Essential Business Finance Definitions
Key Financial Terms Defined
Treasury Plan
A monthly record tracking money inflows (receipts) and outflows (payments). At the end of each month, it helps determine if there is a cash surplus or if additional funds are needed to meet payment obligations.
Liquidity
The amount of readily available cash or assets that can be quickly converted to cash.
Solvency
The ability of a company to meet its long-term financial obligations and debts.
Security Deposit Example
When renting a property, a landlord typically requires a security deposit (e.g., equivalent to two months’ rent). This deposit is usually returned when the contract terminates, provided no significant damage has occurred to the property.
Bank Account
An account held at a bank allowing deposits and withdrawals at any time and as frequently as needed. The term “current account” is often used because money flows steadily and freely through it.
Debt
From the company’s perspective, debt arises from purchasing goods or services, incurring expenses, or receiving loans, creating an obligation for future payment.
Interest
The cost paid for using borrowed funds or assets owned by others. It represents the payment for the use of money.
Financial Costs
Expenses incurred by a company to obtain funding or manage financial resources.
Investment
Refers to the purchase of fixed assets intended for long-term use, such as machinery, tools, equipment, furniture, computers, vehicles, etc.
Rent
Amounts paid for the use (renting) of movable property or real estate.
Purchase of Goods
The value of goods acquired by the company intended for resale without undergoing a transformation process.
Purchase of Raw Materials
The value of materials purchased for use in product development or manufacturing.
Purchase Discounts
Reductions in price offered by suppliers to the company for early or cash payment of invoices (also known as early payment discounts).
Sales Discounts
Reductions in price offered *to* customers for prompt or cash payment of their invoices (also known as prompt payment discounts).
Packaging (Transport)
Materials used to protect products during transportation.
Packaging (Product)
Containers holding the product that is sold to the customer.
Acquisition Costs
Costs associated with acquiring assets or setting up operations. These can often be amortized over several years (e.g., the first five years) or treated as expenses. They typically include:
- Costs of incorporation
- Start-up expenses
Taxes
Amounts paid to local, regional, or state authorities. This generally excludes corporate income tax and Value Added Tax (VAT), which are often accounted for separately.
Interest and Fees on Discounted Bills
Costs incurred for discounting bills of exchange, such as interest, fees, and charges paid to receive payment earlier than the due date.
Interest on Bank Account
Interest earned from the bank for maintaining funds in a deposit account.
Other Financial Costs
Miscellaneous financial expenses, such as costs for managing collateral, bank transfer fees, etc.
Advertising
Expenses incurred for promoting the company’s products or services.
Repairs
Costs associated with maintaining fixed assets in good working condition.
Salaries
Fixed payments or wages paid to company personnel.
Social Security Contributions
Mandatory payments made by the company to social security agencies on behalf of its employees.
Insurance
Amounts paid (premiums) to insurance companies for risk coverage.
Independent Professional Services
Fees paid for services rendered by external professionals such as lawyers, economists, auditors, and notaries.
Grants
Non-repayable funds received directly from government bodies, public entities, or private organizations.
Supplies (Utilities)
Payments made for essential services like water, electricity, telephone, internet, etc.
Transport Costs
Expenses related to the transportation of goods, whether purchased (inbound logistics) or sold (outbound logistics).
Planned Sales
The projected or actual total value of sales expected to occur or achieved during a specific period, such as a year.