Do you ever feel like to need a finance degree to understand some of the terminology when you apply for a business bank loan? A good banker will always help guide you through the process and ensure you understand the language.

The following are some financial terms which are used during the course of analysis of financial statements pertaining to any borrower while lending:

1. Cost of production: This refers to consumption of raw materials (including stores) and spares, power and fuel, direct labor, repairs and maintenance, other manufacturing expenses plus opening balance of stock in process minus closing balance of stock in process.
2. Cost of sales: Cost of production as mentioned above plus opening stock of finished goods less closing stock of finished goods.
3. Operating profit: Net sales less cost of sales minus interest and selling, general and administrative expenses.
4. Net profit before tax: Operating profit plus other income minus other expenses.
5. Net profit after tax: Net profit before tax plus or minus deferred tax plus current tax.
6. Retained profit: Net profit minus dividend paid/declared.
7. Net sales: Gross sales minus excise duty and returns.
8. Total current assets: Inventory, receivables (including bills discounted) and all other current assets which are cashable in next 12 months plus prepaid expenses.
9. Total current liabilities: All liabilities which are payable in the next 12 months including term loan installments payable in next twelve months, if any.
10. Net working capital: Total current assets less total current liabilities.
11. Working capital gap: Total current assets less current liabilities other than bank borrowings.
12. Total outside liabilities: Total liabilities as per balance sheet less net worth.
13. Net worth: Capital Plus reserves plus surplus.
14. Tangible net worth: Net worth less accumulated losses and intangible assets.
15. Current ratio: Current assets/current liabilities.
16. Current assets: Cash balance + bank balance + sundry debtors+ inventory + advance payment made to suppliers + advance paid for miscellaneous purposes
17. Current liabilities: Bank overdraft + Sundry creditors + Provisions for income tax + provisions for any other expenses + advance payments received from the customers
18. Quick ratio: Current assets less inventory/current liabilities less bank overdraft
19. Debt equity ratio: Long term debt/tangible net worth
20. Debt service coverage ratio: (Profit after tax + depreciation + interest on term loan)/(interest on term loan + installments on term loans)

Out of these 20, number 20 is the most important. The debt service coverage ratio is the most important in banking ratios because it says whether you are able to handle this debt that you are asking for (or the debt you currently have).