Once in a while, I will write a short piece of some of the finance terms that are frequently used so that if you do not have much knowledge in the terminology, you start picking up a few things. If you are an auditor like me , who spent most of your working hours listening to embedded derivatives, swaps and journal entries, you might want to skip this post. But please share with your Lawyers, Doctor and mechanic friends , they could use a little knowledge. Thank you.
Let us dive into this:
1.Cash flow – if you are a smaller business owner and you are ever to seek funding from the bank, they are likely to ask you for cash flow projections. A cash flow is simply a summary of money coming in ( income) and your money going out ( expenses). The bank will than add the term projection as they do expect you to know how much money you expect to make and spend in the future.
2.Balance sheet-when you go seek for a home loan, the banker will normally ask you a list of question such as do you have any savings? any car loan? any flat etc? They are trying to establish how much you are worth. A balance sheet is made up of Asset and liability. An asset is something that you own that will bring you money and a liability is something that you have, which you do not own that in many instance you will have to pay for on a monthly basis. Ever wonder why people say cars are not asset?
3.Interest –This is the penalty you pay for asking the bank to give you money. But it can also be the little the bank gives you for allowing them to use your money to give to other people. It then becomes powerful when its compounded. Compounding is when your money start generating more money. You know the ripple effect of throwing a stone in a pond of water? Yes, just like the wave grow, the compound interest does the same thing.
4. Inflation- This is what I call an enemy of progress. Ever wonder why the fat cakes were 20 cent when we were in primary school and now its N$1? This is inflation. Simply put, that life is getting expensive as money does not have that much worth like it had when we were kids. My mother is still making her fat cakes.
Feeling a little smarter? Congratulations. Next time you speak to your banker trying to convince you to take out a particular product, ask them how much interest rate are they offering you?