30 Business Terms You Need To Know
Mark Zuckerberg
Steve Jobs
Bill Gates
Steve Wozniak co-founder of Apple
Matt Mullenweg founder of WordPress
David Karp founder of Tumblr
Daniel Ek co-founded Spotify
John Mackey co-founder Whole Foods
These legendary business icons do not have a business degree.
In fact, none of them have any college degree.
Many owners did not study business in school, but suddenly found themselves in business, providing their product or skill to others. So when terms like Revenue, Cash Flow, ROI and Liabilities start getting thrown around, some business owners may not know what they mean.
Here are 30 critical business terms you absolutely need to know. You don’t necessarily need to be prepared to calculate each of these, but you at least need to understand what they mean, when you are discussing them with your accountant, banker or other principals.
I’m going to break up these terms into a few different categories, but the first one is a standalone term I want to mention at the top.
1. E-commerce: Buying and selling goods and services online.
Your E-commerce business strategy is in many ways different from face-to-face business in brick-and-mortar venues. Your marketing, online presence (like a website or app), standard operating procedures, return policies, and much more will reflect the different nature of online business.
Okay, that easy one out of the way, let’s look at a few terms related to Your Business’s Performance.
2. Revenue: The total income generated by a business from its primary operations. This includes cash, checks, Paypal, Venmo, credit cards, etc
3. Profit: The amount of money a business earns after deducting expenses from its revenue. In other words, what’s left over after supplies, rent, utilities are all paid for. Remember, you don’t support your family on Revenue, or Instagram followers, but rather profit.
4. Strategic Planning: Strategic planning is a process in which an organization's leaders define their vision for the future and identify their organization's goals and objectives. The process includes establishing the sequence in which those goals should be realized so that the organization can reach its stated vision.
5. Key Performance Indicators (KPIs) are measurable and quantifiable metrics used to evaluate the performance of your company’s activities.
For example, at George Supply I measure average order, returning customer rate, and conversion rate (the number of customer’s purchasing divided by the total customer visits) as KPIs. These help me understand how much my customers are buying, how much they are returning to me, and how often a visit to my website results in an actual purchase. These metrics help me identify the strengths and weaknesses of my e-commerce strategy.
At the pizza restaurants, I measure labor as a percent of sales, delivery time, and food cost as a percent of sales, to provide a few examples. If labor or food costs start creeping up as a percentage of sales, I know that I need to adjust my supply chain or raise prices to stay in business.
6. Market Share: Market share is calculated by taking the company's sales over the period and dividing it by the total sales of the industry over the same period. As I mentioned earlier, Dewalt in 2023 had a 16% market share of the power tool market. That means 16% of all power tool sales were Dewalt products. The higher your market share, the better your business is performing.
7. Cash Flow: The movement of money into and out of a business, reflecting its liquidity and ability to meet short-term obligations. Understanding cash flow is critical.
For example, suppose you have a great revenue and profit month, and are expecting to pay yourself as a result. But the money isn’t in the bank, because you had to buy a supplies for next month’s orders.
You can quickly see that even more important than forecasting revenue and profit by month, is forecasting cash flow by month.
Should you want to calculate the cash flow for your own business, you can find our FREE Cash Flow Forecasting Tool here
8. Diversification: Diversification is a growth strategy that involves entering into a new market or industry - one that your business doesn't currently operate in - while also creating a new product for that new market.
Again, see above, all the businesses I either manage or own, are an example of diversification across markets. The benefit here is if one industry is struggling, we have others that may be able to pick up the slack. For example, during covid, while our sit down BBQ restaurants were essentially shut down, our pizza delivery division achieved sales and profit records, thereby maintaining the health for the entire operation. Diversification serves as insurance, so no one poor performer can bring down the entire team.
9. Benchmarking: Benchmarking is a process that involves measuring the performance of your business against a competitor in the same market. This will give you a better understanding of your business performance and potential.
This is often a hard process to do, since you probably don’t have access to your competitors' metrics. So you use what you have, such as social media following, available assortment, pricing, etc. Think from the perspective of your customers. If they are choosing between your company and your competitor’s, what are the factors that are pushing them to buy from you or them? Do they have more products? Is your quality noticeably better? Do they offer lower prices? Do you have more customization options?
Alright. So those were some key terms related to measuring the performance of your business: strategic planning, key performance indicators, market share, diversification, and benchmarking.
Let’s move on to some key terms to describe Your Business's Assets.
10. Assets: Everything of value that a business owns This includes your equipment, supplies and materials you have on hand, cash in the bank, etc.
11. Liabilities: Debts and other financial obligations of a business. This includes loans on your equipment, possibly a 2nd mortgage payment you took for expansion.
12. Budget: A financial plan outlining the expected revenues and expenses over a specific period. Just like your household budget, this is a plan for your revenues and expenses by month, for the year.
13. Equity: The residual interest in the assets of a business after deducting liabilities. So based on the balance sheet calculation, your equity may be positive or negative. Again, it’s most likely only useful if you are getting a loan. But you at least need to know what the lender is asking for.
