Financial Planning For the Future

Nine Financial Terms You Need to Know

Now that you have decided to venture into the world of business, you will need capital to start off your project. You also need to get accustomed to many financial terms which will help you deal with the various financial institutions.

• Financial Statements – There are many financial statements which are helpful for framing a Profit and Loss Statements and the Balance Sheet. They include Cash Flow, Break-Even Analysis, Financial Ratios Analysis and Sources and Uses of Working Capital.
• Debt or Equity Capital – You will need to define the type of capital you want for your business. A promissory note, loan, mortgage or any other legal document forms the basis of debt. If you obtain an ownership position, then it forms equity capital
• Rate of Return – earning a profit is the main motive behind most businesses. The rate of return is what the investors expect for investing in the business. It is important to know this before approaching a lender.
• Cash Flow – Cash flow is the coming in and going out of funds in the business. It is limited by time and is used to pay the expenses and meet the expectations of the lenders.
• Working Capital – This is the value of the total assets in cash after deducting the liabilities.
• Collateral – This is a property which is set up as a secondary mode of payment of a loan or any other financial agreement.
• Break-Even Analysis – This method portrays the profit making capability of a company keeping in view the risks involved. Expenses are divided into fixed costs (rent, salary, utilities, insurance) and variable costs (materials, labor, commissions). From these figures you can fix the cost of every unit to recover all expenses and make a considerable profit.
• Margin – This amount demonstrates the difference between the expenses made and the revenues earned. This can be expressed as a percentage. There can be a gross margin and a net margin.
• Leverage – The capability to get a larger sum of money than the value of the property or assets.