Tool: Financial Literacy
A glossary of terms.
Summary reports that shows how an organisation has used the funds from donors, investors and lenders, and what is its current financial position. The three basic financial statements are the (1) balance sheet, which shows firm's assets, liabilities, and net worth on a stated date; (2) income statement (also called profit & loss account), which shows how the money is received and expended over a stated period, and (3) cash flow statement, which shows the inflows and outflows of cash as a result of the organisation’s activities during a stated period (often 12 months).
An income statement is a financial statement that shows an organisation’s financial performance over a specific accounting period, often monthly, quarterly or annually. The financial performance is assessed by the summary of money received (revenue) and expended (expenses). A profit is achieved when revenue exceeds expenses, and a loss incurred when revenue is less than expenses.
Total income for a particular period. Generated by sales of goods or services, grant funding and other revenue (eg bank interest received)
Operating Expenses (Opex)
Operating expenses include materials, labour and machinery used to make a product or deliver a service. An easy way to determine the operating expenses for a particular business is to think about the costs that are eliminated by shutting down production or provision of service for a period of time.
A cost or expense (such as for administration, insurance, rent, and utility charges) that relates to the organisation as a whole. These costs remain if production of goods or provision of service is shut down of a period of time. Overheads are indirect costs.
The amount remaining after total costs are deducted from total revenue. This is the basis on which provisional tax is calculated (not GST) and dividends paid out on. It is the best known measure of success in an organisation. Profit provides resources for investing in future operations.
Excess of expenditure over income. This loss is usually covered in the short-term by current assets eg cash in bank account. Continued losses over a prolonged period may result in the closure of an organisation.
A balance sheet is a financial statement that summarises a company's assets, liabilities and equity at a specific point in time. These three balance sheet items show investors or stakeholders what the organisation owns and owes, as well as the amount invested by shareholders.
The balance sheet adheres to the following formula:
Assets = Liabilities + Shareholders' Equity
An asset is a resource with economic value that an organisation owns and will provide a future benefit. Assets are reported on a company's balance sheet, and they are bought or created to increase the value of an organisation or benefit the operations. An asset can generate cash flow, reduce expenses, improve sales.
Current assets are short-term assets that can be converted into cash within a year. This includes cash, accounts receivable, inventory, and prepaid expenses.
Fixed assets are long-term resources which are harder to convert into cash. For example plant, equipment and buildings. These assets are depreciated (an adjustment for aging of fixed assets).
Financial assets are investments in the assets of other organisations. Financial assets include stocks, bonds, equity, and other securities.
Intangible assets are not physical assets. They include intellectual property such as patents, trademarks, copyrights and goodwill.
A liability is an organisation’s financial obligations as a result of its business operations. Liabilities are either current, to be paid in 12 months such as loans, accounts payable, tax, and long-term, to be repaid over the long term, such as mortgages.
Equity is equal to a firm's total assets minus its total liabilities and is one of the most common financial metrics used to determine the financial health of a company. Shareholders' equity represents the net value of a company, or the amount that would be returned to shareholders if all the company's assets were liquidated and all its debts repaid.
CapEx - Capital Expenditure
An amount spent to acquire or upgrade assets (such as buildings, machinery and equipment, vehicles) in order to increase the capacity or efficiency of an organisation for more than one accounting period.
Shows the timing of profit or loss over a 12 month period to predict the bank balance. Includes revenues, expenditure, current assets and liabilities and opening and closing bank balances. Lenders and potential investors closely examine the cash flow resulting from the operating activities.
Measuring the results of an organisation’s policies and operations in monetary terms. These results are reflected in the business’ return on investment, return on assets, value added, etc.
The status of the assets, liabilities, and owners' equity (and their interrelationships) of an organisation, as reflected in its financial statements.
ROE - Return on Equity
A measure of the company’s efficiency, how much profit is generated given the resources available. It shows how well the company used reinvested earnings to generate additional earnings. Traditional investors usually look for companies with returns on equity that are high and growing.
Total assets minus total liabilities, also called shareholder's equity or net worth or book value.
Current assets minus current liabilities. Working capital measures readily available assets a company has available to build its business. This can be a positive or negative number, depending on how much debt (liabilities) the company is carrying. Companies that have a lot of working capital can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. Also called net current assets or current capital.
An indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is. Current ratio is equal to current assets divided by current liabilities. If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current assets, then the company may have problems meeting its short-term obligations.
The annual rate of return on an investment, expressed as a percentage.
A taxable payment declared by a company's board of directors and given to its shareholders out of the company's equity or retained earnings. Dividends are usually given as cash (cash dividend). Companies are not required to pay dividends. The companies that offer dividends are most often companies that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they usually choose to pay them out to their shareholders.
One who owns shares of stock in a company. Ownership of shares gives a right to declared dividends and the right to vote on certain company matters, including the board of directors.
A mathematical model that includes variables and calculations that aim to predict an organisation’s financial performance of a business, project, investment or asset over a period of time, often years. Financial models can simulate the effect of specific variable or events so that a company can plan accordingly. It has the ability to quantify the financial impact of policies, and of restrictions or conditions imposed by investors and/or lenders.