Important terms you need to know

Bankers and people involved in finance use many fancy words, and knowing what they mean is necessary if you want to make money, writes Susan Pletts.

Keeping your money under a mattress (where the rats can eat it) won’t help you grow your business! You need to deal with a bank and keep your own records. This includes producing a balance sheet at the end of each financial year (from February 20012 to February 2013 for example).

A balance sheet reflects the state of your business. Bank managers or lending institutions will ask for this, if you need financing. The first step is to understand the language bankers, accountants and bookkeepers use. This will help you keep good records and make a profit.

  • Asset: Anything that is owned by the business and has value that can be converted to cash. Your farmland (if you own it), tractors, implements, livestock and office equipment are all assets.
  • Capital: The value of the assets belonging to the business in rand (money) value.
  • Capital income: The profit (additional money) when an asset increases in value.
  • Capital, long term: Loan period of 10 to 25 years.
  • Capital, medium term: Loan period of two to 10 years.
  • Capital, short term: Loan period of less than a year.
  • Depreciation: Depreciation means to lessen in value. The value of an asset is divided into the number of years the asset will last and is taken off the income of the business.
  • Financial management: Understanding what capital requirements are needed in the business, together with using funds smartly to make good profits.
  • Fixed capital: Money invested in the fixed assets of the business like land, buildings and machinery.
  • Fixed cost: Overhead expenses that don’t change even when there’s no production.
  • Gross farm income (GFI): The value of all produce (crops, livestock sales and so on) that can be sold in one financial year.
  • Gross margin (GM): The money left after variable costs (seed, fertiliser, chemicals, insurance) have been taken off the income you get from selling your produce.
  • Income statement: Usually done by an accountant and shows the income and expenses of the business.
  • Liquidity: Shows if the business can make all its payments (including loan instalments).
  • Net disposable income: What’s left over from the GFI and can be spent at the end of the year.
  • Net farm income: Gross value minus production costs (variable and fixed) but excluding interest and rental/leases.
  • Net farm profit: Net farm income minus interest and rental/lease costs.
  • Residual, salvage or scrap values: The resale value of an asset at the end of its life.
  • Solvency: If a business can pay all its debts if all the assets are sold when no production takes place, we say the business is “solvent” – that is, the value of the assets are greater than the debts.
  • Total cost: Fixed and variable costs added together.
  • Variable cost: Directly dependent on how much production is taking place – if there’s no production, there are no variable costs.