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 key financial terms you may encounter as a salon, spa, or clinic business owner.
Click on any of the terms below to be taken to its summary.
- Accrual accounting
- Break-even point
- Cash accounting
- Profit and Loss Statement (P&L)
- Working capital
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.
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.
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. It is the point at which total costs and total revenue are equal, meaning there is no loss or gain for your business.
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.
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 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.
A creditor is someone your business owes money to.
Debtors are people who owe you money. For example a client has received an invoice for goods and services but this has not yet been paid.
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.
For example the most common depreciation method is the straight-line, this is the most basic way to record depreciation. It reports an equal depreciation expense each year throughout the entire useful life of the asset until the entire asset is depreciated to its salvage value.The annual depreciation using the straight-line method is calculated by dividing the depreciable amount by the total number of years.
Let’s assume that you buy a computer at a cost of $5,000. You decide on a salvage value of $1,000 and a useful life of five years. Based on these assumptions, the depreciable amount is $4,000 ($5,000 cost – $1,000 salvage value).
The annual depreciation using the straight-line method is calculated by dividing the depreciable amount by the total number of years. In this case, it amounts to $800 per year ($4,000 / 5). This results in a depreciation rate of 20% ($800 / $4,000).
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.
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 is what is left over from your revenue after covering all of your expenses. For example, if you sell a bottle of shampoo for $45 and bought it from your supplier at $25 you are making $20 in profit.
Profit and Loss Statement (P&L)
The Profit and Loss Statement (P&L) is a financial statement that summarises the revenues, costs, and expenses incurred during a specified period. It quickly shows how much profit or loss was generated by a business.
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.
Click here to learn how to do a reconciliation using Kitomba and don’t worry if it does not reconcile, we have a solution, click here to find out what to do to do when it doesn’t reconcile.
This is the actual amount of money a business receives from the sale of goods or services. For example, if a client has a facial for $80 and then buys a face moisturiser for $45 the revenue you just received from that client is $125.
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.
Tips for understanding your finances
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.
For more tips for mastering your finances, check out these articles:
- 5 tips to prepare your salon for the end of the financial year
- Small changes that can have a big impact on your finances
- How to master your finances
- Is your salon, spa or clinic on track to make a profit?
Editor’s note: This article was originally published on 23 May 2019 and has been updated on the 14th March 2023 for relevance and comprehensiveness.