A

Accounts Payable (A/P)

Accounts Payable (A/P)

Money you owe to your suppliers and vendors. Part of Current Liabilities.

gb flag de flag il flag it flag

 

Accounts Receivable (A/R)

Accounts Receivable (A/R)

Money your customers owe to you. Part of Current Assets.

gb flag de flag il flag

 

Accrual Basis

Event-based accounting which recognizes events when they appear in the system, not at the time they are paid.

See also Cash Basis.

gb flag de flag il flag

 

Acid-Test Ratio

Acid-Test Ratio

Ratio: (Current Assets less Inventory) divided by Current Liabilities

This is a variant of the Current Ratio; it only includes items which are quickly converted into current assets. It is called ‘Acid-Test’ because it measures the ability to meet unexpected demands without depending on the sale of inventory.

Also called Quick Ratio. A Quick Ratio of 1 is a good benchmark. Higher ratios indicate a satisfactory condition. Decreasing ratios indicate either a deteriorating cash position or a deteriorating demand for products. Ratios below ½ indicate a potentially severe situation like slow moving inventory and a higher chance of bankruptcy.

gb flag de flag il flag

 

Amortization

Decreasing an amount gradually or in installments, to:
1. Write down an expenditure.
2. Pay off a loan.
3. Reduce the value of an intangible asset in a manner analogous to Depreciation.

gb flag de flag fr flag pt flag il flag

 

Asset Stripping

1. (Owner’s view) Buying a company when its market value is below book value, then selling off its component assets to make a profit.

2. (Manager’s view) Selling off non-essential or under-utilized Assets of a business in order to improve short-term metrics such as Return On Assets (ROA).

gb flag de flag il flag

 

Asset Turnover (ATO)

Asset Turnover (ATO)

Ratio: Sales divided by Assets

This ratio measures how asset-intensive a business is and the efficiency of the assets employed.

Asset Turnover shows the speed with which an amount of cash, equivalent to the money tied up in the business, comes back in through the door in fresh sales. It isn’t concerned with profit, only with cash flow. If sales are rapid, little cash is tied up to keep the business going; which may make it easier to expand.

Also called Asset Turns.

See also Income/Outcome Triangle for Ratio Analysis, Return On Assets (ROA), Net Asset Turnover.

gb flag de flag es flag pt flag il flag it flag

 

Asset Turns

Asset Turns

See Asset Turnover (ATO)

 

Assets

Assets

Anything owned by the business.

On the Balance Sheet, the sum of the Assets equals the sum of Liabilities and Equity.

gb flag de flag fr flag es flag pt flag il flag

 

Average Collection Period

Average Collection Period

See Days Sale Outstanding (DSO)

gb flag il flag

 

B

Balance Sheet

Balance Sheet

A summary of the Assets, Liabilities, and Equity for the business at a certain point in time - it gives a financial snapshot for the given moment.

The left side of the Company Board (and of the Income/Outcome business simulation game board) is a Balance Sheet.

When using a numeric format, North America uses a Total Asset Balance Sheet which shows the assets (what you have in the business) and balances that amount against the total of liabilities and equity (which is where the assets came from). In other words, everything you have in the business comes from investing (Capital Stock), making money (Retained Earnings), or borrowing from sources such as banks (Loans) and suppliers (Accounts Payable (A/P)). Elsewhere in the world, a Total Asset Balance Sheet may be used.

See also Income Statement.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Book Value of Assets

Book Value of Assets

Calculation: Purchase value of Fixed Assets less accumulated Depreciation.

This is the value of fixed assets as they are listed on the Balance Sheet.

gb flag de flag il flag it flag

 

Book Value of Business

Calculation: Total Assets less Intangible Assets less Liabilities.

The Net Asset Value of a company.

gb flag de flag il flag

 

Book Value per Share

Calculation: Book Value of Business divided by Number of Shares

gb flag de flag il flag

 

Break-Even Analysis

Analysis of the interrelationship of Sales (price and volume) and Fixed Cost and Variable Costs. Typically done as a graphical representation.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Break-Even Point

The point at which Sales are equal to total costs. It is the combination of Sales and Costs that will yield a no-profit, no-loss situation.

Also known as Break-Even Sales.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Budget

Budget

Expectations of Sales, Costs (or Expenses) and Profit for a future fiscal period (month, quarter, year).

This is definitely a What do you mean by that? term. Many people use it to mean ‘the amount of money they are allowed to spend’, meaning only ‘their’ costs/expenses portion of the actual budget.

gb flag de flag fr flag es flag pt flag il flag it flag

 

C

Capital

Capital

The amount of money invested in the business by shareholders, plus the amount accumulated in profits.
Also referred to as Share Capital, Shareholders’ Equity, or Net Worth.

gb flag

 

Capital Stock

Capital Stock

The original investment in the company, plus any additional investment from outside the company.

gb flag de flag fr flag il flag

 

Cash

Cash

Cash is King!

