If you are involved in business finance, there is some terminology that you will need to know and understand in order to communicate effectively and make an impact. Finance Terms range from basic to technical, and they all represent different aspects of your business activities.
Business Finance Terms
If you do not know and more importantly, understand, these terms, doing business can be made difficult, and when you are in a financial setting it may even end up being embarrassing.
This is a term that every business must use. Assets refer to what you have and own as a business including cash in hand and in the bank as well. It also comprises of all your economic resources including products in your inventory, furniture, and fixings, supplies, trademarks, copyrights, etc.
These assets normally count towards the entire value of the business and in case of difficulties, these are what you sell as a business in order to remain afloat.
Well, you cannot talk about assets without talking about liabilities. While assets refer to what you own, liabilities refer to what you owe. If you have a bank loan, the money you owe your debtors, credit card loans, the money you owe your manufacturers, etc.
It will also include any long-term debts such as mortgages, and car loans. In order to establish the total worth of the company, you will need to calculate the difference between your assets and liabilities.
This Finance Term refers to what you spend in order to run your business. It is normally counted as a part of your liabilities because it is something that you must pay. Expenses comprise of items such as electricity bills, staff salaries, cost of advertising and marketing, employee bonuses, fuel for company cars, etc.
In order to make your business financing remain solid, you are encouraged to always spend less than you have, because in calculating the worth of the company, expenses are counted as liabilities, and therefore they contribute to the final figure.
This refers to the movement of funds in your organization within a given financial year. Every business must be able to track its cash flow in order to determine its solvency.
Now, in order to make this simple to understand this Finance Term, you are supposed to track the business’s finances in terms of what you started with, what you received mostly in terms of sales and how much you spent at the end of a financial period.
In short, it is the movement of cash/funds.
At the end of the financial year, each company is required to produce a financial report. This is simply a report that showcases everything that happened financially for the whole year. The financial report should clearly show the assets of the company, the total amount of sales you made in that year, the amount of money you made before paying taxes, and the profit after paying the tax that the company is projected to make.
This report is mandatory and must be made public, especially if the company has shareholders. It should in addition to the above, show the public how much a company is willing to pay in terms of dividends to its shareholders.
This report must always be displayed during every shareholder’s meeting that the company has.
Capital is a Finance Term which refers to the initial investment. It is the amount of money you invest in order to start the business. It can be added to as time goes by, depending on the needs of the organization. If you need to change one or two things and you require a boost to your business, you can always add to the capital, and this should always be displayed in the financial statement at the end of the financial period.
This refers to the amount of money that your clients owe you. It is the amount that you expect to receive after requesting that your clients pay you what they owe you. What most businesses do is to prepare invoices and send them to their clients so that they can be aware of how much they owe you and when they are supposed to pay what they owe.
If this is not paid, you are entitled to involve the law and legally request the client to pay you what they owe. Accounts receivable is also shown when preparing a financial statement as this is money that is legally yours, just that you haven’t physically received yet, but, it still legally belongs to you.
The general rule of business is that assets always depreciate in value. If you own cars, farming equipment, machinery, etc. they depreciate in value year after year, and what they were valued at this year will not be the same next year.
When preparing the financial statements, you are allowed to recover the value of depreciation of these products through a deduction. This deduction is however fixed in the form of a percentage, of which you calculate as a projection of how much the asset is likely to lose in value that year.
The beauty of this is that depreciation is an asset to the organization.
With depreciation, there must be valuation. Valuation is the most important Finance Terms which refers to the estimated value of assets in your company, and it is what you shall use in order to calculate the depreciation.
You must always value what you have so that you always know how much they would fetch if you decided to sell them off. It is also an extremely valuable figure to investors because they use it in order to know exactly how much your business is worth.
These are just a few of the Finance Terms you need to know as a business owner, but there are plenty more. In order to become successful in business, you must be able to express yourself in the right way and taking time to understand the terminology is crucial to the success of your business.