ratio when evaluating loan applications. A ratio below 1.0 is a red flag that often results in loan denial. If yours is trending downward, investigate whether AR is growing (customers paying slower) or current liabilities are increasing (more short-term debt).