For non-finance professionals, the thought of talking data, forecasts, and valuations can seem daunting. But developing your financial skills so that you have financial fluency can help you excel professionally and make a greater impact on your company.
Finance affects every business function. It’s what determines the number of employees you can hire, and dictates your annual budget. It’s what helps you balance short-term expenses with long-term goals, and meaningfully measure your team’s performance. Quite frankly, it’s what keeps your company afloat; an organization can’t operate successfully if it’s not financially sound.
To learn more about why you should further your financial knowledge if you're in a non-finance role, watch the video below featuring Harvard Business School Professor V.G. Narayanan, who teaches the online course Financial Accounting:
Understanding the financial implications of your decisions and clearly communicating those decisions to key stakeholders can help advance your career. But first, you need to grasp the terminology. Here are 20 financial terms and definitions you should know.
1. Amortization: Amortization is a method of spreading an intangible asset's cost over the course of its useful life. Intangible assets are non-physical assets that are essential to a company, such as a trademark, patent, copyright, or franchise agreement.
2. Assets: Assets are items you own that can provide future benefit to your business, such as cash, inventory, real estate, office equipment, or accounts receivable, which are payments due to a company by its customers. There are different types of assets, including:
3. Asset Allocation: Asset allocation refers to how you choose to spread your money across different investment types, also known as asset classes. These include:
4. Balance Sheet: A balance sheet is an important financial statement that communicates an organization’s worth, or “book value.” The balance sheet includes a tally of the organization’s assets, liabilities, and shareholders’ equity for a given reporting period.
5. Capital Gain: A capital gain is an increase in the value of an asset or investment above the price you initially paid for it. If you sell the asset for less than the original purchase price, that would be considered a capital loss.
6. Capital Market: This is a market where buyers and sellers engage in the trade of financial assets, including stocks and bonds. Capital markets feature several participants, including:
7. Cash Flow: Cash flow refers to the net balance of cash moving in and out of a business at a specific point in time. Cash flow is commonly broken into three categories, including:
8. Cash Flow Statement: A cash flow statement is a financial statement prepared to provide a detailed analysis of what happened to a company’s cash during a given period of time. This document shows how the business generated and spent its cash by including an overview of cash flows from operating, investing, and financing activities during the reporting period.
9. Compound Interest: This refers to “interest on interest.” Rather, when you’re investing or saving, compound interest is earned on the amount you deposited, plus any interest you’ve accumulated over time. While it can grow your savings, it can also increase your debt; compound interest is charged on the initial amount you were loaned, as well as the expenses added to your outstanding balance over time.
10. Depreciation: Depreciation represents the decrease in an asset’s value. It’s a term commonly used in accounting and shows how much of an asset’s value a business has used over a period of time.
11. EBITDA: An acronym standing for Earnings Before Interest, Taxes, Depreciation, and Amortization, EBITDA is a commonly used measure of a company’s ability to generate cash flow. To get EBITDA, you would add net profit, interest, taxes, depreciation, and amortization together.
12. Equity: Equity, often called shareholders’ equity or owners’ equity on a balance sheet, represents the amount of money that belongs to the owners of a business after all assets and liabilities have been accounted for. Using the accounting equation, shareholder’s equity can be found by subtracting total liabilities from total assets.
13. Income Statement: An income statement is a financial statement that summarizes a business’s income and expenses during a given period of time. An income statement is also sometimes referred to as a profit and loss (P&L) statement.
14. Liabilities: The opposite of assets, liabilities are what you owe other parties, such as bank debt, wages, and money due to suppliers, also known as accounts payable. There are different types of liabilities, including:
15. Liquidity: Liquidity describes how quickly your assets can be converted into cash. Because of that, cash is the most liquid asset. The least liquid assets are items like real estate or land, because they can take weeks or months to sell.
16. Net Worth: You can calculate net worth by subtracting what you own, your assets, with what you owe, your liabilities. The remaining number can help you determine the overall state of your financial health.
17. Profit Margin: Profit margin is a measure of profitability that’s calculated by dividing the net income by revenue or the net profit by sales. Companies often analyze two types of profit margins:
18. Return on Investment (ROI): Return on Investment is a simple calculation used to determine the expected return of a project or activity in comparison to the cost of the investment, typically shown as a percentage. This measure is often used to evaluate whether a project will be worthwhile for a business to pursue. ROI is calculated using the following equation: ROI = [(Income - Cost) / Cost] * 100
19. Valuation: Valuation is the process of determining the current worth of an asset, company, or liability. There are a variety of ways you can value a business, but regularly repeating the process is helpful, because you’re then ready if ever faced with an opportunity to merge or sell your company, or are trying to seek funding from outside investors.
20. Working Capital: Also known as net working capital, this is the difference between a company’s current assets and current liabilities. Working capital—the money available for daily operations—can help determine an organization’s operational efficiency and short-term financial health.
By mastering these basic finance terms, you can not only gain a more holistic view of your business, but also analyze the performance of your specific team and understand the value and impact of your work on the company.
Are you interested in furthering your financial fluency? Explore our Leading with Finance and our other online finance and accounting courses to gain the skills and confidence needed to make and convey better financial decisions. To get a jumpstart, download our free Financial Terms Cheat Sheet.
This post was updated on September 17, 2021. It was originally published on October 11, 2018.
Lauren Landry is the director of marketing and communications for Harvard Business School Online. Prior to joining HBS Online, she worked at Northeastern University and BostInno, where she wrote nearly 3,500 articles covering early-stage tech and education—including the very launch of HBS Online. When she's not at HBS Online, you might find her teaching a course on digital media at Emerson College, chugging coffee, or telling anyone who's willing to listen terribly corny jokes.