Cash on hand, in the bank, or otherwise very readily accessible.

See also Profit & Cash.

gb flag de flag il flag

 

Cash Basis

An accounting method which tracks incomes and outlays by when the cash comes in or goes out, not when events first appear in the system.

See also Accrual Basis.

gb flag de flag il flag

 

Cash Conversion Cycle

Cash Conversion Cycle

Calculation: CCC = DIO + DSO - DPO
DIO = Days Inventory Outstanding
DSO = Days Sale Outstanding (DSO)
DPO = Days Payable Outstanding

The ratio shows how quickly inventories and receipts are converted into Cash.

The number indicates how long your cash is tied up in inventories and receivables (before you get it back from your customer); therefore a lower number is preferred.

gb flag

 

Cash Flow

Cash Flow

The flow of money into and out of the business. Understanding the cash flow of a business is as essential as understanding Profit. The two have to be managed separately.

See also Profit & Cash; Cash Flow Forecast (CFF); Cash Flow Statement.

gb flag de flag il flag

 

Cash Flow Forecast (CFF)

A projection of the cash flows, in and out, over a fiscal period of projection, to determine net cash balances at particular points in time. This identifies either the need for additional cash infusions or the opportunity to use excess cash elsewhere.

gb flag de flag es flag pt flag il flag it flag

 

Cash Flow Statement

Analysis of sources of cash that flowed into the business together with how the cash was allocated, for the accounting period.

The information is grouped by functional department, because Cash can be freed up from anywhere (such as getting customers to pay faster, or paying suppliers more slowly), not just from Sales or the Finance Department.

Note: Cash Flow does not consider non-cash items such as Depreciation.

gb flag de flag il flag

 

Contribution

Contribution

CONTRIBUTION
Calculation: Sales less the Cost of Sales (COS).

CONTRIBUTION MARGIN
Ratio: Contribution as a percentage of Sales

Contribution is what’s left from the sale to contribute towards paying for the overhead costs and expenses of the business.

This is a real What do you mean by that? term with people sometimes using the two terms interchangeably. We use ‘margin’ to denote a percentage (of Sales).

Contribution may be the same number as Gross Profit.

Example:
- Sales of 200 less COS of 80 equals Contribution of 120
- Contribution of 120 divided by Sales of 200 equals Contribution Margin of 60%.

gb flag de flag es flag pt flag il flag it flag

 

Contribution Margin

Contribution Margin

CONTRIBUTION
Calculation: Sales less the Cost of Sales (COS).

CONTRIBUTION MARGIN
Ratio: Contribution as a percentage of Sales

Contribution is what’s left from the sale to contribute towards paying for the overhead costs and expenses of the business.

This is a real What do you mean by that? term with people sometimes using the two terms interchangeably. We use ‘margin’ to denote a percentage (of Sales).

Example:
- Sales of 200 less COS of 80 equals Contribution of 120
- Contribution of 120 divided by Sales of 200 equals Contribution Margin of 60%.

gb flag de flag fr flag il flag

 

Cost of Capital

A weighted average of the interest cost of debt and the expectations of the shareholders.

Example:
If half the company’s capital comes from borrowing at 8%, and half from investors who are expecting a 16% return on their investment, the Cost of Capital is deemed to be 12%.

gb flag de flag il flag

 

Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS)

The variable (or direct) costs of products sold and shipped to customers. Typically includes raw materials and labor, and other components on a company-by-company basis. Individual components might include sales commission and depreciation.

COGS is a variable cost because the cost reported varies with sales volume. Conceptually, Direct Costs, Cost of Goods Sold and Variable Cost are very similar. Check how each term is used in your company.

Also called Cost of Sales (COS).

gb flag de flag es flag pt flag il flag it flag

 

Cost of Sales (COS)

Cost of Sales (COS)

The variable (direct) costs of products and/or services provided to customers. Typically includes raw materials and labor, and other components on a company-by-company basis. Individual components might include sales commission and depreciation. Also called Cost of Goods Sold (COGS) or COGS.

COS is a variable cost because the cost reported varies with sales volume. Conceptually, Direct Costs, Cost of Sales and Variable Cost are very similar. Check how each term is used in your company.

Also called Cost of Goods Sold (COGS).

gb flag de flag es flag il flag it flag

 

Current Assets

Current Assets

The Assets of a company that are reasonably expected to be converted to cash or consumed within 12 months from the date of the Balance Sheet. Current Assets include Cash, Receivables, Inventory and Prepaid Expenses.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Current Debt

Current Debt

Liabilities that are due within 12 months of the date of the Balance Sheet. Current Liabilities include Accounts Payable (A/P), Taxes Payable, short-term loans, and the current portion of long-term debt.

