Financial Management Terminology


Financial management has its own language and you need to understand what the terms mean in plain English before you can get down to business.

Some common terms include:

Profit and loss (P&L) statement: This is a report of your income and expenditure for a specific period of time, e.g. a month, a quarter, a year.

Balance sheet: The balance sheet is the total picture of a company’s worth at a given point in time, e.g. 30 June. It lists the value of all assets and liabilities.

Cash flow projection: This is a forecast of when a company expects to receive funds or cash and when payments need to be made. Projections are done for a period of time, generally a month. The aim of doing a cash flow projection is to make sure you have enough money to pay all expenses when they fall due.

Budget: A budget is a financial planning tool. It is a list of anticipated income and expenditure over a period of time, usually a year. Budgets may predict a surplus (income exceeds expenditure) or a deficit (expenditure exceeds income).

A cash budget tracks when income and expenditure can be expected during the period covered by the operating budget. It amounts to a series of monthly cash flow projections.

Income: Monies received or expected to be received (i.e. invoiced).

Expenditure: Monies spent or bills received.

Assets: A physical asset is anything that a person or business owns, e.g. car, furniture, building, equipment.

Current assets (or Liquid Assets) are those that a business could expect to realise in cash, sell or consume during the current year, e.g. cash, short-term investments.

Non current assets (Non Liquid Assets) are ‘long-term’ assets such as property and equipment.

Intangible assets are not physical in nature, e.g. copyright, intellectual property.

Owners Equity: The net worth of the business. All Assets less all Liabilites equals net worth.

Liabilities: Loans or expenses that a person or company has committed to and must pay for.

Capital: Money and property that a person or company uses to transact business.

Reserves: Funds that have been set aside for special purposes or to cover contingencies.

Debtors: People who owe you money.

Creditors: People you owe money to.

Depreciation: An amount which represents a decrease in the value of an item over time due to wear and tear - usually expressed as a percentage amount each year.

Cash accounting: With cash accounting, you record entries according to the date you paid someone or someone paid you. So if you invoice someone, you record the date you receive the money, rather than the date you sent the invoice. At its simplest, cash accounting uses the receipt book and bank deposit details to track income and the chequebook to track expenditure.

Cash accounting is the simplest form of book-keeping and very small stations may find it adequate. If your station operates largely on shortterm transactions and you don’t have long-term debts or commitments, cash accounting will work as long as the station stays small. If you start growing, you will need to switch to accrual accounting.

Accrual accounting: In accrual accounting, revenue is recognised when it is earned rather than when it is received, and expenses are recognised when they are incurred, rather than when they are paid. So if you buy an item using your credit card, record the date you bought the item, rather than the date you paid your credit card bill. Similarly your income is recorded when an invoice is raised by your station, not when it is paid. Accrual accounting is generally preferable because it gives a better idea of your station’s overall medium-term financial status.

Account ageing: Refers to tracking payments due to you, or payments that you need to make. The days are tracked from the date you sent out an invoice, or the date you received an invoice.