10 common Finance & Accounting terms (and what they really mean)

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1️⃣ Closing the Books

Closing the books means you’re signing off (not legally) on the financial statements being accurate through a specific period.

It typically involves classifying & reconciling all transactions, and booking all necessary adjustments

2️⃣ Cash Burn

This represents the net cash change (often times negative) from one period to another - without including any financing activities

Financing activities are activities related to equity / debt…both cash in and cash out…

3️⃣ Runway

Runway means the stage that you model & walk on at board meetings…

Just kidding 😅 it means how many months you have left till you run out of cash

4️⃣ It ties / it’s reconciled

Accountants typically confirm their numbers by comparing one source of information to another

That can be something “reconciling” to a bank statement…

Or something “tying” from the balance sheet to the workpapers

5️⃣ Accruals

Accruals get recorded whenever an expense takes place (like a legal fee)…

But you either haven’t paid it yet or haven’t received the bill

It’s like placing an override (read: journal entry) on your financial statements

6️⃣ Margins

Margins represent the profit, but expressed as a % compared to income

The general formula is Profit / income

That can vary to many types of margins…like

▪️ Profit Margin (Gross profit / Revenue)

▪️ Operating Margin (Net operating Income / Revenue)

▪️ EBITDA Margin (EBITDA / Revenue)

▪️ Unit Margin (Gross profit in units / Gross revenue in units)

7️⃣ The Financials

These are important - and they are:

▪️ Your Income Statement

▪️ Your Balance Sheet

▪️ Your Statement of Cash Flows

8️⃣ Revenue run rate

This refers to your revenue in the most recent month, and multiplied by 12

This gives you a picture of what your business could be doing in terms of revenue if it kept up it’s current level of monthly revenue

Don’t mistake this for Annual Recurring Revenue!

9️⃣ Audited financials

When you hire an auditing firm, they take a look at tons and tons of your financial data, and ultimately provide a sign of approval on the accuracy of your books

This is a lot more common for larger companies, and is a requirement for public companies

🔟 Churn

Churn represents what your business lost - usually referred to with customers, or revenue (IE lost revenue from existing customers)

That’s my take on 10 common Finance & Accounting terms that you may here…