Also called Current Liabilities.

gb flag de flag il flag

 

Current Liabilities

Current Liabilities

Liabilities that are due within 12 months of the date of the Balance Sheet. Current Liabilities include Accounts Payable (A/P), Taxes Payable, short-term loans, and the current portion of long-term debt.

Also called Current Debt.

gb flag de flag es flag pt flag il flag it flag

 

Current Ratio

Current Ratio

Ratio: Current Assets divided by Current Liabilities.

This ratio is a measure of the company’s liquidity. It looks at the ability to pay bills out of the short-term or current assets.

gb flag de flag es flag pt flag il flag it flag

 

D

Days Inventory Outstanding

Days Inventory Outstanding

Ratio: Inventory divided by the Average Daily COS (Annual COS/365).

The ratio shows how quickly inventories are converted into Cash.

Part of the Cash Conversion Cycle.

gb flag

 

Days Payable Outstanding

Days Payable Outstanding

Ratio: Accounts Payable (A/P) divided by the Average Daily COS (Annual Sales/365).

The ratio shows the company’s average payable period.
Part of the Cash Conversion Cycle.

gb flag

 

Days Sale Outstanding (DSO)

Days Sale Outstanding (DSO)

Ratio: Accounts Receivable (A/R) divided by the Average Daily Sales (Annual Sales/365).

The ratio shows how quickly the proceeds from sales are converted into Cash.

DSO is also known as Days Sales in Receivables (DSR) or Average Collection Period.

Part of the Cash Conversion Cycle.

gb flag de flag il flag

 

Days Sales in Receivables

Days Sales in Receivables

See Days Sale Outstanding (DSO)

gb flag il flag

 

Days Sales of Inventory

Days Sales of Inventory

See Days Inventory Outstanding.

gb flag

 

Debt

Debt

What do you mean by that? This term can describe wildly different situations; here are some possibilities.

1) Total Assets less non interest-bearing liabilities (i.e. Net Assets).
2) Total Assets less Current Liabilities.
3) Total Assets less Total Liabilities (i.e. Equity or Net Worth).

And all of these terms are different from Net Asset Value. Make sure you agree on the meaning!

gb flag de flag fr flag il flag

 

Debt to Equity Ratio

Debt to Equity Ratio

Ratio: Debt divided by Equity.

This ratio is a measure of the company’s safety, or ability to withstand adversity.

This is a real What do you mean by that? term. What is meant by ‘debt'? Total Liabilities? Interest-bearing debt? Long-term debt?

See the discussion at Leverage.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Depreciation

Depreciation

Non-cash expense (reported on the Income Statement) that expresses the reduction in economic value of Assets over time.

gb flag de flag pt flag il flag

 

Direct Cost

Direct Cost

The cost of labor, materials and any direct overhead incurred in producing the goods and services.

Conceptually, Direct Costs, Cost of Sales (COS) and Variable Costs are very similar. Check how each term is used in your company.

See also Indirect Cost.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Discounted Cash Flow (DCF)

A calculation of the future value of expected inflows and outflows of Cash.

Future cash flows need to be appropriately discounted to allow for the fact that money that comes back in next year is worth less than money that goes out today.

gb flag de flag il flag

 

Discounting Receivables

Discounting Receivables

Selling your Accounts Receivable (A/R) (e.g. an invoiced sale) at a discount in order to receive immediate Cash.

Also called Factoring.

gb flag de flag es flag pt flag il flag it flag

 

Discounting Sales

Discounting Sales

Reduction in the sales price of goods and services to entice additional sales. Often based on volume, seasonality, obsolescence, a changed competitive environment, or future commitments by the customer.

gb flag de flag fr flag il flag

 

Dividend

A distribution to shareholders of a portion of Earnings.

gb flag de flag

 

Dividend Cover

Ratio: Net Income divided by Dividend

The ratio shows the ratio of Profit to Dividends paid. If this number is greater than 1, it means the business has reinvested some profit back into itself – the higher the number the greater the re-investment.

Some companies occasionally pay Dividends greater than their Earnings; this may happen if they take a temporary loss and want to send a signal that the loss does not matter. Failing to pay an expected dividend signals that the company has run into unexpected difficulty, and this will hurt the price of shares. It shrinks the size of the business to pay a dividend greater than earnings, but a high stock price is important if the company wants to raise more capital by issuing shares. The company wants the most money for the fewest new shares issued.

gb flag de flag il flag

 

E

Earnings

Earnings

Calculation: Sales less all costs and expenses

Net Income or Net Profit for the period.

gb flag de flag il flag

 

Earnings Before Interest and Taxes (EBIT)

Earnings Before Interest and Taxes (EBIT)

Calculation: Sales less all costs and expenses except Finance Charges and Income Tax

gb flag de flag il flag

 

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA)

Calculation: Sales less all Cash expenses except Finance Charges and Income Tax.

