20 Important Financial Terms for Every Professional to Know
By Indeed Editorial Team
Published 4 May 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
The finance industry uses several terms that can be unfamiliar to people outside the sector. Financial terms are any terms that originated in the finance industry. As most people manage and make decisions about money, many of these terms get used outside the finance sector, so it's important to understand them. In this article, we explain why knowing financial language matters and list the meaning of 20 important finance terms.
Why knowing financial terms matters?
Here are some of the reasons that knowing financial terms and their meanings matter:
They can help you make financial decisions
You may see or hear finance terms when you're following news, renting or purchasing property, applying for a loan or credit card or planning for retirement. Understanding what these terms mean can help you make the right decisions for your circumstances. Knowing finance terms can also help you make financial decisions on behalf of other people, such as clients and your loved ones.
They can help you discuss financial topics
You may talk about financial topics with members of the finance department, managers and investors. Understanding common finance terms helps you speak confidently and contribute meaningfully to these discussions. Your understanding helps you form opinions and have your point of view considered. Knowing these terms also helps you understand economic news and trends, so you can contribute to talks on these topics.
They can help you advance in your career
Many people use finance terms in their careers every day. If you want a career in finance, accounting or sales, a basic understanding of financial terms can help you secure qualifications and your first job. Understanding financial words and phrases can also help you advance to a management position or start running your own business.
20 important finance terms
Here are 20 important finance terms and their meanings:
A loan is a financial agreement that a person or business has with a lender. The entity taking out the loan borrows money and promises to pay it back in small amounts, called instalments, over a set period of time, called the loan term. They pay the amount of the loan plus interest.
Interest is payment for use of money over time. Lenders charge interest to make lending money worthwhile. Interest is usually a percentage of the amount borrowed. For example, a $10,000 loan with a 10% interest rate costs $1,000 in interest in the loan's first year. A fixed interest rate stays the same for an agreed period. Variable interest rates change according to market conditions. Interest rates vary between products, with high-risk loans incurring higher interest rates. Some products, such as credit cards, have interest-free periods. People who pay their credit cards off within the interest-free period pay no interest.
3. Credit rating
A credit rating is an assessment of how well a person or business may manage credit. Lenders determine an applicant's credit rating by assessing their borrowing and repayment history. They access this history in credit reports held by a credit reporting agency. After evaluating the credit history and credit rating, lenders decide whether to give the applicant credit and the most appropriate credit limit and interest rate.
An asset is any item that has value or benefit. Assets may generate revenue or interest for the entity that owns them. Assets may be tangible, such as real estate and cars. They can also be intangible, like a business's brand name. Businesses list their assets on balance sheets.
Collateral is an asset that a borrower uses to secure a loan from a lender. If the borrower defaults on the loan, the lender may seize the asset and sell it to recoup their costs. Real estate is a common asset used for collateral. For example, an entrepreneur may put their house up as collateral when applying for a business loan. If the entrepreneur defaults on the loan, the lender can acquire the house. Collateral is sometimes called security.
A liability is a debt or an amount owed. Bank loans, credit card debts and accounts payable are common liabilities. A liability is the opposite of an asset. As with assets, businesses also list their liabilities on their balance sheets.
Capital is the total value of a person or business's finances. You can calculate capital by adding up the value of all assets and subtracting the value of all liabilities. Capital is sometimes called net worth.
8. Capital gain
A capital gain is the amount of value an asset gains above its purchase price over time. Capital gains become realised when the owner sells the assets for a profit. When calculating capital gains, buying costs get factored into the initial purchase price and selling costs get deducted from the selling price.
9. Balance sheet
A balance sheet is a report of a business's financial standing on a particular date. They show business assets, liabilities and capital. Businesses often create balance sheets at the end of the financial year or the end of financial quarters so they can assess their progress.
10. Profit and loss statement
A profit and loss statement is another important financial report for businesses. These reports list all sales and expenses during a set period. Businesses can use their profit and loss statements to calculate their gross and net profits. A profit and loss statement is sometimes called an income statement.
11. Cash flow statement
A cash flow statement is the third key business financial document. This document shows a business's cash flow or how money moves into and out of the business, during a set period. Together the balance sheet, cash flow statement and profit and loss statement form a business's financial statement.
A budget is a financial plan that determines personal or business spending for a set period. Budget can also mean allowing for spending in a particular area. For example, you may budget for a new coffee machine. Creating a budget involves assessing income, goals, assets and liabilities. Sticking to a budget helps entities make sound financial decisions that achieve their goals.
13. Accounts receivable
Accounts receivable is money that customers or clients owe a business in exchange for products or services. Businesses provide invoices that show customers and clients how much they owe. They list the value of unpaid invoices as assets under accounts receivable on their balance sheets.
14. Accounts payable
Accounts payable is the money a business owes others for the goods and services they received. Businesses may have invoices for accounts payable or buy the goods and services on credit. They display their accounts payable as short-term debts or liabilities on their balance sheets.
15. Balance transfer
A balance transfer is the movement of a debt from one account to another. Someone may do a balance transfer to consolidate their credit card debt onto a single card. They might also perform a balance transfer to take advantage of better interest rates, payment terms or an interest-free period.
16. BSB number
A BSB number is a six-digit number that identifies a bank or financial institution. It's short for bank state branch number. Some large banks have different BSB numbers for different branches. Some smaller banks and building societies have a single BSB number for all branches. If you want to transfer money to another person or business, you use their account number and BSB number.
A business is solvent when it can pay its bills on time. Solvent businesses have positive cash flow and are likely to succeed. The opposite of solvent is insolvent. An insolvent business may stop trading and sell its assets.
Liquidation is the process of terminating an insolvent business. The court appoints an administrator to oversee the liquidation. The administrator ensures the business stops trading, sells its assets and uses the funds to repay creditors and shareholders.
Stocks are shares in a company. Companies may sell their stocks to pay debts, raise money for expansion and grow the business. They may also give employees stocks through employee share programs to increase their loyalty. People and businesses with stocks own a percentage of the companies they invest in. They receive a share of each company's profits, called dividends, while they keep the stock. Dividends fluctuate with the company's performance. Investors may also sell their stocks for a profit. Stocks are sometimes called equities.
Bonds are medium- to long-term investments issued by companies and governments. Investors receive a regular, fixed interest amount until the bond matures. When the bond matures, the issuer repays the initial investment in full.
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