Top 10 Financial Terms To Know in 2024
Are you ready for a career in finance? Regarding finance, financial professionals should use specific terminology that affects the business. However, non-financial professionals do not work in data, profits, or forecasting. However, if you are going to enter the financial field, you need to improve your financial knowledge. In addition, finance is the foundation of a company. The employees you hire, their salaries, and your annual budget are all part of your finance department. Once you understand the financial terms, you can leverage your spending to achieve your company's long-term goals. It shows how your company is performing in the market. In this blog, you'll explore critical financial terms, what they mean, and what they mean.
Why is financial health important?
If you want to manage your finances or the finances of your business, it's essential to learn financial terminology.
●If you are buying or renting a home, applying for a loan, or planning retirement, make smart financial decisions.
●It keeps you updated with the latest business news and events.
●You can perform tasks and communicate with colleagues and customers.
●As a company manager, you can manage company finances
●Assist in preparing financial reports
● Help manage accounting tasks
The ten most important financial terms
If you're interested in personal finance, here are ten terms you can learn to understand the topic. Not only does it help with financial decisions, but you can also work with a tax advisor.
Net profit
The money you make from selling products, services, or investments is income. Like revenue, net income is one of the most used terms among entrepreneurs. This is your total income. If your revenue or net income increases, it's called a profit. Generating profits improves your and your shareholders' standing in the company. When you subtract expenses from the money a company receives, it's called net profit. Net profit/net profit = total product or service sales - expenses/costs.
Sales
When you run a business, you generate income called revenue. This is the total income you or the company earns from sales or investments. High sales help advance your business goals and build stable revenue.
Assets
Whatever your company owns is an asset. Assets have economic value, such as property, equipment, or cash.
Current assets or current assets
Entrepreneurs convert liquid assets into cash within one year. This includes investments in inventory and checking or savings account balances.
Long-term assets or fixed assets
These assets must be converted into cash. It takes longer. This includes property, plant and equipment, machinery, and equipment. Entrepreneurs use these tangible assets to make money in the long run.
Rate of fire
If you are a startup, you should understand financial terms and burn rates. It refers to burning money quickly or spending money quickly. Many startups spend more than they earn. This could put new companies in trouble. You have to lead and manage the entire company. So, increasing your burn rate will affect your income.
Gross profit
You get gross profit when subtracting total sales from the cost of goods sold. Therefore, high gross profit can generate more money. Entrepreneurs need to earn higher profits to invest in business products.
Net Sales Revenue – COGS = Gross Profit
However, the company's low gross margins force you to look for cheap materials for production. This ultimately reduces the quality of the product.
Cost of goods sold (COGS)
In production terms, COGS is the cost of manufacturing or servicing a product. You sell a product or service and bear the cost of the materials and labor used in the product. This does not include distribution costs.
Capital gains
Let's say you make a profit from an asset or investment. Capital gains increase a company's value because it costs more than the original price. It describes the current value of something and its previous value (when purchased). Capital gains only occur when you sell the asset. Conversely, selling an asset at a lower price or receiving less cash than invested is a capital loss.
Cash flow
The net cash balance you get from a company's income and expenses at a given time is its cash flow. A cash flow statement is a financial document showing a company's cash flow.
There are three types of cash flows:
l Operating cash flow
Build up a cash balance by operating or conducting regular business.
l Investment cash flow
The net cash balance you generate from investment choices, including the sale or purchase of assets and investments in securities such as real estate
l financing cash flow
When you finance a business, you generate net cash. It's about financing cash flow—for example, dividend payments, debt payments, and equity capital.
Compound interest
Any interest you receive when you deposit a certain amount. When you invest or save money, you can earn compound interest. This may also be due to the interest you accumulate over time; for every new loan, banks and lenders estimate the amount of compound interest. Additionally, you must pay compound interest on the original loan amount. Therefore, this interest will increase your savings; conversely, it will make you more indebted (increased debt). It's different from simple interest.
Capital Market
A financial market where buyers and sellers trade stocks, bonds, cryptocurrencies, and financial assets. These financial investments include government bonds and stocks, among others. This is were buyers and sellers exchange currency. There are two capital markets: the stock market and the bond market.
Look at the following that falls under Capital Markets:
●Companies that sell stocks and bonds to investors
●Institutional investors who manage mutual fund investments
●Institutional investors buy stocks and short similar stocks to generate cash and control risk through hedging
Conclusion
By learning basic financial terminology, you'll better understand your business. Additionally, you can analyze employee and company performance. So, master what it takes to add value to your business.