EBITDA does not include the non-cash expenses such as Depreciation and Amortization.

gb flag de flag il flag

 

Earnings Per Share (EPS)

Ratio: Net Income divided by the number of shares issued and outstanding.

EPS is the net benefit to the shareholder per share; it does not say whether the earnings are paid out as dividends or retained in the company for growth.

gb flag de flag fr flag pt flag il flag it flag

 

Economic Value Added (EVA)

A relatively complex method of evaluating profitability that takes into account the Cost of Capital. It allows shareholder expectations as much weight as the rate of interest on debt; the appropriateness of this is debatable. The practical impacts are 1) to require very high levels of profit before the company is deemed to be ‘adding economic value’, 2) to increase the amount of short-term thinking by managers, and 3) to improve share prices in the short term.

EVA was created by consultants Stern Stewart & Co.

gb flag de flag es flag pt flag il flag

 

Equity

Equity

The ownership the shareholders have in the company, represented by the Capital Stock and the Retained Earnings. Also called Shareholders’ Equity or Net Worth.

On the Balance Sheet, the sum of the Assets equals the sum of Liabilities plus Equity.

gb flag de flag es flag pt flag il flag it flag

 

F

Factoring

Factoring

Selling Accounts Receivable (A/R) (or invoiced sales) at a discount in order to receive immediate Cash.

Also called Discounting Receivables.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Finance Charges

Finance Charges

Expenses associated with financing the business; includes interest, factoring expense, foreign exchange costs, currency hedging, etc.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Finished Goods Inventory (FGI)

Finished Goods Inventory (FGI)

Fully produced goods which are available for sale to customers. Inventories are part of Current Assets.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Fixed Assets

Fixed Assets

Assets categorized as ‘permanent’ and not intended to be ‘turned over’ in the normal business cycle. Fixed Assets may be tangible items such as land, buildings, equipment and furniture with a useful business life of greater than one year; or they may be intangible items such as Goodwill and Intellectual Property property.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Fixed Cost

Fixed Cost

A cost incurred in the general operations of the business that is not directly attributable to the costs of producing goods and services. These ‘Fixed’ or ‘Indirect’ costs will be incurred whether or not any sales are made during the period, thus the designation ‘Fixed’ as opposed to ‘Variable Costs’.

gb flag de flag es flag il flag it flag

 

G

Goodwill

Goodwill

Intangible Assets arise when Assets are purchased for more than their ‘book value’. The ‘Intangible’ value must be re-evaluated on a periodic basis.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Gross Income

Gross Income

Gross Income
Calculation: Sales less Direct Cost less Overhead(s).

Gross Margin
Ratio: Gross Income as a percentage of Sales


Gross Income is the amount of profit available after deducting from sales the direct (or variable) costs of labor and materials, and the costs of the overheads applied to the production of goods and services.

This is a real What do you mean by that? with people sometimes using the two terms interchangeably. We use ‘margin’ to denote a percentage (of Sales).

Example:
- Sales of 200 less COS of 80 less factory overheads of 10 equals Gross Income of 110.
- Gross Income of 110 divided by Sales of 200 equals Gross Margin of 55%.

gb flag de flag il flag

 

Gross Margin

Gross Margin

Gross Income
Calculation: Sales less Direct Cost less Overhead(s).

GROSS MARGIN
Ratio: Gross Income as a percentage of Sales


Gross Margin is the percentage of profit available after deducting from sales the direct (or variable) costs of labor and materials, and the costs of the overheads applied to the production of goods and services.

This is a real What do you mean by that? with people sometimes using the two terms interchangeably. We use ‘margin’ to denote a percentage (of Sales).

Example:
- Sales of 200 less COS of 80 less factory overheads of 10 equals Gross Income of 110.
- Gross Income of 110 divided by Sales of 200 equals Gross Margin of 55%.

gb flag de flag fr flag il flag

 

Gross Profit

Gross Profit

See Gross Income.

gb flag de flag es flag pt flag il flag it flag

 

Gross Sales

Gross Sales

Total sales revenue before applying any sales discounts, allowances or returns.

See also Sales; Net Sales.

gb flag de flag fr flag es flag pt flag il flag it flag

 

I

Income

Income

Ask What do you mean by that?. It could mean Sales Income (Sales Revenue at the top of the Income Statement), or it could mean Net Income (Net Profit at the bottom of the Income Statement).

gb flag de flag fr flag il flag

 

Income Statement

Income Statement

A summary of the income and expenses for the company over the operating period – a financial History Book for the fiscal period (month, quarter, year).

The right side of the The Company Board (and of the Income/Outcome business simulation game board) is an Income Statement. See also Balance Sheet.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Income/Outcome Triangle for Ratio Analysis

Income/Outcome Triangle for Ratio Analysis

The visual representation of the relationships between Sales, Net Income and Assets overlaid on The Company Board.

