What is financial commitment? Definition and example

A Financial Commitment is a commitment to an expense at a future date. We may use the term for either a major expense or an ordinary one. Depending on the situation, the term may refer to either a very long-term commitment or a one-off payment. Financial commitments exist in both the business and non-business world.

Even if the payment has not yet occurred, in accounting, we enter it as a liability on the balance sheet. The moment the company incurs the expense, it becomes a liability.

A balance sheet shows the company’s financial status at a particular moment in time. It is a snapshot of a business’ finances on a given date.

Put simply; a financial commitment is a pledge to pay something on a future date or over a specific period.

Financial commitment to a supplier

When we send a supplier a purchase order, for example, there is a financial commitment on our part. We pledge to pay on a specific future date.

Some financial commitments may have an expiration date. Others, however, are ongoing and have no specific termination date.

Financial commitment
Regarding the term ‘financial commitment,’ this image tells us three things: 1. On a balance sheet, it appears under ‘liabilities.’ 2. It may refer to a pledge to pay regularly over a specific period. 3. It may also refer to a pledge to assume financial responsibility for something at a future date.

If a party with a financial commitment reneges, i.e., does not pay, they may face a lawsuit.

According to the Merriam-Webster dictionary:

“(A financial commitment is) an obligation to spend a lot of money over a long time. Example: ‘Opening your own business requires a significant financial commitment.'”

Financial commitment – a new company

When a new company opens, its owners enter into a financial agreement with each other. Their commitments also extend to the business.

Some owners may commit to investing a regular sum into the company over a specific period.

Others, on the other hand, may assume responsibility for some of the company’s debts if it becomes insolvent. When a company is insolvent, it cannot pay its bills.

Financial commitments can influence an organization’s strategic decisions, as they often dictate the allocation of future resources and can impact the company’s ability to invest in new projects or ventures.

Financial commitment with lenders

If you apply for a loan and the bank approves, there are subsequently two financial commitments.

The lender commits to giving your access to funds either immediately, at a certain date, or when you need it.

You also have a financial commitment. Yours is to pay back the money that you have borrowed. Specifically, your commitment is to pay back according to the specifications in the contract that you signed.

A long-term responsibility

Let’s imagine that John and Mary’s baby girl was born today. As soon as the baby was born, they entered a long-term commitment to raise their child, feed her, pay for her clothes, food, education, etc.

When their daughter grows up, they may also help her buy her new home.

This is a very long-term commitment. A financial commitment can have this meaning. In other words, a commitment to pay somebody’s or something’s bills over a very long period.

When you open your own business, there is a financial commitment. That commitment might continue for a long time.

Financial commitment – vocabulary and concept

There are many compound nouns in the English language that contain the words “financial commitment. Here are seven of them, their meanings, and examples of how we can use them in a sentence:

  • Financial Commitment Agreement

A legal document outlining the specific financial responsibilities of a party.
Example: “The financial commitment agreement clearly stated the investor’s obligation to provide funding in stages.”

  • Financial Commitment Letter

A written promise from a lender indicating the terms and amount of financing they intend to extend.
Example: “Upon approval of the project, the bank issued a financial commitment letter to the developers.”

  • Financial Commitment Schedule

A timetable that details when financial obligations are due.
Example: “The financial commitment schedule was updated quarterly to reflect the company’s payment priorities.”

  • Financial Commitment Plan

A strategy for allocating finances to fulfill commitments over a specified period.
Example: “Their financial commitment plan allocated funds for both short-term operational costs and long-term capital investments.”

  • Financial Commitment Policy

A set of rules that govern how financial commitments are managed and reported.
Example: “The board reviewed the company’s financial commitment policy to ensure compliance with new regulations.”

  • Financial Commitment Limit

A maximum amount that can be committed to financial obligations.
Example: “The CFO established a strict financial commitment limit to maintain the organization’s cash flow.”

  • Financial Commitment Tracking

The process of monitoring and recording financial commitments to ensure they are met on time.
Example: “Financial commitment tracking is essential to avoid penalties and maintain good relationships with suppliers.”

Video – What is a Financial Commitment?

This educational video, from our sister channel on YouTube – Marketing Business Network, explains what a ‘Financial Commitment’ is using simple and easy-to-understand language and examples.