It doesn’t matter how brilliant an entrepreneur or skilled an artisan you are, without some basic financial knowledge, even the best business ideas can falter and fail. Here we offer some key vocabulary words courtesy of Investopedia.com and Salary.com to help level the playing field during budget meetings.
Accounting vs. Finance
While not technically a definition, it is important to know the difference between these two distinct areas. At a high level, Finance is the science of planning the distribution of a business’ assets. Accounting is the art of recording and reporting financial transactions. People tend to group Finance and Accounting because both functions deal with the administration of a business’ assets.
An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. Assets are reported on a company’s balance sheet, and they are bought or created to increase the value of a firm or benefit the firm’s operations. An asset can be thought of as something that in the future can generate cash flow, reduce expenses, improve sales, regardless of whether it’s a company’s manufacturing equipment or a patent on a particular technology.
Types of Assets
- Current Assets—items the company can convert to cash within a fiscal year
- Fixed Assets—long term resources like production plants, facilities or equipment
- Financial Assets—investments the company has in the assets and securities of another company
- Intangible Assets—items with no physical presence like patents, copymarks and goodwill
An audit is an objective examination and evaluation of the financial statements of an organization to make sure that the records are a fair and accurate representation of the transactions they claim to represent. It can be done internally by employees of the organization, or externally by an outside firm.
A balance sheet is a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.
The balance sheet adheres to the following formula:
Assets = Liabilities + Shareholders’ Equity
Debt is an amount of money borrowed by one party from another. Debt is used by many corporations and individuals as a method of making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.
Good Debt vs. Bad Debt
In corporate finance, there is a lot of attention paid to the amount of debt a company has. A company that has a large amount of debt may not be able to make its interest payments if sales drop, putting the business in danger of bankruptcy. Conversely, a company that uses no debt may be missing out on important expansion opportunities.
A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.
The value of an asset less the value of all liabilities on that asset.
Net income (NI) is a company’s total earnings (or profit); net income is calculated by taking revenues and subtracting the costs of doing business such as depreciation, interest, taxes and other expenses. This number appears on a company’s income statement and is an important measure of how profitable the company is over a period of time. Net income also refers to an individual’s income after taking taxes and deductions into account.
Valuation is the process of determining the current worth of an asset or a company; there are many techniques used to determine value. An analyst placing a value on a company looks at the company’s management, the composition of its capital structure, the prospect of future earnings and market value of assets.
Looking for even more knowledge? Consider attending the Alumni Professional Development Series: Finance for Those Without A Finance Background event on Tuesday, March 21 at 6:30pm. Beyond these basic definitions, you will learn the fundamentals of financial statements and how to make basic financial decisions. Email firstname.lastname@example.org for more information.