Glossary of finance and business terms

Many successful business people are not necessarily these that have attended the best business schools.  We say this not out of a lack of experience but out of pure knowledge.  It is therefore very possible for such people to be unaware of basic business terms.  Here is a glossary of the finance and business terms that you should be aware of for the purposes of that important meeting.

Accrued interest

This is the accumulated coupon interest rate earned but not yet paid to the seller of a bond by the buyer unless the bond is in default.

Acid test ratio

This is a key measure of a business’ liquidity and is also called test ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.  It can also be described as the ability of a firm to meet its day to day expenses.

Asset

An asset is anything tangible and with a commercial value owned by a business.  Examples include receivables, equipment or goodwill.

Asset and Liability statements

In business terms, these are financial documents showing the status of Company’s assets and liabilities

Asset based financing

This is a method of financing where the lenders and equity investors look principally to the cash flow from a particular asset or set of assets for a return on, and the return of their financing.

Asset pricing model

This is a system that determines the required rate of return on a particular asset.  An example is the Capital Asset Pricing Model (CAPM).

Balance Sheet

This is the financial report that shows the status of the company’s assets, liabilities and owner’s equity.

Business Plan

This is a written document that will give an overview of your business.  A business plan includes a description of your company, your products and services, your target market, your sales and marketing strategy and off course, your management team.

Credit History

Record of how reliably and punctually a company or individual has paid off past loans advanced by previous lenders.

Credit rating

This is the official investigation of a company’s or individual’s history of repaying obligations performed by a credit agency.

Collateral

These are assets pledged as security against a loan and may be disposed incase of default. Common collateral is equity in your home, stocks or bonds you own, certificates of deposits etc.

Debt Financing

This is the raising of funds for a business by borrowing, often in the form of bank loans.

Debt Service

This is composed of cash payments covering interest and principal amount due on outstanding loans. Debt service is the amount of money you have to pay to the lending institution in order to cover for the money advanced

Due diligence

This is process undertaken by venture capitalists, investment bankers or others to thoroughly investigate a company before financing it.  It is required by law before securities are offered for sale.

Interest rate

This is the amount payable to the lender over and above the principal sum advanced to a borrower.  The charges will vary from lender to lender and will also be based on the risk rating given to a particular borrower.

Guarantee loan

This is a promise to take responsibility for payment of part or all of a debt if the person borrowing the money fails to pay off the loan.

Payback period

This is the length of time it takes to recover the initial cost of a project without regard to the time value of money. The concept of time value of money tries to explain why individuals prefer current cash to future cash.

References:

1. Glossary of Financial and Business Terms
2. Money Words You Need to Know from Idea Cafe
3. http://www.riskglossary.com
4. http://www.federalreserve.gov