Some Important financial terms and definitions

This article provides the list of some important financial terms that are helpful for both finance professionals and Non-professionals of finance.

Improving vocabulary of financial terms has its own value and importance. It’s one of the most important factors of both professional and management success. The financial vocabulary is what it sounds like the terms that are used in business and financial management. It is equally beneficial for those who have formal education as well as those who are attaining it informally to enrich vocabulary with financial terms. If you ever think of doing that, you might find this article helpful for you, as it provides some important financial terms with definitions.

1-Acid test or quick ratio – Current assets, less inventories, divided by current liabilities

2-Arbitrage – It involves taking advantage of temporary differences in market prices by buying in cheaper markets and selling in the higher-priced markets.

3-Average Collection period – It shows the number of days required on average basis to collect accounts receivables. It’s a measure to evaluate how a business firm is getting customers to pay the credit that’s given when they purchase merchandize.

4-Beta – It is defined as an indicator of the risks prevailing in stock returns, as compared to the general market returns.  A beta 1.0 means it’s same as that of general market. It’s to be noted that beta lower than 1.0 is less risky while more than 1.0 is riskier than the market.

5-break-even approach – It’s a method used to evaluate the point at which there is no profit and nor is there any loss. It’s the point where sales equal operating costs. It helps as a guideline to determine the profitability of a business entity.

6-Assets turn over – It’s a measure for evaluating operational efficiency of a business firm. It is used to determine how much revenue is generated on assets available to the business.  It’s calculated this way: Sales revenue/total assets less current liabilities.

7-Balance sheet – It’s one of the main financial statements. Other financial statements are Income statement and cash flow statement and statement of changes in stockholders’ equity.  Balance sheet displays assets, liabilities and equity. Balance sheet is a snapshot of what is owned and owed by a business at a particular point in time.

8-Income summary or net earnings summary – It is a temporary account that is used to close all other temporary capital accounts at the end of the accounting period. It’s a transitional account in which all income statement revenue and expense accounts are transferred and the net amount is transferred in to the income summary account is that equals the net profit or loss that the business incurs during the period.

9-Net worth – To put it simply, net worth is what is owned minus what is owed by a business entity. Being also referred to as net or wealth, it is total assets minus total outside liabilities of a business. It’s used when valuation of a company or personal finance is made for an individual’s economic position.

10-Finance – In general terms, it indicates controlling of money.  It’s the business or art of managing the monetary resources of an organization, country or a person. It also connotes the money necessary to do something, especially to fund project(s). Finance, as field, deals with the allocation of assets and liabilities which involves managing money under both conditions of certainty and uncertainty. A key point that finance holds is the time value of money implying the purchasing power of one unit of currency can vary over time. Finance is subdivided in to three different areas: Personal Finance, Corporate Finance and Public Finance.

11- Personal Finance – Personal finance is about planning a secure financial future of individuals while it deals with protecting someone against unforeseen events and securing one’s inheritance. It involves understanding a person’s financial position and personal resources available for him considering his net worth, that is, all assets that are under the control of an individual person minus all liabilities. Personal finance also deals with tax planning, retirement planning and estate planning which involves planning for the disposition of one’s assets after death.

12-Corpoarate Finance – Corporate Finance is the field of finance that deals with the capital structure and the sources of funding of companies. It’s primarily concerned with increasing the value of the firm on the basis of both long-term and short term financial planning while it necessitates employing tools and analysis to allocate financial resources by maintaining balance between risk and profitability of a business entity. Corporate Finance generally includes three areas of capital resource allocation. The first area is related to capital budgeting that involves business valuation techniques and financial modeling etc. The second area includes making investments and It’s about what to invest and how much and when to invest. The third area deals with making dividend policies. Since corporate finance needs to deal with short term issues, it involves working capital management and short term financing. Working capital –WC is a financial metric representing operating liquidity and one of the objectives of corporate finance is to ensure that an organization continues with its operations and meets its obligations when they fall due; it deals with effective working capital management which involves managing current assets and current liabilities.

13-Public Finance – Public fiancé is the branch of economics that’s concerned with how government raises money and how it’s spent including its effects on economy and society. It’s related to countries, states or provinces. It’s about budgeting process and the identification of necessary expenditures and revenue of public sector involving effective allocation of resources.

14-Liquidity management – It’s the process that helps business managers ensure about sufficient cash is available for the operations of a business firm.

15-Wealth Maximization – Achieving the highest level of profits at given level of risk. It’s a process that involves making sound financial investment decisions and increases the current value of business or shareholders capital by taking the risk factors in to consideration.

16-Profit maximization – It’s the ability of a company or its financial management to achieve maximum profit with low operating expenses.

17-Long term debt – Borrowing over a long period of time or exceeding 12 months from the date of balance sheet. Usually, It’s done through bank loans or the sale of bonds. (Any debt for more than 12 one year is considered as long term debt)

18-Merger – It’s a voluntary amalgamation of two firms on roughly equal terms in to new legal entity. It’s the joining together two or more companies or organizations. If the merged entities are competitors, it’s called horizontal integration. If they are supplier or customer for each other, it’s called as vertical integration.

19-Acquisition – In general terms, it means the act of acquiring something. When relating to business, it’s a corporate action in which a company buys most of the target company’s ownership stakes. It involves taking custody of records, taking possession of an asset by purchase or taking control of a firm by purchasing 51 percent of more its voting shares.

20- Maximum return – Attaining the highest possible profit

21- Net Profit Margin – It involves dividing net profit after taxes by sales. It’s expressed as percentage of revenue. It’s also called as net margin: Net income x 100 / Total revenues.

22-Payback period – The amount of time required to recover the initial investment or loan

23- External sources of funds –  These includes current debts, long term borrowing, preferred stocks and common stock

24- Conservative approach  – It refers to a method of financing in which long term loans and equity are used to finance fixed assets while the minimum level of current assets is used.

 25-Net realizable value of accounts receivable – The total accounts receivable minus the allowance for uncollectable accounts- bad debts. It’s also called the book value of accounts receivable.

Written by:
K. A. Fareed (Fareed Siddiqui)
Writer, Trainer, Author, Blogger, Software Developer
BBA, MBA-Finance, MPhil-Financial Management, (PhD-Management)
MA-English, MPhil-English
Post Graduate Diploma in Computer Applications and Programming
Certificate course in English language proficiency
Level 1 – Leadership and Management ILM – UK
Pursuing CMA-USA
Individual Member of Institute of Management Consultants of India