Whether you run your own business or just work on the books, it’s imperative to know all the lingo. When you work on your books, these factors will tell you quite a bit about your business’s financial health. We know there seem to be an infinite number of terms in the accounting and bookkeeping world. It’s almost like a different language!
Let’s start with cash flow. This is the total amount of money that goes in and out of a business. Essentially, cash flow is the ins and outs of the money in your company – literally the flow of your cash. Contrary to what some think, cash flow and profit/revenue have no correlation. They have no impact on each other.
Capital refers to the net worth of your assets. Whether that be tangible things, like machinery, equipment, or property. Capital can also refer to the amount of money you have put into your business, which is more accurately called “share capital.” Don’t get this confused with property that your business may own, which is equity.
Are capital and assets the same thing? Nope! Assets are just one component of what makes up capital, and on the reverse, capital is a type of asset. Confused? We know! Not all assets are capital because not all assets are tangible. There are also intangible assets that cannot be sold for money, which means it is not capital.
Now let’s talk about equity. This is the difference between the value of your assets and the value of your liabilities. Equity is a value of money. For example, if you buy a car for $20,000 (this is an asset), but used a loan worth $5,000 that you need to pay back (the liability), the equity of the car is $15,000.
We’ve mentioned assets and liabilities a few times in this, so let’s break those down, as well. Assets are resources (tangible or intangible) that a company owns and will have economic value in the future. Liabilities, in accounting, is an obligation that you owe to someone and should be recorded in your books. This is also your accounts payable.
Now that your head is spinning, take a minute to let this soak in and let your newfound knowledge shed light on your books!