When you're asking for capital to start
or expand your business, it's important to know the key financial terms the
financiers use and what these terms actually mean.
I've included a brief summary of these financial terms to help you in your efforts:
I've included a brief summary of these financial terms to help you in your efforts:
1. Financial Statements: Used as a
reference for Profit & Loss Statement (which shows revenues and expenses
and your income or loss) and the Balance Sheet (which reflects your assets,
liabilities, and owner's equity).
Additional financial reports such as Cash Flow, Break Even Analysis, Sources and Uses of Working Capital, and Financial Ratios Analysis are also often included.
Additional financial reports such as Cash Flow, Break Even Analysis, Sources and Uses of Working Capital, and Financial Ratios Analysis are also often included.
2. Debt or Equity Capital: Describes what
kind of capital you are seeking. Debt is usually in the form of a loan,
promissory note, mortgage or other legal instrument. Equity is an ownership
position in the business.
3. Rate of Return (Yield): The primary
purpose of investing your money or getting other people's money is to earn a
return on capital. This number indicates what profit or interest investors or
lenders receive for investing. Prior to approaching any source for funds, you
should know what kind of yields they are seeking.
4. Cash Flow: This is the life blood of a
company. Cash flow is the generation of funds available to pay expenses and
returns to investors or lenders. Cash flow reflects the timing and amount of
inflow and outflow of funds.
5. Working Capital: Usually this figure
represents total assets that will be converted to cash within a year minus liabilities
that must be paid within a year.
6. Collateral: This is property accepted
as a secondary source of repayment of a loan or other obligation.
7. Break Even Analysis: A method of assessing a company's profit potential downside risk. Expenses should be separated into variable costs (i.e. labor, materials, commissions) and fixed costs (i.e. rent, utilities, salaries, insurance, etc.). With these costs and estimated revenues per unit, you can determine how much product/service must be sold to cover costs.
At this volume, your company incurs neither a profit nor loss. The break even analysis is an important tool to illustrate the effects of product price changes, cost increases or a reduction in demand on the company's profitability.
7. Margin: The difference between revenues
received and expenses incurred and commonly expressed as a percentage or dollar
amount. Gross margin is the difference between total sales revenue and total
costs of goods sold. Net margin is the difference between total sales revenue
and all costs associated with producing goods, including administration, taxes,
and other overhead expenses.
8. Leverage: The ability to borrow a
larger amount of money than a company has invested in property or assets.
Now Hack Your Personal Finances in the Age of Trump.
What are Your Thoughts. Leave Your Comments Below.
Now Hack Your Personal Finances in the Age of Trump.
What are Your Thoughts. Leave Your Comments Below.
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