Do you feel confused in meetings when financial terms are thrown around?
You’re not alone. Many small business owners in the UK find finance language difficult to understand.
However, knowing this language is crucial for making well-informed decisions, securing funding, and running your business effectively.
At Advent Communications, we offer practical tips to help you grasp the key concepts and focus on what matters: growth.
This guide explains twenty essential finance and investment terms in simple language, accompanied by examples that you can use immediately.
Let’s get started.
Finance and Investment Terms for Small Entrepreneurs
Here are the twenty finance and investment terms that every small entrepreneurs must know:
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Cash Flow
Cash flow is the movement of money in and out of your business. If you’ve positive cash flow, it means you earn more than you spend.
Example: Your business earned £100,000 in revenue. During that time, it spent £30,000 on expenses. After paying all its bills, your company has £70,000 in cash left. Find out how Cash Flow Management affects your daily business operations.
Why It Matters: Even profitable firms struggle to survive without regular cash flow.
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Equity
Equity is your share in the company. If you own all 100% of the shares, you own the entire equity.
Example: If you sell 25% of your company to an investor, they will own one-fourth of the equity. To know how equity decisions affect funding and control in your business, take a look at Equity in Business Growth.
Why It Matters: Your choices regarding equity impact how the company operates, how funds are distributed, and your ability to secure future funding.
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ROI or Return on Investment
ROI (Return on Investment) indicates the profit you generate in relation to your costs.
Example: You spend £5,000 on marketing and make £20,000 in sales. Your return on investment (ROI) is 100%. Learn how Return on Investment influences your choices in marketing and operations by looking at how to maximise it.
Why It Matters: ROI helps you determine where to allocate your resources for the best outcomes.
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Liquidity
Liquidity refers to the ease with which assets can be converted into cash instantly and efficiently.
Stocks are liquid because you can sell them quickly. Real estate is less liquid because it takes time to sell. Learn how to manage cash flow for smoother business operations in Liquidity Management through strategies.
Why It Matters: Liquidity ensures you can pay for your expenses and meet your prompt needs.
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Compounding
Compounding means earning interest on your original amount and the interest you have already earned.
Example: If you invest £1,000 at a 5% annual interest rate, after 10 years, it’ll grow to £1,629 instead of just £1,500 due to compounding. To get an idea about Compounding Interest, read this guide for more examples.
Why It Matters: Compounding helps your savings and investments grow more as time passes.
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Diversification
Diversification lowers risk by spreading your money across different sectors, rather than investing all your funds in one place.
Instead of just focusing on retail, you can also invest in technology and services. Learn how diversifying your investments can protect your business over time by reading this guide for a detailed example.
Why It Matters: This approach reduces the chances of big losses.
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Angel Investor
An angel investor is someone who uses their personal finances to invest in startups in exchange for a share of the company.
Example: A regional entrepreneur takes a bold step by investing £50,000 into a smart technology startup, fueling its growth and paving the way for exciting new possibilities. Explore this example guide on Angel Investor for more information.
Why It Matters: Angel investors offer financial support and valuable advice to startups.
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Venture Capital
Venture Capital (VC) is money provided by companies or investment groups to growing startups in exchange for shares in the company.
Example: In 2023, UK tech startups received $21.3 billion in venture capital investment. Understand how Venture Capital works and what it means for your business in Venture Capital.
Why It Matters: VCs offer large amounts of funding but usually expect quick expansion in return.
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Debt Financing
Debt financing means borrowing money that you must pay back with interest.
For example, getting a £25,000 loan from a government scheme to buy machinery. To know the difference between Equity and Debt Financing, this guide will help you.
Why It Matters: It lets growth without losing ownership, but if your income goes down, making repayments can become a risk.
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Working Capital
Working Capital is the money you’ve after paying your short-term debts. You calculate it by subtracting your current liabilities from your current assets.
