The 15 Financial Terms Your Business Vocabulary Must Include

“When in Rome … ,” the saying goes.

You’re in a meeting with other managers when the discussion turns to financial issues. And all of a sudden you feel like everyone else is speaking a foreign language. Where do those numbers come from? What do they mean?  Hey, just because you don’t have a formal background in finance doesn’t mean you can’t start speaking the “language of finance” as fluently as everyone else.

This article will introduce you to basic finance terminology that every manager must be familiar with.

1. Accrual method: Recognizes revenue at the point of sale and recognizes expenses when incurred

2. Asset: An item of value owned by a business or individual, whether or not there is a claim on the item

3. Balance sheet: Summary statement of the firm’s financial position at a given point in time

4. Capital expenditure: An outlay of funds by a company, expected to produce benefits over a period greater than one year

5. Current assets: The value of all assets expected to be converted into cash within one year

6. Current liabilities: Short-term liabilities, due within one year

7. Depreciation: The systematic charging of a portion of the cost of a fixed asset against the annual revenues generated by the asset

8. Equity: The value of the owners’ interest in property remaining after all claims and liens against it

9. Income statement: Provides a financial summary of the company’s operating results during a specified period

10. Leverage: The amount of borrowed funds that a company uses to finance company growth and development, usually through the purchase of assets

11. Liability: A legal commitment to pay some amount or transfer some benefit, at some point in the future

12. Retained earnings: Those earnings of a company that are not distributed as dividends

13. Sales forecast: The prediction of a company’s sales over a given period, used as the key input to the short-run financial planning process

14. Statement of cash flows: A cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents. The cash flow statement is concerned with the flow of cash in and out of the business.

15. Statement of retained earnings: Reconciles the net income earned in a year and any cash dividends paid with the change in retained earnings between the start and the end of that year