Created by consultants Andromeda Training, Inc.

gb flag de flag il flag

 

Indirect Cost

Indirect Cost

A cost incurred in the general operations of the business that is not directly attributable to the costs of producing goods and services. Compare to Direct Cost.

See also Fixed Cost vs Variable Costs.

gb flag de flag fr flag pt flag

 

Intangible Assets

Intangible Assets

An asset which has a perceived value but without a tangible nature. Typical examples are Goodwill and Intellectual Property.

gb flag de flag il flag

 

Intellectual Property

Intellectual Property

Copyrights, Patents, Trademarks and Service Marks.

gb flag de flag il flag

 

Inventory

Inventory

Raw materials, work in process (WIP), and finished goods.

gb flag

 

Inventory Turnover

Inventory Turnover

Ratio: Annual Cost of Sales (COS) divided by the average value of inventory on hand.

This ratio is the number of times a business sells out its inventory during the year. Also called Inventory Turns.

gb flag de flag es flag pt flag il flag it flag

 

Inventory Turns

Inventory Turns

See Inventory Turnover.

gb flag

 

L

Leverage

LEVERAGE is how much you extend your Assets by borrowing against your investment.

See also Leverage Ratios.

gb flag de flag il flag

 

Leverage Ratios

Leverage Ratios

LEVERAGE RATIOS incorporate any two of the following: Assets, Equity, Liabilities.

Example:
If you invest $60K of your money in a business, and borrow an additional $30K from the bank, you have assets of $90K. You can express your leverage in several ways:

Debt to Equity : 30/60 = .5
Debt Ratio (i.e. Debt to Assets): 30/90 = .33

Both these numbers are expressing the same situation, and both can be called leverage. One person might say “We’re leveraged 50%”, while another could say “We’re leveraged 33%.”

See also Leverage.

Be sure to ask, What do you mean by that?.

gb flag de flag il flag

 

Liabilities

Liabilities

The debts of the company; includes bank loans, salaries and benefits payable, suppliers’ bills (Accounts Payable (A/P)), taxes due, etc. Liabilities are usually sorted into current or short-term (falling due within one year) and long-term (payment period is greater than one year).

gb flag de flag es flag pt flag il flag it flag

 

Long-Term Liabilities

Long-Term Liabilities

Liabilities which have a payment period exceeding one year; includes bank loans, bonds, etc.

gb flag de flag il flag

 

Long-term Debt

Long-term Debt

Liabilities which have a payment period exceeding one year; includes bank loans, bonds, etc.

gb flag de flag fr flag es flag pt flag il flag it flag

 

M

Margin

Margin

Gross Margin: Gross Profit as a percentage of Sales
Operating Margin: Operating Profit as a percentage of Sales
Return On Sales (ROS): Net Profit as a percentage of Sales

This number describes what income is left over after expenses are deducted from sales.

What do you mean by that? We use ‘margin’ to denote a percentage (of Sales).

People will think of profit margin at different points on the Income Statement. Production might look at Gross Margin while operations might look at Operating Margin; the Finance Department looks at Return On Sales (ROS).

gb flag de flag il flag

 

N

Net Asset

What do you mean by that? This term can describe wildly different situations; here are some possibilities.

1) Total Assets less non interest-bearing liabilities (i.e. Net Assets).
2) Total Assets less Current Liabilities.
3) Total Assets less Total Liabilities (i.e. Equity or Net Worth).

And all of these terms are different from Net Asset Value. Make sure you agree on the meaning!

gb flag de flag fr flag pt flag il flag it flag

 

Net Asset Balance Sheet

Net Asset Balance Sheet

A Balance Sheet balancing the Total Assets less non-interest bearing liabilities against the combined total of Interest-Bearing Liabilities and equity.

This version of the Balance Sheet has advantages for measuring management performance, and is prevalent outside North America.

See also Total Asset Balance Sheet.

What do you mean by that? Any term which uses the phrase ‘net asset’ or ‘net assets’ must be examined closely. See Net Asset; Net Assets.

gb flag de flag il flag

 

Net Asset Turnover

Ratio: Sales divided by Net Assets

This ratio measures how asset-intensive a business is and the efficiency of the assets employed.

Asset Turnover shows the speed with which an amount of cash, equivalent to the money invested in the business by head office, comes back in through the door in fresh sales. It isn’t concerned with profit, only with cash flow. If sales are rapid, little cash is tied up to keep the business going; which may make it easier to expand.

See also Income/Outcome Triangle for Ratio Analysis, Return on Net Assets (RONA), Asset Turnover (ATO).

gb flag de flag

 

Net Asset Value

Net Assets

Calculation: Total Assets less Non-Interest Bearing Liabilities

Net Assets are that portion of Total Assets funded by Corporate HQ long-term financing and share capital.

gb flag de flag pt flag il flag

 

Net Income

Net Income

Net Income
The Profit left for the owners, after all costs, expenses, interest and taxes have been paid. Also called Net Profit.

