Earlier this year I wrote a post about the 9 business terms all freelance designers must know to succeed. I received a lot of great feedback from the GDB community begging for more advanced terms.
So, of course, I just had to oblige. Here are some more advanced business terms to help your business grow (and to sound brilliant at your next networking mixer).
The cost of the next best alternative that must be forgone in order to pursue a certain action.
In layman’s terms: The “cost” incurred by not enjoying the benefits you could have received by taking an alternate action.
Example: You’ve got your eye on a continuing education course that costs $595. You have two options: take the course in hopes that you’ll learn something that offsets the lost income, or work during those course hours and make more money now. The opportunity cost of going to school is the extra money you won’t make, and vice versa.
Opportunity cost is helpful in making many business choices – whether or not to attend a conference, join your community chamber of commerce, work more hours, invest in education, or go on vacation.
A revenue or expense stream that changes a cash account of a given period of time.
In layman’s terms: The difference between how LONG it takes your clients to pay you versus how LITTLE time you have to pay your bills.
Example: Your client takes 30 days to pay your bill for the brochures you printed but your supplier expects payment in 10 days. If you don’t have enough cash to cover the costs while you wait for client payment, you will be out of business very fast.
Negative cash flow has killed more PROFITABLE businesses than probably any other factor.
**A big thank you to GDB reader Mike Pingree for providing this excellent description.**
The ongoing expense of operating a business (also known as “operating expense”).
In layman’s terms: What it costs to operate your business regardless of whether you have clients or not.
Example: Rent, utilities, office supplies, professional fees, advertising, taxes, and all the other things that you must pay to keep your business running that do not directly generate profit.
Money left after a company has serviced its debts and therefore available to meet unexpected demands.
In layman’s terms: Similar to profit, cushion is the amount of money you set aside for unexpected business expenses.
Example: At present, I make sure I always have at least $200 in my Greer Genius bank account. (Don’t worry, I have more in savings and personal accounts.) This is in case something unexpected and business-related comes up, but an unexpected $200 expense doesn’t happen often in my business.
You should never, NEVER, spend all of the money your business earns. Just like in your personal lives, you need emergency money stashed away in case something bad happens, such as a client not paying on time or equipment failure.
A business credit card is another option, albeit it should be a last option. Greer Genius has a low-interest credit card for big expenses that I’d like to defray over a few months. However, I always create a payment plan and stick to it. If you have a tendency to max out credit lines, request a card with a low maximum balance (like $1000) so you can’t over-burden your business with debt.
The volume of services you can produce utilizing current resources.
In layman’s terms: How much work you can produce.
Example: There is a finite amount of work each of us can do – and therefore a finite amount of money we can earn. Eventually you’re going to hit that ceiling, officially called your production capacity.
When you do, you have to decide whether to outsource projects or portions of projects, charge more (everyone is clamoring after your services, after all), improve your productivity (if possible), or be satisfied with the maximum amount of money you can currently make.
Money owed, but not yet collected, by customers to a business for goods and services sold by the business.
In layman’s terms: Money your customers owe you but haven’t yet paid.
Example: You finish a project and invoice the client for payment. Until they pay your bill, the sum they owe you is considered an accounts receivable.
Similarly, accounts payable is the money you owe other businesses but have not yet paid.
Do you have any to add?
Have you run across any terms that you aren’t familiar with? Leave a comment on this post and I promise to help you figure it out.