14. Intellectual Property: Intellectual property (IP) refers to creations of the mind: inventions; literary and artistic works; and symbols, images, names and logos used in commerce. Businesses are often unaware that their business assets include IP rights.
It’s worth looking more into what intellectual property rights might apply to your products and business. Similarly, if you see inspiration in the work of others (and who doesn’t?), you’ll want to make sure you aren’t too inspired by their work and infringe on their IP when you make a similar product.
15. Liquidity: Liquidity is a company's ability to convert assets to cash or acquire cash—through a loan or money in the bank—to pay its short-term obligations or liabilities. How much cash could your business access if you had to pay off what you owe today —and how fast could you get it? Liquidity answers that question. Knowing your business’s liquidity is important for your bookkeeping and finance.
16. Depreciation: The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation. Your accountant can use this as an expense on your Profit and Loss statement, thereby reducing your profit on paper, but not reducing your cash on hand. Be sure to consult your tax accountant regarding this topic. I am not offering any tax advice
17. Return on Investment (ROI): A measure of the profitability of an investment, calculated as the ratio of net profit to the initial cost of the investment. Sounds complicated, but its really simple.
For example if you purchased a piece of equipment for $500, which allowed you to make an additional $5000 in profit, your ROI would be (5000-500)/500 or 900%
18. Return on Assets (ROA): Return on assets measures how efficient a company's management is in generating profit from their total assets on their balance sheet. ROA is shown as a percentage, and the higher the number, the more efficient a company's management is at managing its balance sheet to generate profits.
Next, I want to talk briefly about Your Business’s Message. Let’s define some key terms that will help your business’s branding and marketing.
19. Market Research: The systematic gathering and analysis of information about markets, including target customers and competitors, to inform business decisions. This could be as simple as understanding who your typical customer is.
20. Sustainability: Sustainability in business refers to a company's strategy to reduce the negative environmental impact that results from their operations. An organization's sustainability practices are typically analyzed against environmental, social, and governance (ESG) metrics.
For example, on most of the George Supply Company product descriptions, we mention the sustainability advantage of direct to garment printing, and how it leaves no unsold inventory to add to landfills. Mentioning this kind of information can be very important to some customers, and give them a better impression of the brand.
21. Value Proposition: A value proposition is a statement that clearly identifies the benefits a company's products and services will deliver to its customers. A well-crafted value proposition will differentiate the company and/or its specific product or service in the marketplace and among a target market or target audience.
22. Pricing Strategy: The approach a business takes to set the prices of its products or services. This may include 1 price for all the materials and labor, or a materials plus price per labor hours. It may include a quote in advance, or a menu of options and prices.
23. Customer Relationship Management (CRM): Strategies, technologies, and practices that businesses use to manage and analyze customer interactions and data throughout the customer lifecycle. How do you keep track of your customers? Their contact information, details of prior orders, etc?
Your website that processes your orders will have this information. Now whether you export that information into another system, or simply maintain the one in your website is up to you
Okay, finally, let’s define some terms for Your Business’s Future. If you are discussing your business with investors or partners, knowing these terms can help you have a productive conversation about what the future holds for you and your business.
24. Business Plan: A formal document outlining a business's goals, target market, strategy, and financial forecasts. Is the document critical? No. Is the process of thinking it through, assembling a strategy, and doing the research necessary to have a plan critical to business success? Absolutely. "Plans are nothing; planning is everything." — Dwight D. Eisenhower
25. Balance Sheet: This is a report calculating the value of your business, by subtracting your Liabilities from your Assets. It’s a quick snapshot of your business that helps a lender understand what your business is worth. This report will likely be required to get a business loan.
26. Break-even Point: The level of sales at which a business covers its costs and neither makes a profit nor incurs a loss. This is the minimum level of revenue you need, to cover your monthly expenses. This will likely be revealed, when you do a monthly budget, see above.
27. Supply Chain: The network of individuals, organizations, resources, activities, and technology involved in creating and delivering a product or service.
28. Stakeholder: A stakeholder is a person, group or organization with a vested interest, or stake, in the decision-making and activities of a business, organization or project. Stakeholders can be members of the organization they have a stake in, or they can have no official affiliation.
29. Exit Strategy: A business exit strategy is an entrepreneur's strategic plan to sell his or her ownership in a company to investors or another company. An exit strategy gives a business owner a way to reduce or liquidate his stake in a business and, if the business is successful, make a substantial profit.
30. Mergers and Acquisitions (M&A): Mergers and acquisitions (M&A) is a generally used term to describe the process of combining companies through various
ABOUT THE AUTHORS
Scott Chervitz is owner of George Supply Company and Woodwrx.co, and Director of Operations for 10 food service locations and 1 retail location. You can reach him at Scott@GeorgeSupplyCo.com, on Instagram at @GeorgeSupplyCompany
Brian Chervitz, M.S., is an