When I talk to my clients about reading financial statements they will always say – Hey I do not understand numbers. I was not good at maths. So how do I understand financial statements? I too am not trained in Finance, but understand it.This is a myth that always is present. You do not need to be a maths expert to understand finance and financial statements. You just need to understand basic numbers. Now let us take an example to make it more clear.
Can you read the football score sheet in the adjacent picture? Well I believe you can. If you can read the score sheet of a soccer game you can well understand to read financial statements. It is so simple. The numbers we use in business are very basic. Almost everyone knows to count money and add and subtract. That is the maths we require nothing more.
If it is still not clear let us take another example. It is more financial in nature. Let us take a first look at a Balance Sheet. Can you read the numbers now on the Balance Sheet. You sure can. Only you will not be able to understand the terms. Well we will understand the terms in the Balance Sheet. Going slow will be the key to learning quick.
Finance is used in daily life. When we go out to buy Grocery we are making a transaction which is a financial transaction. Getting paid for the service we render or the product we sell is also a financial transaction. My endeavor will be to start with understanding some basic financial terms.
- Financial Transaction – We do many transactions in our life, and most of them involve money. The transaction which involves direct or indirect exchange of money is called financial transaction.
- Bottom Line – The net income is called bottom line in finance. Do not get confused by the terminology. I will be using this term very much in the coming posts. It simply means profit.
- Costs (Fixed and variable) – Every thing has a value attached to it. When this value is expressed in terms of money it is called cost. In business costs can be fixed( For one time) and variable (continuous). You can look at this example from Canadian electricity association to understand them.
- Equity and Debt – Equity means the money from investors. The investors will have share in the profit or loss. Debt is loan from individuals or financial institutions which carry a fixed interest.
- Resources – The things used to produce product or provide services. They are commonly known as land, labor and capital.
This was a brief on some very basic terms used in finance. We will continue with some more basic understanding about finance before plunging into serious stuff. Do not worry I will make it all simple.