Financial Terms Glossary

Balance Sheet Terms

Also known as: Equity Capital, Shareholder Capital
Money invested by owners or shareholders into the business. Unlike loans, this money doesn't need to be repaid - it represents ownership in the company.
Example:
If you invest R100,000 of your own money to start a business, that R100,000 is your share capital.
Also known as: Retained Earnings, Accumulated Profits
Profits that the business has kept rather than distributing to owners as dividends. This accumulates over time as the business operates.
Example:
If your business makes R50,000 profit and you take R20,000 as dividends, the remaining R30,000 becomes retained profits.
Also known as: Owner's Equity, Net Worth
The total value belonging to the business owners. This is what owners would theoretically receive if all assets were sold and all debts paid.
Formula: Share Capital + Retained Profits = Shareholders Equity
Also known as: Term Loan, Long-term Debt
Money borrowed from banks or other lenders that will be repaid over a period longer than one year. Usually comes with a fixed repayment schedule and interest rate.
Example:
A 5-year loan of R500,000 at 12% interest to buy equipment.
All the money invested in the business, from both owners and lenders. This is the total funding used to acquire assets and run operations.
Formula: Shareholders Equity + Long Term Loans = Capital Employed
Also known as: Non-current Assets, Property Plant & Equipment
Long-term assets used in the business to generate income, such as buildings, equipment, vehicles, and machinery. These are not intended for resale.
Examples:
Delivery vehicles, manufacturing equipment, computers, office furniture, buildings
The total amount that fixed assets have decreased in value since purchase due to wear and tear, age, or obsolescence. This is a cumulative figure that increases over time.
Example:
A vehicle bought for R200,000 might depreciate R40,000 per year. After 3 years, accumulated depreciation would be R120,000.
Also known as: Carrying Value, Book Value
The current value of fixed assets on your books, after accounting for depreciation.
Formula: Original Cost - Accumulated Depreciation = Net Book Value
Assets that will be converted into cash or used up within one year. These represent the short-term resources available to the business.
Examples:
Stock/inventory, money owed by customers (debtors), bank balance, short-term deposits
Also known as: Accounts Receivable, Trade Receivables
Money owed to your business by customers who have purchased goods or services on credit. You've made the sale but haven't received the cash yet.
Example:
You invoice a customer R10,000 with 30-day payment terms. Until they pay, that R10,000 is a debtor.
Also known as: Inventory
Products or materials that you have available to sell but haven't sold yet. This includes raw materials, work in progress, and finished goods.
Also known as: Short-term Liabilities
Debts and obligations that must be paid within one year. These represent short-term financial obligations.
Examples:
Money owed to suppliers (creditors), tax payable, overdrafts, short-term loan repayments due within 12 months
Also known as: Accounts Payable, Trade Payables
Money your business owes to suppliers for goods or services purchased on credit. You've received the goods/services but haven't paid for them yet.
Example:
Your supplier delivers R15,000 of inventory with 60-day payment terms. Until you pay, that R15,000 is a creditor.
Money set aside to pay future tax bills. This represents tax that has been incurred on profits but not yet paid to the tax authority.
A negative bank balance where you're borrowing money from the bank on a short-term, flexible basis. Interest is charged on the amount borrowed.
Example:
If your bank balance shows -R5,000, you have a R5,000 overdraft and owe the bank this amount plus interest.
Also known as: Working Capital
The difference between current assets and current liabilities. This measures whether you have enough short-term resources to cover short-term obligations.
Formula: Current Assets - Current Liabilities = Net Current Assets
Interpretation:
Positive working capital = good liquidity. Negative working capital = potential cash flow problems.
The total value of everything the business owns. In a balanced balance sheet, this should equal Shareholders Equity.
Formula: Fixed Assets + Net Current Assets = Total Net Assets

Income Statement Terms

Also known as: Sales, Turnover, Income
The total income from selling goods or services before any costs are deducted. This is the top line of your income statement.
Also known as: Cost of Goods Sold (COGS), Direct Costs
Direct costs to make or purchase the products you sell. This includes materials, product purchases, and direct labor.
Examples:
Raw materials, wholesale product purchases, manufacturing labor, packaging
Profit from sales before operating expenses. Shows how efficiently you're producing/sourcing your products.
Formula: Revenue - Cost of Sale = Gross Profit
Also known as: Variable Operating Expenses
Operating costs that change in proportion to sales volume. As sales increase, these expenses increase; as sales decrease, they decrease.
Examples:
Credit card processing fees, delivery costs, sales commissions, packaging materials
Also known as: Contribution Margin, Variable Profit
The money left from each sale after covering all variable costs. This contributes toward covering fixed expenses and generating profit.
Formula: Gross Profit - Variable Expenses = Contribution
Why it matters:
A higher contribution % means each sale contributes more toward fixed costs and profit.
Also known as: Fixed Costs, Overhead
Operating costs that stay relatively constant regardless of sales volume. You incur these expenses even if you make no sales.
Examples:
Rent, salaries, insurance, utilities, telephone, internet, subscriptions
Full name: Earnings Before Interest, Tax, Depreciation & Amortization
Operating profit before accounting for financing costs (interest), taxes, and non-cash expenses (depreciation). This measures pure operational performance.
Formula: Contribution - Fixed Expenses = EBITDA
Why it matters:
EBITDA shows how profitable your core business operations are, independent of financing decisions and accounting methods.
The spreading of a fixed asset's cost over its useful life. This is a non-cash expense (no money leaves the bank), but reduces reported profit.
Example:
A R120,000 vehicle depreciated over 5 years = R24,000 depreciation expense per year.
Full name: Earnings Before Interest & Tax
Operating profit after depreciation but before interest and tax. Also known as Operating Profit or PBIT.
Formula: EBITDA - Depreciation = EBIT
Total profit after all operating costs and interest, but before tax is deducted.
Formula: EBIT - Interest + Interest Received = PBT
Also known as: Net Profit, Net Income, Bottom Line
The final profit after all costs, interest, and taxes. This is what's available for dividends or retention in the business.
Formula: PBT - Tax = PAT
Money paid out to owners/shareholders from profits. This is a distribution of earnings, not an expense.
Decision:
Paying dividends gives owners immediate returns. Retaining profits allows business growth and investment.

Key Financial Indicators (KFIs)

The expected annual return percentage on your investment in the project. Think of it as the interest rate your project generates.
Interpretation:
IRR of 25% means your project is expected to generate a 25% annual return. Compare this to bank interest rates or other investments.
Today's value of all future cash flows from your project. Takes into account the time value of money (money today is worth more than money tomorrow).
Interpretation:
Positive NPV = project creates value, worth doing. Negative NPV = project destroys value, don't do it.
The blended cost of all funding sources (equity and debt), weighted by their proportion. Used as the discount rate for NPV calculations.
Example:
If shareholders require 20% return and debt costs 10% (after tax), and you have 50/50 split, WACC = 15%
How long it takes to recover your initial investment. Measured in months or years.
Interpretation:
Shorter payback = less risk. Many businesses prefer payback under 2-3 years.
The level of sales where you make zero profit - revenue exactly covers all costs. Sales above break-even = profit. Sales below = loss.
Why it matters:
Knowing your break-even helps you set sales targets and assess risk. The lower the break-even, the safer the business.