8 Important Financial Terms for Hacking Your Business Future

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:

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.

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.


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Avoid this when Starting your Enterprise

Here is what you should avoid when starting your enterprise.

While the two corporate models for starting your enterprise are the non-profit model and the for-profit model, people more often choose either a sole proprietorship or a partnership.

As a sole proprietor you take all the risk and receive all the rewards. Whereas in a partnership you share the risks and the rewards. In my opinion, under most circumstances, the partnership way should be avoided. If you have the rare situation where you and the other partner(s) can agree on how the enterprise should be financed, managed, promoted, and how responsibilities should be shared, that would be fantastic. Even so the partnership agreement should be drafted, finalized and copies kept by each partner.  I don't care whether its a husband and wife, brother and brother or whatever.

As a rule, avoid the partnership arrangement. But if you feel that you must do it, make sure you have a clear, unambiguous written agreement.

I will have further things to say about my personal experience in a partnership and why I feel this way in my next blog.

If you have been involved or are currently in a partnership, let me know about your experiences, either positive or negative.