Return On Sales (ROS)
Ratio: Net Income as a percentage of Sales

Net Income (or Net Profit) is the Profit left for the owners, after all costs, expenses, interest and taxes have been paid.

Example:
• Sales of 200 less COS (80) less Operating expense (70) less interest expense (20) and income tax (10) leaves Net Income of 20.
• Net Income of 20 divided by Sales of 200 equals Return on Sales of 10%.

gb flag de flag es flag il flag

 

Net Present Value (NPV)

NPV is used to determine when, if ever, a capital investment will generate a profit, and how much that will be in today’s terms. The Net cash flows are considered in today’s terms (i.e. Present Value), because the money that comes in next year will be worth less than the money that goes out this year.

gb flag de flag

 

Net Profit

Net Profit

See Net Income.

gb flag de flag fr flag es flag pt flag it flag

 

Net Sales

Net Sales

Calculation: Gross Sales at list price less any discounts, sales returns and allowances, but before subtracting the Cost of Sales (COS) and Operating Expense.

Revenues from the sale of goods and services which are part of the company’s regular operations.

Net Sales is the number used in Financial Statements if the line item just says ’Sales.’

What do you mean by that? The term ‘Sales’ generally refers to Net Sales. The term ‘Total Sales’ could refer to Gross Sales or Net Sales.

gb flag fr flag es flag pt flag il flag it flag

 

Net Working Capital

Net Working Capital

See Working Capital

gb flag de flag

 

Net Worth

Net Worth

The ownership the shareholders have in the company, represented by the Capital Stock and the Retained Earnings. Also called Shareholders’ Equity.

gb flag de flag il flag

 

O

Operating Expense

Operating Expense

The after-COS expenses related to normal operation of the business including R&D, advertising, salaries, rent and utilities, but excluding Finance Charges, taxes, and exceptional (one-time) charges.

Operating Expense is also referred to as Overhead.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Operating Income

Operating Income

Operating Income
Calculation: Sales less Cost of Sales (COS) less Operating Expense.

Operating Margin
Ratio: Operating Income as a percentage of Sales.


Operating Income is one of many possible finance terms for the same concept. It can also be known as:
Earnings Before Interest and Tax (EBIT),
Operating Profit,
Measured Operating Income (MOI),
Profit Before Interest and Tax (PBIT) in the United Kingdom,
Result No. 3 in Germany,
The Primary Result in Denmark.

This is a real What do you mean by that? with people sometimes using the two terms interchangeably. We are using ‘margin’ is to denote a percentage (of Sales).

Example:
- Sales of 200 less COS of 80 less Operating expense of 70 leaves Operating Profit of 50.
- Operating Profit of 50 divided by Sales of 200 equals Operating Margin of 25%.

gb flag de flag fr flag es flag il flag it flag

 

Operating Margin

Operating Margin

Operating Income
Calculation: Sales less Cost of Sales (COS) less Operating Expense.

Operating Margin
Ratio: Operating Income as a percentage of Sales.


Operating Income is one of many possible finance terms for the same concept. It can also be known as:
Earnings Before Interest and Tax (EBIT),
Operating Profit,
Measured Operating Income (MOI),
Profit Before Interest and Tax (PBIT) in the United Kingdom,
Result No. 3 in Germany,
The Primary Result in Denmark.

This is a real What do you mean by that? with people sometimes using the two terms interchangeably. We are using ‘margin’ is to denote a percentage (of Sales).

Example:
- Sales of 200 less COS of 80 less Operating expense of 70 leaves Operating Profit of 50.
- Operating Profit of 50 divided by Sales of 200 equals Operating Margin of 25%.

gb flag de flag il flag

 

Operating Profit

Operating Profit

See Operating Income.

gb flag de flag pt flag il flag

 

Other Current Assets

Other Current Assets

Deposits, bonds and securities which are not included in Cash, but can be readily converted into cash.

gb flag de flag il flag

 

Other Fixed Assets

Other Fixed Assets

The accumulation of Fixed Assets which are not detailed by individual class on the Balance Sheet.

gb flag de flag il flag

 

Overhead(s)

Overhead(s)

The after-COS expenses related to normal operation of the business including R&D, advertising, salaries, rent and utilities, but excluding Finance Charges, taxes, and exceptional (one-time) charges. Also called Operating Expense.

gb flag de flag es flag pt flag il flag it flag

 

P

P/E Ratio

Ratio: Price per Share divided by Earnings Per Share (EPS).

This is the number of years it will take for the investment to be paid back by Earnings at the current rate, and thus reflects the confidence that investors feel in the company.

gb flag de flag il flag

 

Payables

Payables

See Accounts Payable (A/P)

gb flag de flag il flag

 

Price/Book Value Ratio

Ratio: Price per Share divided by Book Value per Share.

