Basic Financial Terms

4 Key excerpts on "Basic Financial Terms"

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  eBook - PDF

  Entrepreneurship NQF2 SB

  TVET FIRST

  • R Rehbock(Author)
  • 2013(Publication Date)
  • Macmillan

    (Publisher)

  103 Module 3 Basic financial management Overview By the end of this Module you will be able to: ● Understand basic financial terminology. ● Understand processes and principles for pricing of products and services. ● Understand processes and principles of financial management, record keeping and stock control. Module 3 Financial terminology Introduction In the last Module you learnt about the importance of communication and customer service in business. It is really the life-blood of business success. To communicate and negotiate sales successfully, entrepreneurs must be professional in their financial dealings. This means that they should be familiar with common terminology that banks and business owners use. It is not enough to recognise these terms – you must understand their meaning and implications. In this Unit we will identify and explain the most important financial terms. We will also discuss the first and most important financial activity – costing your product. Financial terminology Capital This refers to money or assets that are used by a business. Capital means money, machinery and equipment used to manufacture the product, or deliver the service, for which the business charges a price. Start-up capital This is the capital or funds necessary to start a business. This will include money to buy stock, machinery, vehicles and cash flow. Security/guarantees When a bank gives someone a loan, they want something in return that will guarantee that they will get their money back. This is called security, or guarantees. Most often this security is an asset that the entrepreneur or business owns, such as land and buildings. A person with a good financial standing (creditworthiness) can also sign as a guarantor. In other words, this person (the guarantor) will promise to pay the bank back if you can’t. Cash flow Cash flow means all the money flowing in and out of the business.

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  Basic Finance

  An Introduction to Financial Institutions, Investments, and Management

  • Herbert Mayo, , , (Authors)
  • 2018(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  CHAPTER 1 An Introduction to Basic Finance 3 managing decisions can have important implications for the firm’s financial well-being. Virtually every business decision has a financial implication, and financial resources are often a major constraint on the firm’s nonfinancial personnel. It is cer-tainly desirable for individuals in marketing, human resources, information systems, and planning to understand the basic concepts of finance and the role of the financial manager. Such understanding may lead to better communication, the creation of bet-ter data for decision making, and better integration of the various components of the business. 1.2 Key Financial Concepts Several crucial concepts appear throughout this text. The first is the sources of funds used by a firm. Firms can acquire assets only if someone puts up the funds. For every dollar the firm invests, someone must invest that dollar in the firm. The second con-cept centers around risk and return. Individuals and firms make investments to earn a return, but that return is not certain. All investments involve risk. The third concept is financial leverage, which is an important source of risk. The last concept is valua-tion, or what an asset is worth. Because the return earned by an investment occurs in the future, the anticipated cash flow to be generated by the asset must be expressed in the present. That is, the asset must be valued in today’s dollars in order to determine whether to make the investment. Because the goal of financial management is often specified as the maximization of the value of the firm, the valuation of assets is prob-ably the most crucial individual concept covered in this text. 1.2a Sources of Finance Finance is concerned with the management of assets, especially financial assets, and the sources of finance used to acquire the assets. These sources and the assets that a firm owns are often summarized in a financial statement called a balance sheet .

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  eBook - ePub

  Executive Finance and Strategy

  How to Understand and Use Financial Information to Set Strategic Goals

  • Ralph Tiffin(Author)
  • 2014(Publication Date)
  • Kogan Page

    (Publisher)

  Chapter 6 on published financial statements.

  Financial position – the balance sheet We all know intuitively what an asset is – money, gold, a building; and also what a liability is: a debt, a loan that has to be repaid, a tax bill. Here are the accounting standard definitions:

  The elements directly related to the measurement of financial position are assets, liabilities and equity. These are defined as follows:

  (a) An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

  (b) A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

  (c) Equity is the residual interest in the assets of the entity after deducting all its liabilities.

  A simple balance sheet and a layout used for management purposes

  The layout below gives clarity to the fact that there are the two classes of financial strategy available in the business world, strategies that deliver by: (1) making profitable and efficient use of assets and (2) structuring the business’s financing or funding. This simple example (Table 3.8 ) is formatted to show the two sides of a balance sheet from a management and a strategic perspective.

  TABLE 3.8 Example

  Two basic definitions:

  • Net assets employed: tangible, intangible and financial assets (buildings, equipment, inventories, receivables, cash) less liabilities principally relating to operating activities and due to be settled within a short period (a year or much less). This is the net worth of the business or capital employed in the business as visibly seen, recorded, measured and managed by the executives and employees.
  • Finance: this is what finances the business, ie the capital employed in the business, but from the perspective of the investor. It is the owners’ and lenders’ investment in the business. This side should be exactly equal in amount to the net assets employed side, X = X.

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  Financial Accounting

  • David W. O'Bryan(Author)
  • 2006(Publication Date)
  • Information Age Publishing

    (Publisher)

  In fact, this is one of the primary benefits of financial statements. If you are thinking about buying stock in Wal-Mart, or if a bank were thinking about lending them money, you probably don’t need to review every single cash register transaction. You do need to know whether they are making money from their day-to-day operations, whether they can repay their debts, or whether they can pay their day-to-day costs as they come due. There are three, primary financial statements. The remainder of this chapter will introduce these financial statements and the related concepts that accompany each statement. THE BALANCE SHEET The very name of this statement implies that something “balances”, that something equals something else. Let’s cut to the chase and look at the fundamental equation underlying the balance sheet: This equation underlies much of what we will do in Financial Account-ing. You should memorize it now. Please note that this is merely an alge-bra equation stating that the term on the left, Assets, must always equal the summation of the terms on the right, Liabilities and Equity. Like any algebra equation this can also be rewritten as follows: The Accounting Equation: Assets = Liabilities + Equity The Accounting Equation − Alternative Forms: Assets − Liabilities = Equity or Assets − Equity = Liabilities Financial Accounting: A Course for All Majors 7 Now, let’s examine each element of the balance sheet in more detail. Assets Most people have an intuitive understanding of this term. Assets are things with future, economic benefits. That’s a fancy way of saying they are things with value. Examples of assets include cash, vehicles, houses, land, and the computer I’m using to prepare this chapter. Liabilities Most people have an even better understanding of this term! Liabilities are amounts we owe, or debts. Examples of liabilities include student loans, credit card debt, and car loans.

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