Business owners who struggle with finances should definitely hire an accountant or utilize accounting software to make things easier, but there are some basic financial terms every entrepreneur should know as their business grows.
These are the economic resources a business has, including the products it has in inventory , the office furniture and supplies purchased for use, and any trademarks or copyrights it owns. These assets count toward the value of a business , since they could be sold if the business experienced difficult times.
This includes any debt accrued by a business in the course of starting, growing and maintaining its operations, including bank loans , credit card debts, and monies owed to vendors and product manufacturers. Liabilities can be divided into two major types: Business expenses are the costs the company incurs each month in order to operate, including rent, utilities, legal costs, employee salaries, contractor pay, and marketing and advertising costs.
To remain financially solid, businesses are often encouraged to keep expenses as low as possible. Your cash flow is the overall movement of funds through your business each month, including income and expenses. Businesses track general cash flow to determine long-term solvency. This is the total amount a business has earned or lost at the end of the month. The bottom line is the last financial figure on a ledger. A financial report may be prepared for internal use or external sources, such as potential investors.
However, a financial statement is generally a more formal document, often issued by a lending institution. A cash flow statement shows the money that entered and exited a business during a specific period of time. Download a free cash flow statement template here. Download a free income statement template here. This includes the cash it has on hand, the notes payable it has outstanding and owner s equity in the business.
Download a free balance sheet template here. Expense — money spent on supplies, equipment or other investments. Finance — the management and allocation of money and other assets.
Industry — a category of like businesses. Liabilities — the value of what a business owes to someone else. Management — the act of organizing and conducting a business to accomplish goals and objectives. Marketing — the process of promoting, selling and distributing a product or service. Net Worth — the total value of a business. Payback Period — the amount of time it takes to recover the initial investment of a business.
Product — something produced or manufactured to be sold; a good. Profit Margin — the ratio of profit divided by revenue displayed as a percentage. Return on Investment ROI — how much money a business gets in return from an investment. Revenue — the entire amount of income before expenses are subtracted.
Sales Prospect — a potential customer. Service — work done for pay that benefits another. An importing buyer would typically ask for the FOB price, which is now now often linked to a port name, eg. Logically FOB also meant and still means that the seller is liable for any loss or damage up to the point that the goods are loaded onto the vessel at the FOB port, and that thereafter the buyer assumes responsibility for the goods and the costs of transport and the liability.
In modern times FOB also applies to freight for export by aircraft from airports. In recent years the term has come to be used in slightly different ways, even to the extent that other interpretations are placed on the acronym, most commonly 'Freight On Board', which is technically incorrect.
While technically incorrect also, terms such as 'FOB Destination' have entered into common use, meaning that the insurance liability and costs of transportation and responsibility for the goods are the seller's until the goods are delivered to the buyer's stipulated delivery destination. If in doubt ask exactly what the other person means by FOB because the applications have broadened. While liability and responsibility for goods passes from seller to buyer at the point that goods are agreed to be FOB, the FOB principle does not correlate to payment terms, which is a matter for separate negotiation.
FOB is a mechanism for agreeing price and transport responsibility, not for agreeing payment terms. FOB Free On Board , used alone, originally meant that the transportation cost and liability for exported goods was with the seller until the goods were loaded onto the ship at the port of exportation ; nowadays FOB Free On Board or the distorted interpretation 'Freight On Board' has a wider usage - the principle is the same, ie.
So, if you are an exporter, beware of buyers stipulating 'FOB destination' - it means the exporter is liable for the goods and pays transport costs up until delivery to the customer. The ratio of debt to equity, usually the relationship between long-term borrowings and shareholders' funds. Sales less cost of goods or services sold. Also referred to as gross profit margin, or gross profit, and often abbreviated to simply 'margin'. See also 'net profit'.
An Initial Public Offering IPO being the Stock Exchange and corporate acronym is the first sale of privately owned equity stock or shares in a company via the issue of shares to the public and other investing institutions. In other words an IPO is the first sale of stock by a private company to the public. IPOs typically involve small, young companies raising capital to finance growth.
