Financial term

Description

What it tell us

Profit

The amount of money a business earns after subtracting all its expenses from its revenue.

 Profit = Revenue – Expenses

Indicates how well the business is managing its revenues and expenses.

Loss

The opposite of profit, loss occurs when a business’s expenses exceed its revenue.

Indicates that the business is spending more than it earns. Sustained losses can signal operational inefficiencies or issues with cost control, pricing, or revenue generation

Revenue

The total income a business generates from selling goods or services before any expenses are deducted. Also known as sales or turnover.

Shows how much income the business is generating from its core operations (sales of products or services).

Expenses

The costs incurred by a business in order to generate revenue.

Types of Cost: depending on how they change with changes in activity. 

Fixed Costs: Costs that remain constant regardless of production levels (e.g., rent salaries).

Variable Costs: Costs that fluctuate based on production or sales levels more production=more cost  (e.g., raw materials, sales commissions).

Direct Costs: Expenses that are directly attributable to producing a specific product or service; depending on their nature, they may behave as either fixed or variable costs.(e.g raw material,salary)

Indirect Costs: Expenses that cannot be directly traced to a specific product or service but support overall operations; these costs may also behave as either fixed or variable.(e.g rent,utility)

Reveal where the business is spending its money. Understanding fixed, variable, and mixed costs helps control spending and improve profit margins.

Assets

Assets are resources owned by a business that have economic value and can provide future benefits. They are categorized as:

Assets=Liabilities + Equity

Current Assets: Cash or other assets that can be converted to cash within a year (e.g., cash, accounts receivable, inventory).

Fixed Assets: Long-term assets that are used in the business and not intended for sale (e.g., machinery, buildings, land).

Intangible Assets: Non-physical assets such as patents, trademarks, or goodwill.

Assets show the resources a business owns that have economic value and can be used to generate future revenue.

Liabilities

Liabilities represent what a business owes to others, such as debts or obligations.

Liabilities indicate the financial obligations a business has to creditors, suppliers, or lenders. High liabilities can strain the business’s cash flow and reduce financial flexibility

Equity

The ownership value in a business after all liabilities is subtracted from its assets. It’s essentially what the owners or shareholders “own” in the company.

Equity=Assets−Liabilities

Equity represents the owner’s interest in the business. It shows how much of the company is financed by the owners versus creditors. Growing equity indicates that the business is building value for its shareholders.

Cash Flow

The movement of money into and out of a business.

Cash flow reflects the liquidity and operational health of the business. Positive cash flow ensures that the business can meet its financial obligations, while negative cash flow may indicate a need for better cash management or financing.

Liquidity

Liquidity measures a company’s ability to meet its short-term obligations using its current assets

Using Current Ratio=Current Assets​/current liability

Quick Ratio= Current Assets−Inventory​/current liability

Liquidity measures how easily the business can meet its short-term obligations with its available assets. Higher liquidity means the business has enough resources to pay its bills and handle unexpected expenses.