Woman doing her finances

Finance terms every salon, spa, or clinic owner should know

23 May 2019 by Kitomba

The business world is full of jargon and financial terms you’re expected to understand. To help you navigate these terms, we’ve put together a quick reference guide of some of the financial terms you may encounter as a salon, spa, or clinic business owner.

Accrual accounting
Asset
Break-even point
Capital
Cash accounting
Cashflow
Creditor
Debtor
Depreciation
Liability
Liquidity
Reconciliation
Revenue
Working capital

Accrual accounting

This is a way of accounting for income at the time it is earned, rather than when you receive payment; and accounting for expenses when the good or service is received, not when they are paid for. An example would be recognising the income from a voucher when the voucher is used, rather than when it is sold.

Asset

An asset is something a business owns. Assets are often referred to in a variety of ways, including:

  • Tangible assets are physical items of value such as equipment and stock.
  • Intangible assets are things that have value in a business but aren’t physical items, such as your client list.
  • Current assets are things your business owns that it can turn into cash. This includes money in the bank, money owed by clients, and retail stock.

Break-even point

A break-even point is the amount of money a business needs to earn in order to cover it’s running costs with nothing left over.

Capital

Assets that can be used to make a business money are referred to as capital. The simplest example of capital is cash in the bank that can be invested in the business.

Cash accounting

This is a way of accounting for income and expenses at the time money is received or paid, rather than when the benefit is received or income is earned. An example of this is if you recognised the cost of council rates on the day you pay them, rather than spreading the cost out over the time period they are for. Another example is recognising the income on a concession when it is sold, not when it is redeemed.

Cashflow

Cashflow is money coming in and out of your business, either cash in your hand (or cash drawer), or money in your bank account. It is usually measured over a period of time.

If your business has received more money than it has spent, this is called positive cash flow. If your business has spent more money than it has received it is called negative cash flow and isn’t usually a good thing.

Creditor

A creditor is someone your business owes money to.

Debtor

Debtors are people who owe you money.

Depreciation

An accountant may spread the value of a large asset over its lifetime, this is called depreciation. It helps you to account for the fact that if you were to sell the asset in the future you would sell it for less than you bought it for. There are a few different methods that an accountant might use to do this.

Liability

A liability is something a business owes. This could be money or services. For example, if a client has purchased a 10-trip concession, you owe them those 10 services.

Liquidity

How liquid a business is indicates its ability to pay for things. This may be through cash in the bank or assets it can sell.

Profit

Profit is what is left over from your revenue after covering all of your expenses.

Reconciliation

Ensuring that two sets of records are the same is referred to as reconciliation. For example, cash deposits to your bank account should match cash sales in your point of sale system, and credit card deposits should match credit card payments in your point of sale system.

Revenue

This is the actual amount of money a business receives from the sale of goods or services.

Working capital

The difference between a business’s current assets and liabilities is called working capital. It shows how much money a business has to invest and grow.

It’s important you understand what’s happening in your business. So if your business coach, accountant, business adviser or anyone else is using a finance term you’re not sure of, be sure to ask them to explain it to you, even if you feel silly. It can be easy to slip into jargon when you use it every day so they probably don’t even realise they’re doing it and should be happy to help you understand them.

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