As we’ve previously stated, just because you aren’t an expert bookkeeper doesn’t mean you should be in the dark when it comes to your finances. Even those who know nothing about bookkeeping, finances, or investing can learn the basics. Sadly, too many clients are too busy to learn even tthat. Now they can learn or relearn what they should know with our 6 key financial terms everyone should know.
1. ROI
Also known as “return on investment,” it is a key term that is often tossed around. Put in simple terms, ROI is what you expect to get back on your investment. This number can be in dollars, percentages, etc. The calculation is based on the gain or loss associated with the initial investment. For example, if you invest $1,000 and expect that to grow to $1,200 by the end of the dedicated period, your ROI is expected to be 20% or $200. Of course, an ROI can also be negative.
As an equation it would be expressed as: Investment gain or loss / Investment cost = ROI
2. Net Income
The simplest definition of net income is how much an individual or business earned after all expenses are paid. Net income is derived by deducting expenses (and losses) from total earnings. For example, if a company has $1 million in sales, pays $300,000 in taxes and $500,000 in payroll, it has a net income of $200,000. Of course, this total assumes no other expenses.
As an equation, net income is expressed as: Total income – Total expenses = Net income.
3. Liquidity
We all should have assets we don’t intend to spend right away. Included among these are bank accounts, investments, retirement accounts, stocks, bonds, etc. But do you have liquidity? Liquidity is basically defined as ease of accessing these funds quickly and with little or no expense. For example, a 401(k) you can’t touch until retirement has low liquidity because it would take a lot of time and money to access. Your checking account has a high liquidity because you can basically drive to any ATM and take out money.
4. Amortization
When you have a payment plan to pay off a debt, this is called amortization. It can include anything such as your mortgage, your car note, tax debt, and more. Amortization also takes into account the length of time these payments must be made until the debt is settled. Amortization is calculated in situations such as determining your credit score. It is also used to determine the value of a business when being sold or for tax purposes.
As an equation, amortization is expressed as: Dollar amount of all single payments X how many periods until debt is settled = Amortization.
5. EBITDA
The acronym is short for “earnings before interest, tax, depreciation, and amortization.” EBITDA is a little like net income without deducting expenses. For example, an individual with a salary of $50,000 per year whose investment accounts have returned $5,000 per year has an EBITDA of $55,000. Businesses also calculate this total in a similar way by subtracting expenses from income, then adding back any amortization or any profit.
6. Initial public offering
Also known as an IPO, this term has increased in usage given all the new companies with a high net worth and visibility that are planning to go public. In short, this means you can buy stock in them. The IPO refers to the first sales of stock by a company to the general public. A few famous ones in the past include Facebook and Snapchat. Before “going public,” these companies were considered private. Privacy in this form means that only initial founders, investors, venture capitalists, etc. owned stock in the company. After the IPO these same investors may choose to buy or sell stock in the company as well.
To see the latest businesses that are planning an upcoming initial public offering, click here for the NASDAQ list.
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