Example: If your assets are £50,000 and your liabilities are £30,000, your working capital is £20,000. Discover the Working Capital strategies to ensure your business has sufficient cash available for its daily needs.
Why It Matters: Having positive working capital means your business can pay its daily expenses.
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EBITDA
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It measures a company’s profitability without considering taxes and financing costs.
Example: If your firm is valued at a multiple of 4.0. Increasing your EBITDA by £100,000 each year can raise your business’s value by £400,000. This is calculated by multiplying £100,000 by 4.0. Check out this example guide and calculate your EBITDA now.
Why It Matters: Investors and creditors use EBITDA to compare the performance of different companies.
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Balance Sheet
A balance sheet is a financial report that shows your assets, debts, and ownership as of specific date.
Example: Suppose your company takes out a five-year bank loan of £4,000. Your cash increases by £4,000, and your debts also rise by £4,000. The balance sheet always shows that assets equal liabilities plus equity. An explanation of the Balance Sheet with a few examples are shown.
Why It Matters: It gives you an overview of your financial health.
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Burn Rate
The burn rate indicates how immediately a company spends its money before it starts generating a profit.
Example: If a company has £1 million in the bank and spends £100,000 monthly, it can continue operating for 10 months. Simply learn how to control your burn rate by reading and managing.
Why It Matters: Knowing the burn rate helps you plan how long your funding will last.
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Breakeven Point
Breakeven happens when your income equals your expenses, meaning you don’t make a profit or a loss.
Example: A small skincare brand needs to sell 6,000 units at £2 each to break even. This means it must make £12,000 in sales to cover all its costs. Take a look at some of the examples of Breakeven Point to understand this term much better.
Why It Matters: Breakeven analysis helps set sales goals and decide on pricing.
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Inflation
Inflation means the prices rise over time, which reduces the value of money.
Example: If a loaf of bread cost £1 a year ago and now costs £1.03, then the price has gone up by 3%. For a detailed knowledge of Inflation, continue to read this guide.
Why It Matters: Inflation affects how much people earn, how much they spend, and how businesses set their prices.
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Dividends
Dividends are payments made to shareholders from a company’s profits.
Example: Aviva increased its interim dividend to 13.1 pence per share, driven by solid profit growth. This is an example of Real Dividend per share.
Why It Matters: When you own shares, you can earn money through dividends and also benefit from an increase in the share’s value.
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Capital Gains
Capital gains are the profits you make when you sell an asset for more than you paid for it.
For example, a UK landlord selling a buy-to-let property for a profit of £100,000 will have to pay capital gains tax after deducting the annual allowance. For detailed information on Capital Gains, you can check this helpful guide.
Why It Matters: You may be required to pay tax on these capital gains, so it’s essential to plan accordingly.
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Risk Tolerance
Risk tolerance refers to the level of risk you are willing to take with your investments.
Some business owners prefer safe investments, while others are willing to take bigger risks for the chance of greater rewards. Find out how to determine your willingness to tolerate risks and match it with your investment plan.
Why It Matters: Your risk tolerance affects your investment alternatives and helps you align them with your goals.
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Valuation
Valuation refers to determining the value of your company.
Example: If you invest £100,000 in a company that is worth £500,000 today, you will own 20% of that company. For more details, you can check out Valuation scale ups and startups with a few examples mentioned.
Why It Matters: Understanding your company’s value is vital for attracting investors or selling the business.
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Forecasting
To predict future sales, costs, or profits, businesses use past data and trends.
Example: A restaurant expects a bustling December based on its experience from past years. See how Forecasting techniques can help you plan for growth.
Why It Matters: Making predictions helps with planning, budgeting, and getting loans.
Conclusion
Finance shouldn’t feel confusing. Once you understand the basics, every decision, from setting prices to attracting investors, becomes easier to make.
You don’t require a finance degree to operate a successful business, but you should be confident with the numbers.
Start using what you’ve learned today and continue to learn as you grow. Every smart decision begins with clear finances.