For many creatives, the financial world is full of confusing terminology and legalese. Some terms can even feel scary, conjuring up thoughts of improperly filed taxes, financial misconduct, penalties & interest, and more.

But these terms don't need to feel scary. Your Creative CPA exists to support creatives on the journey to financial freedom, and the best way to do that is by educating others.

Below is a list of common financial terms that creative business owners can benefit from. Where possible, we link to additional resources where you can expand your knowledge even further.

Pro tip: Use CTRL+F (on PC) or CMD+F (on Mac) to search this page for a specific term. or category.

COMMON FINANCIAL TERMS

Level 1 - Foundational Financial Terms

• Balance Sheet: A financial statement showing assets, liabilities, and equity at a specific point in time. Learn more about balance sheets. Download the balance sheet template.

• Assets: Resources owned by the business, such as cash, inventory, equipment. Learn more about assets.

• Liabilities: Debts or obligations the business owes, such as loans, mortgages, or unpaid bills. Learn more about liabilities.

• Income Statement: Also known as a Profit & Loss Statement (P&L), this is report showing revenue, expenses, and profit over a period. Learn more about income statements. Download the income statement template.

• Revenue: The total income generated from sales of goods or services before expenses are deducted. Learn more about income. Download the free business income cheat sheet.

• Expenses: Costs incurred in running the business, such as rent, salaries, equipment, subscriptions, utilities, etc. Learn more about expenses. Download the free business expense cheat sheet.

• Profit (Net Income): The amount of money left after subtracting all expenses from revenue.

• Taxable Income: The portion of income subject to taxes after deductions and exemptions.

• Tax Deduction: Expenses that can be subtracted from taxable income to reduce tax liability. Learn more about deductions.

• Tax Credit: Dollar-for-dollar deductions that can reduce your tax burden on your personal income tax return.

• Credit Score: A three-digit number that represents your creditworthiness, or your ability to take out loans. Learn more about credit scores.

• Form 1099: A tax form for reporting payments to independent contractors, freelancers, gig workers, etc. Freelancers use Form 1099 to report income on their Form 1040 Income Tax Return. Learn more about 1099s.

• Form W-2: A tax form for reporting employee wages and withholdings.

• Form 1040: The individual income tax return filed by U.S. taxpayers to report their annual earnings, calculate and pay their tax liability, and claim deductions or credits.

• Stock Market: Public markets (there are several different ones) where individuals and businesses buy and sell shares of ownership in public companies.

Level 2 - Less Common Financial Terms

• Cash Flow Statement: Tracks cash inflows and outflows from operations, investing, and financing. Learn more about Cash Flow Statements.

• Cash Flow: The movement of money in and out of a business, indicating liquidity. Learn more about liquidity.

• Positive Cash Flow: When cash inflows exceed cash outflows.

• Negative Cash Flow: When cash outflows exceed cash inflows.

• COGS (Cost of Goods Sold): Direct costs of producing goods sold by the business.

• Operating Expenses (OPEX): Day-to-day business costs not directly tied to production.

• Equity (Owner’s Equity): The residual value of the business after liabilities are subtracted from assets.

• Accounts Receivable (AR): Money owed to the business by customers for goods or services delivered.

• Accounts Payable (AP): Money the business owes to suppliers or creditors for goods or services received.

• Depreciation: The gradual reduction in value of a tangible asset over time.

• Amortization: Spreading the cost of an intangible asset (e.g., a patent) over its useful life.

• Mutual Fund: Investment vehicles that pool money from multiple investors to buy a diversified portfolio of stocks, bonds, or other assets, managed by professionals.

• Exchange-Traded Fund (ETF): Similar to mutual funds but trade like stocks on exchanges, offering real-time pricing and typically lower fees.

Level 3 - Semi Pro Financial Terms

• Gross Profit: Revenue minus the cost of goods sold (COGS), showing profitability before operating expenses.

• Gross Margin: Gross profit as a percentage of revenue, indicating production efficiency.

• Profit Margin: Net income as a percentage of revenue, showing overall profitability.

• Break-Even Point: The point where total revenue equals total expenses, resulting in no profit or loss.

• Fixed Costs: Expenses that remain constant (e.g., rent, salaries).

• Variable Costs: Expenses that fluctuate with production/sales (e.g., raw materials).

• Markup: The amount added to the cost price to determine the selling price.

• Profit Margin: The percentage of revenue that remains as profit after expenses.

• Liquidity: How quickly assets can be converted into cash without losing value. Learn more about liquidity.

• Solvency: A business’s ability to meet long-term financial obligations.

• ROI (Return on Investment): A measure of profitability relative to investment costs.

• Line of Credit (LOC): A flexible loan allowing businesses to borrow up to a set limit (learn more about lines of credit here).

