UNDERSTANDING KEY FINANCIAL TERMS ,breaking down financial statement terminologies

The language of finance can be confusing to many as there are many often conflicting terms used to describe the same concept. It is true that the strength of a business often referred to as having a "strong" or "weak" balance sheet. This often refers to the type of asserts that a business owns or controls.

Assert : Anything owned or controlled by a business with a measurable economic value, for example desks, machinery, stock, cash in bank. Asserts are categorized into either fixed asserts or current asserts.

Fixed assert: Anything you expect to last for more than one year or more for example buildings and machinery. fixed asserts can either be tangible or intangible.

Current Assert: Things that you expect to change more quickly such as cash, inventory and debtors also known as account receivable.

Tangible Asserts: physical things that you can touch such as computers, furniture company car.

Intangible Asserts: Things like intellectual property and patents.

As a business owner the type of asserts you acquire can influence the growth funding and rates that are available to you. your asserts can also determine if a new supplier will deal with you and what credit terms they may offer. Understanding financial terms helps you to make the right decisions to enable your growth.

Most Owners of growing businesses focus on sales and business development sometimes it gets disheartening to find yourself working very hard but not generating much profit. It is important to carefully monitor and manage your sales, expenses and profits by using your income statement.

Liabilities: debt owed to someone outside the business.

Income statement / Profit and loss statement/ PNL / Statement of Revenue Expense: All these refer to the same thing and can be used interchangeably. It should be used as part of your internal management accounts and is essential for your annual financial reporting. It shows revenues and expenses over a specific period of time eg. a month, quarter or year. You use it to accurately calculate how much profit or loss your business has made in that period

Now to bring it all together we have Mr Kamau a manufacturer of kids snacks who is considering to rent some space that has fallen vacant next to his factory in Industrial area, how can he go about assessing if this is a good business decision? Apart from the rental expense, other price estimates required include equipment, people, utilities etc. The big question he needs to ask is would the revenue generated be more than the total cost of hiring and using the space?

Gross Profit: The difference between the revenue earned and cost of goods sold

Direct costs/costs of goods sold; these costs often increase with with an increase in sales eg cost of labor, production, stock etc

Indirect costs; General administrative expenses or operating costs. They do not directly increase or decrease according to the number of sales a business makes. eg rent and office utilities

Operating profit/operating income; if you deduct indirect costs from gross profit you get a more comprehensive profit value called operating profit or operating income. This is what tells you how much a business is actually making. This value is what is used to calculate EBITDA Earnings Before Taxation, Depreciation and Amortization

EBITDA ( Earnings Before Taxation, Depreciation and Amortization) Is the most common measure used to calculate profitability of the business. it also forms the basis of business valuations

Balance Sheet: while the income statement tracks revenues and costs of your business, the balance sheet describes the business by focusing on its asserts , liabilities (debts) and Equity. A balance sheet shows how the investments, debts and sales are connected. It enables you to see the overall financial health of your business.

For some, this words may sound like jargon but if you are a business owner you need to get financial literacy to be able to make sense of your Balance sheet and profit and loss statements which will in turn direct how you spend your precious resources to ensure your business grows at a healthy pace.