What are financial costs? Types of financial costs and calculation formulas
Although the concept of financial costs is unfamiliar to many people, this is an indispensable part of business activities and needs to be given proper attention so as not to become a burden. So what are financial costs ? How to manage financial costs effectively? Let's find out with 1C Vietnam in the article below!
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1. What are financial costs?
Financial costs are costs related to or incurred during the process of an enterprise using financial resources to organize business activities and manage assets of organizations and individuals. Financial costs include transaction fees, interest rates, insurance fees and other costs related to borrowing money or using financial resources.
Managing and analyzing financial costs can help administrators have an overview of the capital use situation of the entire enterprise. From there, managers can come up with strategies to optimize financial costs to increase the business's competitiveness in the market. In addition, mastering financial costs is a key factor in devising business strategies, determining product prices and ensuring business stability.
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2. What types of costs are included in financial costs?
Financial costs are one of the important factors when assessing the health of a business. Effective management of this index will help businesses limit risks and optimize profits. So what do financial costs include? Find out the details below:
2.1 Loan interest expenses
Interest expense, also known as interest, is a fee that businesses must pay to borrowers. This is the most common financial cost and often appears in business activities of businesses. Expenses include fixed and variable interest paid to creditors or banks.
2.2 Initialization costs
Origination costs are initial costs charged when customers borrow money from credit institutions. This fee serves activities related to the credit assessment process, processing loan applications, handling legal procedures and negotiating to grant loans. This fee is calculated based on a percentage of the loan and can be paid separately or together with the loan amount.
Start-up costs are related to the use of capital of the business. Although not directly generating a profit, this is a virtual cost that reflects the value of missed investment opportunities.
2.3 Cost of issuing new capital
Financing costs also include the cost of issuing new capital, which involves issuing bonds or shares to raise capital. This type of cost manifests itself in the form of brokerage fees, legal fees, and registration fees.
2.4 Transaction costs
Transaction costs are costs incurred in the process of carrying out financial transactions. This is one of the most common types of financial costs because most money transfer transactions incur related fees.
2.5 Late fees
Late fees are the amount of money you have to pay when you don't pay your debt on time. Late fees in finance charges are usually calculated based on a percentage of the outstanding balance. This fee may be incurred for each late payment period. The purpose of charging late fees is to encourage customers to pay their debts on time.
At the same time, late fees help credit institutions offset costs related to handling late debts. This helps maintain financial system stability and ensure correct credit risk management. This fee is usually specified in the contract according to the regulations of the bank or lending institution.
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3. Amounts not included in financial expenses
Are all costs incurred during the business process included in financial costs? During the production and business process of an enterprise, a number of costs will arise that need to be accounted for separately and not recorded as financial costs. Specifically:
- Expenses for business management and operation activities.
- Selling expenses.
- Production and business costs.
- Costs are covered by other funding sources.
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4. Detailed and simple formula for calculating financial costs
After understanding the concept of what financial costs are, administrators should learn the formulas to calculate this index. Depending on different types of financial costs, users can use different formulas to calculate. Below are detailed suggestions:
- Expenses related to foreign currency trading, securities trading, capital lending, etc. are recorded:
- Debit Account 635 - Financial expenses;
- There are accounts 111, 112, 141,…
- Financial expenses incurred when investing in subsidiaries, paying investments, securities sales, incurring losses or affiliated companies:
- Debit Account 111, 112,... (selling price calculated according to the fair value of the assets received).
- Debit Account 635 - Financial expenses (loss).
- There is Account 121, Account 221, Account 222, Account 228,... (book value).
- Enterprises receiving capital contributions from joint venture companies, subsidiaries, associates whose capital value is divided, etc. record:
- Debt to Account 111, 112, Account 152, Account 211,... (fair value of divided assets).
- Debit Account 635 – Financial expenses (loss amount).
- There is Account 221, Account 222.
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5. 1C:Company Management solution supports effective financial management
Effective financial cost management can help businesses maintain the financial health of the entire enterprise. To make management more effective and easier, businesses can apply 1C:Company Management software - an open solution with features to automate business administration in many different models. The software possesses many specialized modules, allowing to connect and process information of all departments: Human Resources, Payroll - Warehouse - Finance - Sales - Purchasing - CRM - Production on the same system . The solution helps businesses optimize time and management costs, increasing operating productivity by up to 60%.
1C:Company Management software stands out with many features to help businesses manage finances such as:
- Allows setting up financial funds and cash funds.
- Plan financial costs from time to time.
- Set up payment schedule based on documents, expected expenses and revenues.
- Record and control debts for each subject, each contract/order.
- Track details of loans, automatically calculate payments that need to be paid accurately...
Thus, the above article has provided your business with sufficient knowledge to answer the question of what financial costs are . This is an index that needs attention to optimize profits as well as limit risks. If you want to learn more about 1C:Company Management support solutions, please contact 1C Vietnam for advice.
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