For investors IPOs can risky as it is difficult to predict the value of the stock shares when they open for trading. An IPO is effectively 'going public' or 'taking a company public'. These mechanisms are used by exporters and importers, and usually provided by the importing company's bank to the exporter to safeguard the contractual expectations and particularly financial exposure of the exporter of the goods or services. Also called 'export letters of credit, and 'import letters of credit'.
When an exporter agrees to supply a customer in another country, the exporter needs to know that the goods will be paid for. The common system, which has been in use for many years, is for the customer's bank to issue a 'letter of credit' at the request of the buyer, to the seller.
The letter of credit essentially guarantees that the bank will pay the seller's invoice using the customer's money of course provided the goods or services are supplied in accordance with the terms stipulated in the letter, which should obviously reflect the agreement between the seller and buyer.
This gives the supplier an assurance that their invoice will be paid, beyond any other assurances or contracts made with the customer. Letters of credit are often complex documents that require careful drafting to protect the interests of buyer and seller.
The customer's bank charges a fee to issue a letter of credit, and the customer pays this cost. The seller should also approve the wording of the buyer's letter of credit, and often should seek professional advice and guarantees to this effect from their own financial services provider. In short, a letter of credit is a guarantee from the issuing bank's to the seller that if compliant documents are presented by the seller to the buyer's bank, then the buyer's bank will pay the seller the amount due.
The 'compliance' of the seller's documentation covers not only the goods or services supplied, but also the timescales involved, method for, format of and place at which the documents are presented. It is common for exporters to experience delays in obtaining payment against letters of credit because they have either failed to understand the terms within the letter of credit, failed to meet the terms, or both.
It is important therefore for sellers to understand all aspects of letters of credit and to ensure letters of credit are properly drafted, checked, approved and their conditions met.
It is also important for sellers to use appropriate professional services to validate the authenticity of any unknown bank issuing a letter of credit. There are many types of letters of guarantee. These types of letters of guarantee are concerned with providing safeguards to buyers that suppliers will meet their obligations or vice-versa, and are issued by the supplier's or customer's bank depending on which party seeks the guarantee.
While a letter of credit essentially guarantees payment to the exporter, a letter of guarantee provides safeguard that other aspects of the supplier's or customer's obligations will be met. The supplier's or customer's bank is effectively giving a direct guarantee on behalf of the supplier or customer that the supplier's or customer's obligations will be met, and in the event of the supplier's or customer's failure to meet obligations to the other party then the bank undertakes the responsibility for those obligations.
There are other types of letters of guarantee, including obligations concerning customs and tax, etc, and as with letters of credit, these are complex documents with extremely serious implications. For this reasons suppliers and customers alike must check and obtain necessary validation of any issued letters of guarantee. General term for what the business owes. Liabilities are long-term loans of the type used to finance the business and short-term debts or money owing as a result of trading activities to date.
Long term liabilities, along with Share Capital and Reserves make up one side of the balance sheet equation showing where the money came from. The other side of the balance sheet will show Current Liabilities along with various Assets, showing where the money is now.
Indicates the company's ability to pay its short term debts, by measuring the relationship between current assets ie those which can be turned into cash against the short-term debt value. Total assets fixed and current less current liabilities and long-term liabilities that have not been capitalised eg, short-term loans.
NPV is a significant measurement in business investment decisions. NPV is essentially a measurement of all future cashflow revenues minus costs, also referred to as net benefits that will be derived from a particular investment whether in the form of a project, a new product line, a proposition, or an entire business , minus the cost of the investment. Logically if a proposition has a positive NPV then it is profitable and is worthy of consideration.
If negative then it's unprofitable and should not be pursued. There are different and complex ways to construct NPV formulae, largely due to the interpretation of the 'discount rate' used in the calculations to enable future values to be shown as a present value.
Corporations generally develop their own rules for NPV calculations, including discount rate. NPV is not easy to understand for non-financial people - wikipedia seems to provide a good detailed explanation if you need one.
Free online financial terms dictionary and financial ratios definitions - business training and consulting for management, sales, marketing, project management, communications, leadership, time management, team building and motivation.
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