Financial Terms Everyone Should Know

Financial Terms Everyone Should Know

Let’s face it, there is a lot of confusing financial jargon out there. Even long-time business people may be confused by some words. This week, we help you to brush up on some of the common terms that everyone should know. The definitions come courtesy of Lauren Landry from Harvard Business School Online.

Amortization: Amortization is a method of spreading an intangible asset’s cost over the course of its useful life. Intangible assets are non-physical assets that are essential to a company, such as a trademark, patent, copyright, or franchise agreement.

Balance Sheet: A balance sheet is an important financial statement that communicates an organization’s worth, or “book value.” The balance sheet includes a tally of the organization’s assets, liabilities, and shareholders’ equity for a given reporting period. The Balance Sheet Equation: Balance sheets are arranged according to the following equation: Assets = Liabilities + Owners’ Equity

Cash Flow Statement: A cash flow statement is a financial statement prepared to provide a detailed analysis of what happened to a company’s cash during a given period of time. This document shows how the business generated and spent its cash by including an overview of cash flows from operating, investing, and financing activities during the reporting period.

Income Statement: An income statement is a financial statement that summarizes a business’s income and expenses during a given period of time. An income statement is also sometimes referred to as a profit and loss (P&L) statement.

Liquidity: Liquidity describes how quickly your assets can be converted into cash. Because of that, cash is the most liquid asset. The least liquid assets are items like real estate or land, because they can take weeks or months to sell.

Return on Investment (ROI): Return on Investment is a simple calculation used to determine the expected return of a project or activity in comparison to the cost of the investment, typically shown as a percentage. This measure is often used to evaluate whether a project will be worthwhile for a business to pursue. ROI is calculated using the following equation: ROI = [(Income – Cost) / Cost] * 100

Valuation: Valuation is the process of determining the current worth of an asset, company, or liability. There are a variety of ways you can value a business, but regularly repeating the process is helpful, because you’re then ready if ever faced with an opportunity to merge or sell your company, or are trying to seek funding from outside investors.

Working Capital: Also known as net working capital, this is the difference between a company’s current assets and current liabilities. Working capital—the money available for daily operations—can help determine an organization’s operational efficiency and short-term financial health.

Here’s a term not included in the HBSO list: outsource. It’s what you can do to make running your business easier. Outsource your HR, Admin, or bookkeeping tasks to us. Our experts at VersaTel Solutions can take over some of the day-to-day burdens of running your business, so you have more time to focus on growing your company. Contact us to find out how we can help you.

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