• Term Loan: A lump-sum loan repaid over a fixed period with interest.

• Collateral: An asset pledged to secure a loan, like physical property, inventory, a bank account, business ownership, etc.

• APR (Annual Percentage Rate): The yearly cost of borrowing money, including interest and fees.

• Credit Terms: Payment conditions set between a business and its customers or suppliers.

Level 4 - Major League Financial Terms

• Cash Accounting: Recording transactions only when cash is received or paid. This method is used by individuals, freelancers, and single-member LLCs.

• Accrual Accounting: Recording revenue and expenses when they are earned/incurred, not when cash is exchanged. This method is used by multi-member LLCs, partnerships, S-Corporations, C-Corporations, and nonprofits.

• Trial Balance: A worksheet listing all ledger accounts to ensure debits equal credits.

• General Ledger: A complete record of all financial transactions in a business.

• Chart of Accounts: A categorized list of all accounts used in bookkeeping (e.g., assets, liabilities, revenue).

• Market Capitalization: The total market value of a company’s outstanding shares (for corporations).

• EBIT (Earnings Before Interest and Taxes): A profitability measure excluding interest and taxes.

• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): A measure of operating profitability before non-operating expenses.

• Venture Capital (VC): Funding provided by investors in exchange for equity in high-growth startups.

• Cash Conversion Cycle (CCC) – The time it takes to turn inventory and resources into cash flow.

• Burn Rate – The rate at which a business spends cash, especially for startups.

• Working Capital: Current assets minus current liabilities, measuring short-term financial health. Learn more about working capital.

Major League Financial Ratios

• Learn more about financial ratios.

• Current Ratio – Measures a company’s ability to pay short-term debts with current assets (Current Assets / Current Liabilities).

• Quick Ratio (Acid-Test) – Assesses immediate liquidity by excluding inventory from current assets (Cash + Marketable Securities + Receivables / Current Liabilities).

• Cash Ratio – Evaluates a firm’s ability to cover short-term liabilities with only cash and cash equivalents (Cash + Equivalents / Current Liabilities).

• Profitability Ratios

  • Gross Margin Ratio – Shows the percentage of revenue remaining after COGS (Gross Profit / Revenue).

  • Net Profit Margin – Reveals the percentage of revenue left as net income after all expenses (Net Income / Revenue).

  • Return on Assets (ROA) – Measures how efficiently a company uses its assets to generate profit (Net Income / Total Assets).

  • Return on Equity (ROE) – Indicates profitability relative to shareholders’ equity (Net Income / Shareholders’ Equity).

  • Return on Investment (ROI) – Calculates the gain or loss on an investment relative to its cost (Net Profit / Cost of Investment).

• Leverage (Debt) Ratios

  • Debt-to-Equity Ratio (D/E) – Compares total liabilities to shareholders’ equity to assess financial leverage (Total Liabilities / Shareholders’ Equity).

  • Debt Ratio – Shows the proportion of assets financed by debt (Total Liabilities / Total Assets).

  • Interest Coverage Ratio – Tests a company’s ability to pay interest on debt (EBIT / Interest Expense).

• Efficiency (Activity) Ratios

  • Inventory Turnover – Measures how quickly inventory is sold and replaced (COGS / Average Inventory).

  • Accounts Receivable Turnover – Evaluates how efficiently a company collects payments (Net Credit Sales / Average Accounts Receivable).

  • Asset Turnover Ratio – Gauges how well assets generate revenue (Revenue / Total Assets).

• Market Value Ratios

  • Price-to-Earnings (P/E) Ratio – Compares share price to earnings per share (Market Price per Share / EPS).

  • Earnings Per Share (EPS) – Shows net income allocated to each outstanding share (Net Income / Shares Outstanding).

  • Dividend Yield – Indicates annual dividend income relative to share price (Annual Dividend per Share / Share Price).

• Cash Flow Ratios

  • Operating Cash Flow Ratio – Assesses ability to cover short-term liabilities with cash flow (Operating Cash Flow / Current Liabilities).

  • Free Cash Flow (FCF) – Measures cash available after capital expenditures (Operating Cash Flow – CapEx).

Disclaimer: the information provided in this article is for educational purposes only and does not constitute tax, accounting, investing, legal, or financial advice. The information in this article does not take into account your unique financial or business situation or goals, and YCCPA cannot be responsible for reader's financial decision-making. YCCPA's goal is to educate and support you on your creative business journey.

A word from Your Creative CPA's Founder:

If you're capable of starting a business doing what you love, then you're 100% capable of understanding financial basics and applying them to your business. Trust me, the former is way more challenging. You've got this.

-David Kindness

Written by David Kindness, CPA

David is a CPA (Certified Public Accountant) and professional photographer, videographer, and designer based in San Diego, California. Learn more.

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