When ordering capital to start or expand your business, it is important to understand the main financial sponsors and what use these terms really mean. We have included a brief summary of the financial terms to help you in your efforts:
Financial Statements: Used as a reference to the profit and loss statement (showing the income and expenditure and income or loss) and the Balance Sheet (reflecting the assets, liabilities and owner’s equity). Additional financial reports such as Cash Flow, Break Even Analysis, Sources and Uses of Working Capital and Financial Analysis Ratios also are often included.
Debt or equity capital: Describe what kind of capital you’re looking for. The debt is usually in the form of a loan, note, mortgage or other legal instrument. Equity is an ownership position in the business.
Rate of return (yield): The primary objective of investing their money or to get other people to make money is a return on capital. This number indicates the profit or interest lenders or investors will receive investment. Before approaching any source of funds, you should know what kind of performance you are looking for.
Cash Flow: This is the lifeblood of a company. Cash flow is the generation of funds available to pay the costs and returns for investors or lenders. Cash flow reflects the timing and amount of inflows and outflows of funds.
Working Capital: Generally, this figure represents the total assets will be converted into cash within a year, less the liabilities payable within one year.
Warranty: This property is accepted as a secondary source of repayment of a loan or other obligation.
Break even analysis: A method for assessing the benefits of the business risk of a potential disadvantage. The expenses must be separated into variable costs (ie labor, materials, commissions) and fixed costs (ie rent, utilities, salaries, insurance, etc.). With these costs and estimated earnings per unit can determine the quantity of product / service must be sold to cover costs. In this volume, the company incurs a gain or loss. The threshold analysis is an important tool to illustrate the effects of changes in prices of products, cost increases or a reduction in demand on the company’s profitability.
Margin: The difference between revenue and expenditure, commonly expressed as a percentage or dollar amount. Gross margin is the difference between total sales revenue and total cost of goods sold. Net margin is the difference between total revenues and all costs associated with production of goods, including the administration, taxes and other overheads.