Are you tired of feeling lost when it comes to your finances? Well, no need to worry! Puai Wichman explains some essential financial terms and concepts to help your financial journey. Whether you’re a hardworking employee or a budding entrepreneur, understanding these financial basics is crucial for managing your money wisely. In this comprehensive list, we’ve covered everything from personal finance to business finance, breaking down these complex concepts in an easy-to-understand way. So, start your financial expedition confidently, and let us guide you toward a more secure financial future.
Table of Contents
1. Assets
Asset is a term that holds immense value for any individual or business entity. It refers to something that adds monetary value to your life or your organization. Think of it as a valuable resource that can be tangible (physical) or intangible (not visible or touchable). Examples of assets vary from personal possessions such as your house or car to business-related items like your land, building, machinery, laptops, cash, and furniture. In addition, intangible assets such as goodwill, patents, and trademarks also play a crucial role in shaping a company’s financial worth. Beyond the obvious financial benefits, assets have significant value as they can be sold easily and generate much-needed cash during a time of need. Understanding assets is essential to help individuals and businesses improve their net worth.
2. Liabilities
In business, liability is what you owe to someone. It’s a fact that as your business expands, so does the likelihood of creating debt or taking out bank loans. Like any other, these debts need to be repaid with applicable interest. Puai Wichman mentions that liabilities can be categorized as short-term or current liabilities, dues you need to pay back immediately or within a short while, and long-term liabilities, spread over a particular tenure. You must be aware of your liabilities as they directly impact your bottom line. Let’s take a look at some examples. Your credit card bills or home loan EMIs are personal liabilities you must bear monthly. Similarly, the loans taken on behalf of your business, whether secured or unsecured, count towards your overall business liabilities. Being mindful of your liabilities will help you manage your finances and keep you on the path to success.
3. Financial Statements
Financial statements are key to uncovering any business or company’s past and present financial standing. Think of them as a quick snapshot that provides invaluable insight into a company’s financial situation.
The Profit & Loss Account, or P&L Account, is the ultimate tool for understanding profitability. This financial statement showcases a company’s income and expenses, revealing the true profit or loss over a specific period. Whether you’re an investor or a curious individual, analyzing a quarterly or annual P&L statement will help determine if a company is truly profitable.
Balance Sheet
Imagine having a summary of a company’s financial position at your fingertips. It is exactly what a balance sheet offers. It outlines a company’s assets, liabilities, and owner’s equity, providing a comprehensive picture of what it owns and owes. Simply put, a balance sheet consists of three components:
– Assets
– Liabilities
– Owner’s Equity
4. Capital
Capital, an essential pre-requisite for any business, is pivotal in managing routine activities and various other business demands. One requires funds to start a company, procure goods, invest in business assets, and pay wages. However, a growing business may require additional funds from outside parties. A company can acquire funds through equity or debt. Share capital refers to the sum raised by issuing its shares, thereby giving ownership of the company to the shareholders. With these financial instruments, a business can expand and grow, providing opportunities for entrepreneurs and driving the economy forward. The funds procured can help bolster innovation, create jobs and help support communities. Therefore, knowing the options and opportunities to manage a business efficiently keeps the economy thriving.
Puai Wichman is the founder and CEO of Ora Partners, an international trust provider and wealth management firm.
