If you are starting or running a business, you need to be familiar with some basic business terms like (ROI, KPI etc) that will help you understand and communicate your goals, strategies and performance. Here are some of the most common and important business terms that every entrepreneur should know:
Return on investment (ROI) refers to all the benefits — monetary or otherwise — received from an investment. It is usually calculated as the ratio of net profit to total cost of the investment. A high ROI means that the investment was profitable and efficient.
Key performance indicator (KPI) is a measurable value that shows how well a business is achieving its objectives. KPIs can be used to track progress, identify strengths and weaknesses, and improve performance. Examples of KPIs are revenue growth, customer satisfaction, employee retention and market share.
Business-to-business (B2B) describes a type of transaction or relationship between two businesses that provide goods or services to each other. For example, a manufacturer may sell its products to a wholesaler, who then sells them to retailers. B2B transactions often involve long-term contracts and complex negotiations.
Business-to-consumer (B2C) describes a type of transaction or relationship between a business and an individual customer who buys its goods or services for personal use. For example, an online retailer may sell clothes, books or electronics to consumers through its website. B2C transactions often involve impulse buying and emotional appeal.
Strengths, weaknesses, opportunities and threats (SWOT) analysis is a strategic planning tool that helps a business identify its internal and external factors that affect its success. Strengths and weaknesses are internal factors that can be controlled by the business, such as resources, skills and reputation. Opportunities and threats are external factors that cannot be controlled by the business, such as market trends, competitors and regulations.
Accounts receivable (AR) is the amount of money that customers owe to a business for goods or services they have purchased on credit. AR is an asset on the balance sheet of a business because it represents future income. AR is also an indicator of cash flow and liquidity.
Accounts payable (AP) is the amount of money that a business owes to its suppliers or vendors for goods or services they have purchased on credit. AP is a liability on the balance sheet of a business because it represents future expenses. AP is also an indicator of cash flow and liquidity.
Fixed costs are expenses that do not change with the level of output or sales of a business. They are incurred regardless of whether the business produces anything or not. Examples of fixed costs are rent, salaries, insurance and depreciation.
Variable costs are expenses that change with the level of output or sales of a business. They increase when output increases and decrease when output decreases. Examples of variable costs are raw materials, utilities and commissions.
Working capital is the difference between current assets and current liabilities of a business.
It measures how much money a business has available to fund its day-to-day operations and meet its short-term obligations.
A positive working capital means that the business has more current assets than current liabilities, which indicates good financial health and liquidity.
A negative working capital means that the business has more current liabilities than current assets,which indicates poor financial healthand liquidity.
Equity is the amount of ownership interest that shareholders have in a business.
It represents their claim on the assets and profits of the business after all debts are paid off.
Equity can be calculated as the difference between total assets and total liabilities of the business,
or as the sum of share capital and retained earnings.Equity can also be increased by issuing new shares,
or decreased by paying dividends,buying back shares,or suffering losses.