by Tapuwa Mashangwa
In S&P’s Global Financial Literacy Survey, African countries score the worst in terms of financial literacy in the world. The most financial literate country is Botswana at 51% and the least is Somalia at 15% according to the survey. These statistics show just how much this status quo needs to be improved especially for smallholder farmers that may lack some secondary and tertiary education.
Quite a number of Sub-Saharan farmers end up outsourcing documentation processes that involve business terms or require some financial literacy, and though this is progressive, most of the farmers still remain without an understanding of terms used.
It would be helpful to elaborate on the meaning of some financial terms commonly used in agribusiness, such as a balance sheet, assets, and revenue, just to mention a few.
Accounting encompasses the systematic recording and reporting of business financial transactions. Every
process that involves the exchange and or movement of money around a business forms a part of accounting.
Accounts receivable is the amount of money customers or clients owe the agribusiness for goods or services supplied. The total value of accounts receivable gives a snapshot of the amount owed to the business at any given time, whereas accounts payable reflects what the business owes creditors for goods or services supplied to the business.
A balance sheet is a document that presents a company’s financial health at specific points in time, usually at the end of the quarter or fiscal year. The balance sheet includes assets, liabilities, and equity, and follows the accounting equation:
Assets = liabilities + equity
The left side shows what one owns, whereas the right side shows what one is owed. Asset values should equal those of liabilities and equity.
Assets are resources that businesses control, in which the owner expects assets to generate future cash flow. Examples include inventory, equipment, and land. Liabilities are debts, usually sums of money that a business owes to another entity. Examples include expenses payable to suppliers, accounts payable, and business loans.
Shareholders’ equity (SE) gives information regarding a company’s net value when liquidating assets to pay off debts.
The shareholders’ equity is calculated by subtracting total liabilities from assets:
Shareholders’ equity = total assets − total liabilities
An income statement shows the business’s performance during a specific period. Periods commonly assessed are quarters (3 months) and in some cases may analyse the performance over a year. Focusing on revenue and expenses, the income statement depicts a company’s profit or loss.
Revenue refers to the income generated from a business’s operations and activities. One way to calculate revenue is by multiplying the price of an item by the quantity sold. Expense refers to money spent on utilities, salaries, and raw materials, and other costs that a company incurs operating the business.
Profit, also known as “net income” or the “bottom line”, shows the difference between what a business earns and spends. Profit earned is calculated by subtracting total expenses from total revenue.
Profit = total revenue – total expenses
Net loss can be calculated using the profit equation. A net loss occurs when the total expenses exceed total revenue and the difference is negative.
A cash flow statement shows the cash generated (inflow) or used (outflow) by a company in a given period. Classify cash flow under operating, investing, or financing activities.
When it comes to profit margins, there are three types of profit margins. These are gross profit, net profit, and operating profit margin. Profit margin is obtained by dividing profit with revenue. Profit margins display a company’s growth potential and answer how much of each dollar of sale generates into profit.
Profit margin = (profit / revenue) x 100%
It is important to note that more revenue does not always translate to higher margins and more profit resulting from sales.
Return in Investment (ROI) is a ratio measuring performance efficiency relative to how much a company spent on investments. ROI is determined by dividing net profit by the investment cost.
ROI = (net profit / investment cost) x 100%
Variable costs are costs that change proportionally to production. For example, the cost of raw materials increases with the number of units purchased. Unlike variable costs, fixed costs stay the same regardless of changes in production. For example, a company pays the same amount in monthly rent.
A cash flow is a measure of the amount of cash generated (or lost) through a business’s operations. It’s
different from net profit as net profit includes non-cash expenses (such as depreciation), and excludes some uses of cash (such as capital expenditures for new equipment, or repayment of outstanding debt).
Business to business (B2B) are transactions that occur when a company sells goods or services to another company and business to consumer (B2C) transactions occur when a company sells goods or services to end-users.
Best practices are standard methods for executing a task to ensure effective results. A deliverable is a final product given to the client at the end of a project.
A deliverable can include information decks, research, financial models, and actual products for sale.
20 key business terms every professional should know. (2023) Available at: https://www.suitably.com/blogs/well-suited/20-key-business-termsevery-professional-should-know
Practical business terms. (2023) Available at: https://www.practicalbusinessskills.com/resources/glossary-of-terms
Basic financial terms. Available at: https://www.studysmarter.co.uk/explanations/business-studies/introduction-to-business/basic-financialterms/
Wood, M. (2020). Business finance. 60 Business and Finance Terms You Should Absolutely Know. Available at: https://www.fundera.com/blog/business-finance-terms-and-definitions
Hayes, A. (2022) What Is a Business? Understanding Different Types and Company Sizes. Available at:
CFI Team (2022) Financial Literacy – The cognitive understanding of financial components and skills.
Available at: https://corporatefinanceinstitute.com/resources/management/financial-literacy/