As a business professional, you have to understand the language of business and finance to communicate effectively and stay on top of the latest developments.
There are hundreds of business and finance terms you need to know to communicate effectively with peers and clients. This article will introduce you to the most important terms and concepts in business & finance communication in a clear and simple language, and give you the confidence to communicate accurately and effectively in all situations.
It’s an account that shows how much money you owe to your suppliers for goods you’ve purchased on credit. Accounting Cycle – The period of time between the date you record a transaction (usually when you pay a bill) and the date the transaction appears on the balance sheet. This period includes the number of days between the end of the reporting period and the closing date of the books, plus the days required to prepare financial statements.
A liability account that reports money your business owes to customers for sales that haven’t been paid for yet. An example of an accounts receivable is the $10,000 you owe to a client who ordered 5,000 widgets from you on credit, but hasn’t paid you yet. Accounts receivable are considered current liabilities because a business can collect these within one year. It’s an account that shows how much money you have collected on sales you’ve made on credit.
Something of value that you own. For example, accounts receivable is money owed to your business by customers for goods or services that have been delivered or sold but not yet paid for. Assets are everything your company owns that has value: land, buildings, inventory, cash, accounts receivable, equipment, furniture, etc. Assets are recorded on the balance sheet as “current assets” because it is assumed that they can be converted to cash within one year or less. Businesses keep balance sheets because investors often ask for them as part of an annual review of their business. Liabilities – Money owed to others by your business. For example, accounts payable is money owed to your suppliers for goods or services that have been delivered or sold but not yet paid for. Liabilities are the opposite of assets: they are recorded on the balance sheet as “current liabilities” because it is assumed that they can be converted to cash within one year or less.
A Balance sheet is a financial statement of a company’s assets, liabilities and owner’s equity at a specific point in time. Assets and liabilities are two sides of the same coin: what you owe and what you have. Assets are what you (the business) own (cash, inventory, accounts receivable). Liability is what you (the business) owe (payroll, bank debt, unpaid bills). Owner’s equity is the part of a company that is owned by the business owners (book value of the owner’s investment). Assets Account – An individual account that is simply an amount of money owed to the company by the client.
It shows the sources and uses of cash during a specific time period. To calculate a cash flow statement: subtract cash from net income; the result is cash flow from operations. Cash Flows from Operations – Cash flow generated by normal business activities; also called operating cash flows. Capital Expenditures – Expenses that increase the value of a company’s physical property (buildings, machinery, equipment) and intangible assets such as goodwill and trademarks.
A fixed asset is an asset that cannot be converted into cash within a year’s time without a substantial loss in value. The “fixed” in the term “fixed asset” means that it can’t be easily converted into cash, unlike “current assets” such as cash and accounts receivable which can be quickly converted to cash if necessary. Depreciation – The process of allocating the cost of a fixed asset over its useful life to the income statement. For example, if you buy a computer for $1,000 and estimate that it will last three years, you would depreciate the computer over three years.
It’s a financial statement that summarizes a company’s revenues and expenses for a specific time period, usually a year. To calculate an income statement: Start by adding up your sales for the period. Then add up all of your expenses for the period. The result is income for the period. Net Income – The difference between total revenues and total costs; also called net income or net profit or the bottom line of a P&L statement; is a measure of the profit generated by a business during an accounting period.
Refers to the obligation of one party to another; also known as a debt or debt obligation. Liabilities appear on the balance sheet as “current liabilities” because they are payable within one year; they are classified as long-term if they are payable after one year. Also, a loan which is money borrowed from a bank or other financial institution that must be repaid with interest; a loan is usually secured by collateral such as real estate, equipment or stocks.
Profit & Loss Statement
It’s a financial statement that shows the revenues, expenses and net income for a specific time period; also known as the income statement or the profit and loss statement. To calculate a profit & loss statement: Start by adding up your sales, then add up all of your expenses, the result is the income for that period. Then subtract your revenue expenses from your income. The result is your net income for the period. If the amount is positive, this is called your bottom line for the period. If the amount is negative, this is called your net profit for the period.
Annual Percentage Rate
(APR) – The rate that is calculated to show how much a loan will cost if all of the interest is paid and the loan is repaid in one year. The APR shows the total cost of borrowing money for a full year; it is expressed as a percentage per year. Internal Rate of Return – An estimate of the average rate of return earned over a specific period of time. To find the internal rate of return: Divide the amount of total profits by the total amount of money invested; the result is the internal rate of return. Inventory Turnover Ratio – The amount of revenue generated by selling your inventory divided by the total amount of inventory you carry, usually expressed as a percentage.
Collateral is property pledged by a borrower to secure a loan. If the borrower defaults on the loan, the mortgage lender can take possession of the collateral to make up for their loss. Common collateral includes cars, trucks, and real estate. Collateral can also be used to secure a line of credit.
Also a personal guarantee is a promise by an individual or organization to a bank or other lender that they will pay a debt if the borrower is unable to. For example, if Bob borrows $50,000 from a bank and the bank requires Bob to be personally liable for the debt, Bob must sign a personal guarantee stating that he will pay the debt if the bank loses money.
Credit Risk Factor – The probability that a borrower will make timely payments on a loan or line of credit based on an analysis of credit history and payment history. The credit risk is higher when the borrower has a poor credit history and pays his bills late, or has few assets that can be used as security. On the other hand, if the borrower has an established credit history and owns a lot of assets, the credit risk is low.
Ratio: The ratio of the value of a property being financed to the amount of money being borrowed for the purchase; also known as LTV ratio. This ratio is calculated by dividing the amount of the loan by the appraised value of the property being financed; for example, if the appraised value of a home being purchased is $100, 000 and the loan amount is $50,000, the loan-to-value ratio is 50% (i.e., $50, 000/$100, 000 = 0.5). Loan-to-Value Ratio = Loan Amount ÷ Appraised Value
These article of business terms have been derived from common usage and are presented for informational purposes only. It is suggested that you contact an attorney or other competent legal professional to obtain legal advice about the meaning of these terms.