Don’t Misinterpret These Finance Terms Any Longer

As a business owner, you don’t need to be a financial expert to run your operations. However, it is helpful to understand some basic finance terms and what they mean. Here are some of the most commonly confused financial terms and a little bit of clarification about what they actually mean.

Bankruptcy

When you hear the word “bankruptcy,” you might shudder in fear. Although bankruptcy does have negative connotations, it is important to keep in mind that this term means that a borrower cannot repay their debts and they need a way out. In most cases, this legal process involves selling the borrower’s assets to pay a portion of their debts.

Accounts Receivable

In the finance world, “accounts receivable” is a term that is thrown around on a regular basis. To give you a better feel for what it means, it merely indicates that as a business owner, your clients owe you money. When this occurs, you probably send your clients an invoice that outline how much they owe you and when you need them to pay you.

Factoring

This term is often used interchangeably with “invoice factoring” and “accounts receivable factoring.” It is basically used for businesses to acquire the funds they need to run their operations. Typically, when a business moves forward with the factoring process, they sell their invoices to a factor in exchange for immediate capital.

Rating

In the finance industry, this word basically refers to a company’s ability to repay any debts that they owe. In most cases, a business’ rating is determined by a rating agency and often determines their creditworthiness. As you apply for funding from lenders, your rating will play a large role in whether or not you qualify for a loan.

Working Capital

A company’s working capital refers to its ability to make any payments that it needs to handle within the next year. In order to determine how much working capital your business has available for use, you need to subtract all of your liabilities from any assets you own.

If you are still a little bit confused by all of these finance terms you are expected to know as you run your business’ operations, don’t worry. Keep in mind that as time passes, you will learn what each means and how they directly apply to your operations.

However, in order to ensure that you are able to make beneficial financial decisions, it is essential that you review common terms like this on a regular basis. You may even find that you start to enjoy the financial side of your business more than you ever thought you would.