Finance Quick Notes

Understanding Key Concepts

Assets: Anything a company or individual owns that has value. This includes cash, investments, accounts receivable (money owed to you), buildings, and equipment. Think of it as your possessions with monetary worth.

Liabilities: What a company or individual owes to others. Examples are accounts payable (money you owe), loans, salaries payable, and deferred revenue. These are your debts.

Equity: Represents the owner’s stake in the assets of a company, after deducting liabilities. For individuals, think of it as net worth (assets – liabilities). It’s your ownership claim.

Revenue: The income generated from normal business operations. For example, sales of products or services.

Expenses: The costs incurred to generate revenue. Examples include salaries, rent, utilities, and cost of goods sold.

Financial Statements: A Quick Overview

Income Statement: Summarizes a company’s financial performance over a period of time, showing revenues, expenses, and net income (or loss). It tells you how profitable the company was.

Balance Sheet: A snapshot of a company’s assets, liabilities, and equity at a specific point in time. It provides a view of the company’s financial position. The fundamental equation is: Assets = Liabilities + Equity.

Cash Flow Statement: Tracks the movement of cash both into and out of a company over a period of time. It’s broken down into operating, investing, and financing activities. This statement shows how well a company manages its cash.

Basic Investment Principles

Diversification: Spreading investments across different asset classes (stocks, bonds, real estate, etc.) to reduce risk. Don’t put all your eggs in one basket!

Risk and Return: Generally, higher potential returns come with higher risks. It’s a tradeoff you need to consider.

Time Value of Money: Money is worth more today than the same amount in the future due to its potential earning capacity. Understanding this helps with investment decisions.

Compounding: Earning returns on both the principal and accumulated interest. It’s a powerful wealth-building tool.

Key Financial Ratios (Simplified)

Profit Margin: Measures how much profit a company makes for every dollar of revenue. Higher is generally better.

Debt-to-Equity Ratio: Indicates the proportion of debt a company uses to finance its assets relative to equity. A lower ratio generally indicates a financially stable company.

Current Ratio: Measures a company’s ability to pay its short-term liabilities with its short-term assets. A ratio greater than 1 is generally considered healthy.

Personal Finance Essentials

Budgeting: Creating a plan for how to spend your money. Track income and expenses to identify areas for saving.

Saving: Setting aside a portion of your income for future needs. Aim to save at least 15% of your income.

Investing: Putting your money to work to generate returns. Start early and invest consistently.

Debt Management: Prioritize paying down high-interest debt. Avoid unnecessary debt accumulation.

Emergency Fund: Having readily available cash to cover unexpected expenses (3-6 months of living expenses). This will keep you out of debt during a crisis.