Understanding cash flow jargon in simple business terms - part one

Have you ever received a financial statement and been completely lost? No matter what industry you operate it in, chances are there will be a group of words or jargon that are only relevant to the professionals operating in that particular field.

From an outside perspective trying to make sense of it all can be quite challenging.

In the finance and credit industry there are a number of terms and phrases thrown aroundwhich may fall under the category of being unfamiliar. So what does it all mean? Below is a glossary of common words you may come across when looking at your financial reports:

Cash: Cash will exclusively refer to the amount of money that is held in your business's bank accounts and will include items such as cheques and bank drafts which are exchangeable for cash. It is not uncommon for short term investments that are highly liquid in nature to be included in this category.

Current Assets: Your assets are the economic resources of your company. These will be items that will result in cash inflow or savings of cash outflow. Generally speaking your current assets are the assets owned by your business that are expected to be consumed within a single operating cycle, such as your accounts receivable, prepaid expenses, inventory and cash.

Current Liability: Liabilities represent the economic obligations of your company. Current liabilities are similar to current assets in that they require an action within the business's operating cycle. Examples of current liabilities are short term loans, employee wages and accounts payable.

Long term assets/Long term liabilities: Long term assets or liabilities are the business investments that will not mature or expire within a single business operating cycle. Examples of your long term assets are the property, plant and equipment owned by the business where as your long term liabilities could be made up of mortgages or long-term leases.

It's important to remember that although your mortgage falls under the category of a long-term liability, any expenses owed, such as interest payments, are short term and fall under your current liabilities.

Net Working Capital: Your networking capital refers to your current assets less your current liabilities and measures the amount of residual capital available in the operating cycle of your business. 

A positive working capital ratio will reflect the financial stability of your business, but it can be hard to determine how much working capital to invest when starting up.

Current Ratio: The current ratio of your business is an indicator of your business's ability to repay its debts as they fall due. A minimum ratio of 1 will indicate that the business holds enough currents assets required to meet its current obligations at least once.

It's hard to determine a good or bad ratio number because it will be different dependent on the industry you work in. But generally speaking a ratio lower than one is dangerous and suggests your business is having trouble meeting its current obligations. Alternatively though, a ratio that is too high could be an indication that you aren't utilising your assets to the best of your ability.

  • For more information on the financial documents where you may have seen these terms, check out Accounting 101.
  • Want to know more? Stay tuned for part two of understanding of your financial statements.


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