Glossary of Business Finance Terms
At AutoCFO, we belive that you shouldn't need a finance degree to understand your business financials.
Below are some plain-English definitions of important finance terms you'll come across when working with your finance team, board, and investors.
Business Finance Terms
Accounts payable means the money your business owes to others (usually vendors), typically unpaid invoices, invoices sent to the business are an important indicator of the liabilities of the business, and should be entered into the accounting system
Accounts receivable means the money owed to your business (usually customers), invoices sent from the business are an important indicator of the assets of the business, and should be entered into the accounting system
Accounting on an accrual basis is an accounting concept and a method of accounting and means recognizing revenue (income) and expenses at the time they are incurred, rather than cash basis where you recognize income and expenses at the time you pay or receive them. The reason companies use accrual accounting is to have a better understanding of the ongoing costs of their business. Cash accounting can cause expenses and income to be lumpy over time, making it hard to determine how profitable (or not) a business might actually be. Cash accounting can make it easier to understand the current cash position of the business, and is significantly less complicated on the accounting side, and thus less costly to maintain. You can also use your cash flow statement in accrual accounting to understand where the cash is going and what the current cash position of the company is.
Accruals are are an accounting entry to account for moving cost from the date they are paid to the date they were incurred.
Example: You pay Joe in May for 4 months worth of contracting services. In cash accounting you recognize that cost in May. In accrual accounting, you make accrual entries in February, March, April and May in anticipation of paying Joe in May (when he remembers to send his bill). Accruals can help you understand the future liabilities (or expenses of your business) so you aren’t surprised by a big unexpected bill. Of course this requires accurate accruals for anticipated expenses to be accurate.
An asset is anything that could turn into money for the business. These things include inventory, monies people owe you (accounts receivable), any machinery or equipment owned by the company, etc.
A balance sheet is a record of the assets and liabilities of the business as a whole.
Bootstrapping is a term for operating and growing a business without raising external equity capital. You can still be considered a bootstrapping with debt capital raised.
Cash flow is a combination of the results of operations (profit and losses) of the business and any changes in the balance sheet (assets and liabilities of the business). This resulting “Total Cash Flow” is the difference between your bank account balance from month to month and thus is a full explanation of where all of the money has gone (and come from) in your business 🤯
Cash Flow Projections
Cash flow projections are an estimate of the future operations and changes in assets and liabilities of the business to determine how much cash the business will generate (or use)
Cash Forecasting or Cash Flow Forecasting
Cash flow forecasting is often confused with profit and loss forecasting. Cash flow also takes into account payment timing of customers and to vendors.
CFO (Chief Financial Officer)
A Chief Financial Officer is a senior executive responsible for financial operations of a business or organization. Responsibilities may include managing financial operations and strategy, cash flow projections, budgeting, etc.
A contract CFO is a CFO who is not a full-time employee of the company. They can be hired on an hourly, daily, weekly, or monthly basis, depending on how much help that company needs.
A forecasting tool is used to project business operations, liabilities, and assets in the future. The simplest form of a forecasting tool is a spreadsheet. AutoCFO offers a sophisticated proprietary forecasting tool.
FP&A Analyst (Financial Planning and Analysis)
An FP&A Analyst is a person that can complete financial analysis for the business. This can be a wide range of projects and support.
When you hire a fractional CFO (rather than a full-time or in-house CFO) you purchase a portion of a financial professional (a Chief Financial Officer’s) time. Fractional CFOs usually bill hourly or on a retainer basis.
Record of the operations of the business, including incomes and expenses of the business. Also known as Profit & Loss Statement.
An interim CFO comes in for a short term project, possibly a transition between full-time CFOs or to complete a special project like a fund raise, transition to a new accounting system, or after a full-time person leaves and a full-time replacement cannot be immediately found. A good interim CFO will not only keep the lights on between CFOs, but look for opportunities to improve processes, and then pass their knowledge on to the next full-time person.
In finance, a liability is any monies owed by the company including unpaid invoices (Accounts Payable), credit card and bank debts owed.
An outsourced CFO can be a portion of a full time CFO’s time or all of their time, but the CFO is employed by a third party rather than the company.
A part-time CFO works part-time for a company, this can be a part time employee or a contractor.
Profit & Loss Statement
See Income Statement.
A resilient business is a business that can survive a few bumps in the road. This means having some cash reserves and buffer in your profit margin in case things don’t go according to plan, or the economic environment changes.
Generally a virtual CFO is a CFO you meet with online rather than in person, though it can just mean a person that functions as the CFO of your company, but is not a full-time employee of your company.