Essential Financial Terms

“Many people take no care of their money till they come nearly to the end of it, and others do just the same with their time.” 

— Johann Wolfgang von Goethe.

The field of finance can be complex. Learning about financial terms can help you develop your skills so that they can help you excel professionally and make a greater impact on your company.

Let’s check these 15 business finance terms and definitions you need to know: 

1- Net worth: the total value of what an individual or business owns minus the amount owed in debts. As a result, it represents the difference between an entity's assets and liabilities.

2- Net income or net profit: the amount of money an entity receives after subtracting expenses or costs. In other words, your total earnings.

3- A cash flow statement: a document that reflects the movement of money in and out of business over a particular period. It measures solvency, meaning an organization's ability to pay its bills and expenses. If more money flows into the business than out of it, the business is cash-flow positive.

4- Cost of Goods Sold (COGS): the cost of all materials and labor required by your products or services. These costs also include manufacturing overheads, but not indirect expenses like distribution costs.

 5- Gross profit: your net sales revenue minus COGS gives you your gross profit. So, a high gross profit means your company has more money available to invest back into the business or pay off liabilities. If the gross profit of a company is falling, then the business may want to look at cheaper ways to run production, like sourcing more affordable materials.

 6- Gross profit margin: shows how much capital a business has retained on each dollar of sales. Once you have found your gross profit, you can take this figure and divide it by revenue to see your gross profit as a percentage. 

7- Burn rate refers to how quickly you spend money or burn through your cash. Start-ups will usually have to spend more money than they make to get up and running. Keeping a close eye on just how fast they are spending can give a solid picture of just how much longer they have before they are in real trouble.

8- Runway: a company's time before it runs out of money. In other words, the runway is how long your company has left to live, and finding ways to generate more income, such as through investors before D-Day, is essential.

9- Liabilities: are what you owe other parties, such as bank debt, wages, and money due to suppliers, also known as accounts payable. There are different types of liabilities, including:

- Current liabilities: also known as short-term liabilities, these are what’s due in the next year.

Long-term liabilities are financial obligations not due over a year that can be paid off over a longer period. 

10- Assets: are items you own that can provide future benefit to your business, such as cash, inventory, real estate, office equipment, or accounts receivable, which are payments due to a company by its customers. There are different types of assets, including:

- Current assets: which can be converted to cash within a year.

Fixed assets can’t immediately be turned into cash but are tangible items that a company owns and uses to generate long-term income.

11- FICO score: a three-digit number that measures an individual's trustworthiness to pay back loans or debts. This concept, also called a credit score, demonstrates the individual's creditworthiness. Banks, lenders, and other financial institutions calculate credit scores based on factors such as payment history, length of credit history, and debts. 

The scores range from 300 to 850, and the higher the score, the better the terms you may receive on your next loan or credit card. People with scores below 650 may have a harder time securing credit at a favorable interest rate.

FICO is an acronym for the Fair Isaac Corporation, the company that came up with the methodology for calculating this credit score.

12- Solvency: a company’s ability to cover its liabilities and be financially stable in the long term. If a business goes under, it’s no longer solvent and will need to enter administration.

13- Bonds: are debt investments. When you buy a bond, you’re lending money to an entity, typically the government or a corporation, for a specified period at a fixed interest rate (also called a coupon). You then receive periodic interest payments over time and the loaned amount back at the bond’s maturity date. Bond prices tend to move in the opposite direction of interest rates — that is, when interest rates rise, bond prices typically fall.

14- Internal Revenue Service (IRS): a U.S. government agency responsible for collecting taxes and enforcement of tax laws. It also handles corporate, gift, excise, and estate taxes.

 15- Adjusted gross income (AGI): the total income earned from wages or investments minus IRS-approved income adjustments. These adjustments may include interest on student loans, retirement account contributions, or work expenses. The IRS uses individuals' AGI to identify their taxable income and determine whether they qualify for certain tax deductions or credits.

WEEKLY VOCABULARY ??

??Paycheck: a check for salary or wages made out to an employee.

??Significantly: in a sufficiently great or important way as to be worthy of attention. 

??Saver: a person who regularly saves money through a bank or investment plan. 

??Overdraw: draw money from (one's bank account) in excess of what the account holds.

 ??Loan: a thing that is borrowed, especially a sum of money that is expected to be paid back with interest.

PHRASAL VERBS ?

??Bail out: to give a financially troubled institution with capital.

"After the crash in 2008, many banks and companies had to be bailed out with taxpayer money."

??Hammer out: to produce something with much difficulty.

"After many sleepless nights, our finance team hammered out the 2022 budget."

IDIOMS ??

??Pay through the nose: pay a high price; pay dearly for something.  

??Money for old rope: gaining money for almost nothing. Being rewarded for very little effort.

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