This is a measure of the safety of an investment: how well is the investment covered by assets if the worst things happen and the company closes operations?

gb flag de flag il flag

 

Profit

Profit

Calculation of Gross Income or Gross Profit:
Sales less Cost of Sales (COS)
Calculation of Operating Income or OperatingProfit:
Sales less Cost of Sales (COS) less Operating Expense
Calculation of Net Income or Net Profit:
Sales less all costs and expenses

This number describes what income is left over after expenses are deducted from sales.

See also Profit & Cash

gb flag de flag es flag pt flag il flag it flag

 

Profit & Cash

Profit & Cash

Understanding the Cash Flow of a business is as essential as understanding Profit.

Profit is like food - you need it for the business to grow and to be healthy and strong; but you don’t have to eat all the time. But cash is like air – you need it constantly. If you run out, and cannot immediately get more, you die.

Profit happens on the Income Statement. Cash happens on the Balance Sheet. The two have to be managed separately.

gb flag de flag il flag

 

Profit & Loss (P&L)

Profit & Loss (P&L)

The Profit or Loss for the period, as reflected on the Income Statement.

‘The P&L’ is also used as another name for the Income Statement.

gb flag de flag es flag il flag it flag

 

Profit & Loss Account (P&L)

Profit & Loss Account (P&L)

Another name for the Income Statement.

gb flag de flag fr flag es flag pt flag il flag

 

Profit Margin

Profit Margin

Gross Margin: Gross Income or Gross Profit as a percentage of Sales
Operating Margin: Operating Income or Operating Profit as a percentage of Sales
Return on Sales: Net Income or Net Profit as a percentage of Sales

This number describes what income is left over after expenses are deducted from sales.

What do you mean by that? We use ‘margin’ is to denote a percentage (of Sales).

People will think of profit margins at different points on the Income Statement. Production might look at Gross Margin while operations might look at Operating Margin; the Finance Department looks at Return on Sales.

gb flag de flag il flag

 

Profitability

Profitability

Ratio: Net Income as a percentage of Sales.

Also called Return On Sales (ROS).

See also Income/Outcome Triangle for Ratio Analysis.

gb flag de flag il flag

 

Q

Quick Ratio

Quick Ratio

See Current Ratio.

gb flag de flag il flag

 

R

Raw Materials

Raw Materials

Materials purchased for manufacture, not yet altered by the production process.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Receivables

Receivables

See Accounts Receivable (A/R).

gb flag de flag il flag

 

Retained Earnings

Retained Earnings

The accumulation of Net Income that has been paid kept in the company to help it grow (rather than being paid out to Shareholders as Dividends).

gb flag de flag fr flag es flag pt flag il flag it flag

 

Return On Assets (ROA)

Return On Assets (ROA)

Ratio: Net Income as a percentage of the Total (average) Assets.

ROA measures how effectively the assets are employed in the business.

See also Income/Outcome Triangle for Ratio Analysis; Return on Net Assets (RONA).

gb flag de flag fr flag pt flag il flag

 

Return On Capital Employed (ROCE)

Ratio: Operating Income as a percentage of Equity plus Long-term Debt. The precise definition will vary by company.

Also known as Return on Net Assets (RONA).

gb flag de flag il flag

 

Return On Equity (ROE)

Return On Equity (ROE)

Ratio: Net Income as a percentage of the Shareholders’ Equity.

ROE measures how effectively the Shareholders’ investment has been put to work to create profit. Also known as Return on Investment.

gb flag de flag pt flag il flag

 

Return On Sales (ROS)

Return On Sales (ROS)

Net Income
The Profit left for the owners, after all costs, expenses, interest and taxes have been paid.

Return On Sales (ROS)
Ratio: Net Income as a percentage of Sales

Net Income (or Net Profit) is the Profit left for the owners, after all costs, expenses, interest and taxes have been paid.

Example:
- Sales of 200 less COS (80) less Operating expense (70) less interest expense (20) and income tax (10) leaves Net Income of 20.
- Net Income of 20 divided by Sales of 200 equals Return on Sales of 10%.

gb flag de flag es flag pt flag il flag it flag

 

Return on Investment

1. Investor’s View
Ratio: Net Income as a percentage of the Shareholders’ Equity.

ROI measures how effectively the Shareholders’ investment has been put to work to create profit. Also known as Return On Equity (ROE).


2. Manager’s View
The benefit obtained from any internal improvement or expansion, expressed as a percentage of the cost. This ROI forecast allows the Finance Department to choose between competing proposals for improving the business, by seeing which ones provide the biggest bang for the buck.

gb flag de flag fr flag es flag il flag it flag

 

Return on Net Assets (RONA)

Ratio: Operating Income as a percentage of the Net Assets

RONA shows the profit that managers are making as a percentage of the assets given them to manage. Net Assets in this sense means the amount of Assets derived from Equity and long-term debt. Net Assets does not include supplier Accounts Payable (A/P) and other liabilities which the managers have generated themselves. Similarly, Operating Income does not take into account the finance charges and taxes; i.e. the items that managers have no control over.

