We’ve all been there- you’re at a party and walk up to a group of friendly looking folks. You join the conversation only to discover you have no idea what these weirdos are talking about. You nod, you smile, you plot your escape while nodding and smiling. Every industry has its own language and accounting is no different. And it can be intimidating to talk about money when you don’t even know what you are talking about!
So, without further ado, here are 6 key words that will help you talk about and understand your finances:
Gross income is referring to the good type of gross, not the ick-how-did-I-get-that-on-my-hands gross. This is the gross of crisp, sweet apples that you get to take home from the county fair. It refer to quantity. In finances, gross income means everything you earned BEFORE expenses or taxes. So, let’s say one month you earn $5000 from consulting and another $3,000 from workshops. Your gross income is $8,000.
Now, say you spend $4,000 in business expenses. What is your gross income? It’s still $8,000! Gross income is completely unaffected by what you spend. It is that beautiful, pristine number that is what you sold in any given period of time.
Bonus word! Gross has an alias- it’s revenue. Revenue is the EXACT same thing as gross income, just a more fancy sounding term for it.
Net income is what you earned AFTER your business expenses. I like to think of it as what is left over to catch YOU- the owner of your business. Gross income is great for understanding how you make money and from what sources, but net income is the true truth teller. It tells you how profitable your business is. Sure, you can earn $20,000/month from sales, but if you are spending $25,000 on expenses, then your business is not profitable.
Let’s go back to the example above. Your gross income is $8,000/mo and you spend $4,000 in business expenses. Your net income is……..$4,000!
Ok, so most people know what this means, but I wanted to include it to make a note about the differences between business expenses and personal expenses. When you are talking about your business, an expense is anything that you pay for that is necessary for your business to operate. This can range from the $10/month you pay for Dropbox, to the $3,000 you pay your web developer.
What’s not a business expense? The taxes you pay as the owner of the business. A super fly pair of Nikes. Brand new yoga pants (yes, even if you are a yoga teacher). Food purchased for personal consumption. You get the picture.
Owner’s Draw is what you, the business owner, has drawn out of the business for personal use. This can happen in a lot of ways- you can transfer money to yourself every month, use your business account to pay your personal credit card, or accidentally use your business card to buy a new fabulous blazer. In any of these cases, these withdrawals from your business are considered an Owner’s Draw.
Owner’s Draw is a term specifically used for sole proprietors. Other businesses structures, like LLCs and S-Corps will call this Member Distributions or Shareholder Distributions. Whatever it is called the concept is the same- it refers to what you, the owner, takes out of your business for personal use.
To put it bluntly, liabilities are debt that you owe. There are two types of liabilities- current liabilities, which are things you will pay off in the next 12 months such as credit cards or bills due, and long term liabilities, which are debts that will take you more than 12 months to pay off, like loans or back tax payments. An easy way to remember this one is every time you hear the word “liability”, just replace it with the word “debt”.
Receivables are the opposite of liabilities (and waaaay more fun!). It means everything that someone owes YOU. For example, let’s say you invoice someone for $1,000. That $1,000 is a receivable- it is money that is coming to you. It takes your client 2 months to pay you- during those two months that $1,000 remains a receivable. When your client does pay you, that $1,000 is no longer a receivable but becomes part of your………………….gross income!! (that was a quiz, friends)
And there you have- 5 words that are going to make you the life of every accounting firm’s party and make you sound pretty darn impressive when you talk about your business!
Try using each of these words in a sentence. Now trying using each of these words when you talk about your finances. What do you notice as you become more comfortable talking about your finances?
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