As finance professionals, we often hear the same terms over and over. It can be hard to keep track of them all, but that’s what we’re here for! Let’s walk through the most common finance terms you may encounter.
Budgeting and Forecasting
Budget – A budget is the amount of money a department, function, or business can spend in a given period of time. Usually, but not always, finance does this annually for the upcoming year.
Rolling Forecast – A rolling forecast maintains a consistent view over a period of time (often 12 months). When one period closes, finance adds one more period to the forecast.
Topside – A topside adjustment is an overlay to a forecast. This is typically completed by the corporate or headquarter team. As individual teams submit a forecast, the consolidated result might not make sense or align with expectations. When this occurs, the high-level teams use a topside adjustment to streamline or adjust the consolidated view.
Internal Rate of Return – Internal Rate of Return (or IRR) compares multiple projects against one another. IRR provides an annual rate of return assuming that the net present value of a project is zero.
Net Present Value – Net Present Value (or NPV) tells us the value of cash received in the future but in today’s dollars. This is one of the building blocks of Finance as it allows us to value cash flows across different periods. You can use this tool to compare projects, businesses, and other assets with different cash flow streams against one another.
Pro Forma – A Pro Forma is a way of creating financial statements based on hypothetical scenarios. This is a great tool to test strategies and management decisions before executing. At its core, Pro Forma blends actuals and known information with projections. Finance professionals then use the scenarios that result to inform management of decisions.
Ratios – Financial ratios are the relative values of two data points taken from a company’s financial statements. We use ratios to evaluate the financial condition of an organization.
Index – An index is a structured set of data that can be evaluated quickly by a computer program. For example, if you have a chart of data with a row or column heading, guess what? You have an index.
Python – Python is a general-purpose programming language. Finance professionals use Python to evaluate large data sets and run statistical analyses.
R – R is a general-purpose programming language. Finance professionals use R to run statistical analyses and generate visualizations.
Have any questions on the common finance terms above or any ones we missed? Are there other topics you would like us to cover? Leave a comment below and let us know! And make sure to subscribe to our Newsletter to receive exclusive financial news right to your inbox.