See also Return On Assets (ROA).

gb flag de flag fr flag es flag pt flag il flag it flag

 

S

Sales

Sales

Revenues from the sale of goods and services which are part of the company’s regular operations.

What do you mean by that? The term ‘Sales’ generally refers to Net Sales which is the number used in the Financial Statements.

The term ‘Total Sales’ could refer to Gross Sales or Net Sales.

gb flag de flag pt flag il flag

 

Selling, General & Administrative (SG&A)

Selling, General & Administrative (SG&A)

The general expenses of running the business which are not associated directly with the products or services, i.e., the costs for sales and marketing, administration, recruitment and training and rent. Research and Development (R&D) may be included or may be broken out as a separate line item.

gb flag de flag es flag pt flag il flag it flag

 

Semi-Direct Cost, Semi-Fixed Cost, Semi-Variable Cost

First make sure you understand the concept behind the term without the ‘semi’; then ask What do you mean by that?

gb flag de flag

 

Shareholders’ Equity

Shareholders’ Equity

See Equity.

gb flag de flag fr flag il flag

 

Shares at Par Value

The face value of the capital shares, at their original declared value.

This is normally far lower than the market price of the shares.

gb flag de flag es flag pt flag il flag it flag

 

Statement of Cash Flow

Analysis of sources of cash that flowed into the business together with how cash was allocated, for the accounting period.

The information is grouped by functional department, because Cash can be freed up from anywhere (such as getting customers to pay faster, or paying suppliers more slowly), not just from Sales or the Finance Department.

Note: Cash Flow does not consider non-cash items such as depreciation.

gb flag de flag il flag

 

Statement of Changes in Shareholders’ Equity

A summary of the changes in the Equity section of the Balance Sheet from year to year.

gb flag de flag il flag

 

Stock

Typically means shares (e.g. Shareholder Equity). In other countries, it is more likely to mean Inventory.

gb flag de flag

 

T

Tangible Assets

Tangible Assets

Fixed Assets with a physical, tangible nature such as land, buildings, equipment and furniture.

See also Intangible Assets.

gb flag de flag il flag

 

The Company Board

The Company Board

A 3-dimensional landscape of the financial results of a business developed by Andromeda Training, Inc.

gb flag de flag es flag

 

Total Asset Balance Sheet

Total Asset Balance Sheet

A Balance Sheet balancing the total Assets against the combined total of Liabilities and Equity.

This is the simplest representation of Balance Sheet information, and is prevalent in North America. It shows the assets (what you have in the business) and balances that amount against the total of liabilities and equity (which is where the assets came from). In other words, everything you have in the business comes from investing (Capital Stock), making money (Retained Earnings ), or borrowing from sources such as banks (Loans) and suppliers (Accounts Payable (A/P) ).

See also Net Asset Balance Sheet.

gb flag de flag il flag

 

Total Assets

Total Assets

The combined total of Current Assets and Fixed Assets.

gb flag de flag il flag

 

Total Sales

Total Sales

Revenues from the sale of goods and services which are part of the company’s regular operations.

What do you mean by that? The term ‘Sales’ generally refers to Net Sales which is the number used in the Financial Statements.

The term ‘Total Sales’ could refer to Gross Sales or Net Sales.

gb flag de flag il flag

 

V

Variable Costs

Variable Costs

A cost that varies with the Sales volume. Examples are materials, labor, and sales commission.

Conceptually, Direct Cost, Cost of Goods Sold (COGS) and Variable Costs are very similar. Check how each term is used in your company.

gb flag de flag es flag il flag it flag

 

Variance

The difference between the expected or planned result and the actual result.

gb flag de flag fr flag es flag pt flag il flag it flag

 

W

What do you mean by that?

The definitions given here are our generic explanations of common corporate financial terminology. Actual meanings can vary wildly from company to company; in order to have the correct internal definition you need to ask your Finance Department, "What do you mean by that?"

gb flag de flag es flag

 

Work-in-Process (WIP)

Work-in-Process (WIP)

Goods that are in the production stage, to be finished at some future date for shipment to customers.

gb flag de flag fr flag es flag pt flag il flag it flag

 

Working Capital

Working Capital

Calculation: Cash, Accounts Receivable (A/R), and Inventory minus the Accounts Payable (A/P) and other short-term financing obtained in relation to the Current Assets.

What it takes to run the business on a day-to-day basis. Defined as the difference between Current Assets and Current Liabilities.

Also known as Net Working Capital.

gb flag de flag fr flag es flag pt flag il flag it flag

 

A
B
C
D
E
F
G
I
L
M
N
O
P
Q
R
S
T
V
W