Financial terms you simply must know and understand

financial terms
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Not every entrepreneur is a financial guru, and many financial duties can be delegated to the right employee or be outsourced. But here’s the thing though: As a business owner there are certain financial terms, duties and responsibilities that you simply must know and understand if you want to run a professional and successful operation.

Debtors and Creditors

As basic as it is, two financial terms that often confuse people are Debtors and Creditors, otherwise known as Clients and Suppliers.

Debtors are clients who owe you – they are in debt to your company until they pay your invoice in full. Creditors are your suppliers – they give you credit until you pay their invoice in full. It is in your own best interest to manage your Debtors Book effectively and efficiently. Failure to do so usually impacts on your cash flow. Part of your monthly Management Reports should consist of an Aging Analysis. This shows how much you are owed in total, by which clients and how long they have owed you this money. Allowing clients to owe you longer than 30 days is not a good idea!

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You also need to keep a very close eye on your Creditors Book. Unless you have negotiated otherwise, your suppliers should be paid as soon as possible.

Not paying your suppliers on time may result in consequences, such as penalties, interest or even your business being liquidated.

Accounting records

Accounting records and balances have to be retained for at least 15 years from the date of the last entry. If SARS wants to look at something that happened 10 years (or even further back) and you no longer have the proof and/or documentation, there will be consequences in the form of penalties and interest. So be sure to have proper Archive Procedures in place and ensure you know what the time period is required for documentation to be retained. (For a comprehensive list of documentation retention periods, email nikki@viljoenconsulting.co.za.)

Asset Register

An Asset Register is a list of all the business equipment and belongings that has been purchased, such as (but not limited to) office furniture, computers, printers, etc. Basically everything you need to operationally run your
business.

The list should be used by your short term insurance company to ensure that you are properly insured. It is also required by your accountant in order for them to calculate your depreciation, which impacts your Company Tax. Some of these assets will depreciate more quickly than others and values needs to be adjusted every year. For example your office furniture will depreciate faster than you company vehicle.

Current Assets vs Fixed Assets

Current Assets may include your stock on-hand, cash and accounts receivable. Examples of fixed assets are buildings, manufacturing equipment, fixtures, and vehicles.

Tangible Assets vs Intangible Assets

Tangible Assets are physical and have various sub-classes that include both Current and Fixed Assets.

Intangible Assets are non-physical and can be divided into two categories, namely goodwill, and intellectual property such as copyrights, patents, trademarks, trade names, and customer lists.

Short Term Liability vs Long Term Liability

Liabilities are obligations that you have incurred and they carry a responsibility. Short Term Liabilities are usually payable within one fiscal year, e.g. stock that you have purchased and that payment is due and payable within 90 days.
Long Term would be items that are payable over a longer period of time, such as a building or vehicles.

Accounting equations

The ‘basic accounting equation’ is the foundation for the double entry bookkeeping system. For each transaction, the total debits must equal the total credits or the other way around, as long as they balance in total. So you can have one debit and twenty credits as long as the total value of the credits is equal to the total value of the debits.

Basic category groups in bookkeeping

There are seven basic category groups in bookkeeping. All entries in bookkeeping belong in one of these groups. They are:
1. Assets
2. Liabilities
3. Bonus Equity
4. Revenue
5. Expenses
6. Profits
7. Losses.

Accounting transaction

Accounting transactions are the components of a system that keeps track of the money. In accounting, all money that enters and exits a company must be recorded. This is why Auditors are often heard to say “follow the money”, when they find discrepancies that may or may not be fraudulent.

Source document

A source document is the physical bill that you need to pay. It also tells you the amount to be paid.

Expenses

Examples of expenses are (but not limited to) salaries, advertising and marketing, rental, fuel, office refreshments, accounting fees, etc.

Income

A few types of income are (but not limited to), sales, interest, shareholding dividends.

Financial Statements

The four basic Financial Statements are:
1. Balance Sheet
2. Income Statement
3. Statement of retained earnings.
4. Statement of cash flow.

Financial Statements provide an overview of the business’s financial condition in both the short term and the long term.

Financial period

The financial period is the time period for which the financial statements are prepared. In the usual course of business and as a legal requirement in terms of the New Company’s Act, this is one financial year, but it can be for a month, a quarter, semi-annual, etc.

Trial balance

The trial balance is a worksheet that lists the balance as at a certain date of each ledger account in two columns, namely debits and credits, and it must balance in total. It is used to detect errors, such as (but not limited to):
• Error of entry
• Error of omission
• Error of reversal
• Error of commission
• Error of principal and
• Compensating errors

Income Statement

Income statements are used to determine the past performance of the business, to predict the future performance of the business and also to assess the capability of generating future cash flows.

Calculating profit

In accounting, net profit is equal to the gross profit minus overheads, minus interest payable for a given time period.

Calculating Gross Profit

In accounting, gross profit (or sales profit) is the difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll taxation and interest payments.

Working capital

Working capital is a financial metric which represents operating liquidity available to a business. Net working capital is calculated as current assets minus current liabilities.

These are just some of the financial terms that you should know, but there are obviously a great many more that are used on a daily basis, mainly by bookkeepers and certainly by Accountants and Auditors. If you want to increase your understanding and comprehension of these documents, it is well worth attending some sort of Financial Literacy program.


Nikki ViljoenNikki is an Internal Auditor and Business Administration Specialist. Contact her on 083 702 8849, email: nikki@viljoenconsulting.co.za or viljoenconsulting.co.za for any policies and procedures that you may require.


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