Standard Chartered Bank
Have you ever felt that the world of finance is a little bit daunting? If you didn’t take economics or accounting in school, phrases like balance sheets, cashflow and liabilities may sound like a different language and probably don’t mean too much to you.
Don’t feel bad, while most of us aren’t as financially savvy as we’d like to be, it would be good to understand some key terms that may help you better understand the financial world and your money.
There are two main types of assets that we should know about. These are current assets and fixed assets. Current assets are also called short-term assets and are usually in the form of cash or will be turning into cash within the next year. These would include money you have in your bank account.
On the other hand, fixed assets are assets which are long term (greater than a year) and would not easily turn into cash. Fixed assets would include things you might own such as your car, home or company equipment.
ACCRUAL AND CURRENT LIABILITIES
Liabilities is the term for any amount that a business or an individual owes. Accrued liabilities are amounts owed but not yet paid. Current liabilities is the term to describe debts that are required to be paid immediately or must be made good within the next 12 months. To put it into context, a current liability that you may need to pay immediately would be an overdraft and a current liability which needs to be paid within the next 12 months might be monthly installments for a loan.
For those who are new to accounting, a balance sheet is a record of where a business is financially. It shows us where money has come from to finance a business (the source) and how the business has used the money (the use) at a given point in time. Think of it like your personal bank statement that shows your source of money and how you have used it, which will then indicate if you are in credit or in debt. As the name suggests, balance sheets should show a balance between the source and the use.
Cashflow is basically a measure of a business’s financial health or in other words, the business’s ability to pay for things. This is sometimes called working capital. Cashflow can be measured on the balance sheet of a company by looking at the relationship between current assets and current liabilities. If we were to place this in a personal context, it is the monthly relationship you would have with your net income and your monthly out-goings. As a general business rule, you would generally be in better financial health and have better cash flow when you have more current assets to current liabilities. For example, cashflow would be considered tight if you earned a monthly income of BND2,500 but had to cover a fixed monthly outgoing of BND2,200.
This is a word to describe the situation when prices of items persistently go up. It is important to understand how inflation affects you because the effects of increased prices cause your money to lose purchasing power. To put simply, if 10 years ago, you could buy yourself a decent meal and a drink for just BND2, that same BND2 might only just be enough to buy you a bottle of water today. With inflation, the general cost of living goes up and maintaining the same basic wealth as you had 10 years ago can become a challenging feat making it all the more important to spend your money wisely.
DEBT SERVICE RATIO
This is a measurement of how much of your income is spent on servicing loans. The general rule is that the lower the ratio the better it is, as it indicates that your commitments are not too great, and you are not using a high portion of your income to service debt. This is a simple way to track how healthy you are in terms of your financials.
Solvency is a measurement of your financial liquidity. Financial liquidity means that you have ample cash, or you can sell your assets when you need cash. The formula is fairly easy; you take your net worth (assets minus liabilities) over your total assets. The higher the ratio the better it is as it shows that you have higher assets with less liabilities. When the measurement goes below 50 per cent, it’s time to relook into your liabilities and take some corrective measures.
Another tip to help you get in tune with financial jargon would be to sign up for investment and business seminars. Major banks like Standard Chartered continuously offer business seminars and financial talks to customers or the general public for free. Through these events, you can gain useful tips from managing your wealth to understanding current market trends. Seminars also provide a great opportunity for you to expand your network by meeting different people who may have different ideas they can share with you. By incorporating more business talk into your life, you will soon come to realise that the jargon you once thought were so daunting has become a language you can now comprehend.
This article is for general information purposes only and while the information in it is believed to be reliable, it has not been independently verified by us. You are advised to exercise your own independent judgement with the contents in this article and seek the advice of your professional advisors if necessary.