Financial Terms

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Acid Test

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A stern measure of a company's ability to pay for its short term debts, in that stock is excluded from asset value.

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Assets

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Anything owned by the company having a monetary value

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Asset Turnover

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Measure of operational efficiency - shows how much revenue per £ of assets available to the business.

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Balance Sheet

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The balance sheet is one of three essential measurement reports for the performance and health of the company along with the profit and loss account and the cashflow statement

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Budget

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In a financial planning context the word 'budget' means an amount of money that is planned to spend on a particular activity or resource, usually over a trading year.

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Capital Employed

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The value of all resources available to the company, typically comprising share capital, retained profits and revenues, long-term loans and deferred taxation.

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Cashflow

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The movement of cash in and out of a business from day-to-day direct trading and other non-trading or indirect effects, such as capital expenditure, tax and dividend payments.

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Cashflow Statememt

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One of the three essential reporting and measurement systems for any company. The cashflow statement provides a third perspective alongside the Profit and Loss account and the Balance Sheet.

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Cost of Debt Ratio

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This term normally and simply refers to the interest expense over a given period as a percentage of the average outstanding debt over the same period.

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Cost of Goods Sold (COGS)

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The directly attributable costs of products or services sold. Sales less COGS = Gross Profit. Effectively the same as Cost of Sales (COS)

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Cost of Sales (COS)

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Cost of sales is the value, at cost, of the goods or services sold during the period in question, usually the financial year, as shown in a Profit and Loss Account (P&L)

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Current Assets

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Cash and anything that is expected to be converted into cash within twelve levels of the balance sheet date.

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Current Ratio

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The relationship between current assets and current liabilities, indicating the liquidity of a business, ie its ability to meet its short-term obligations. Often referred to as the Liquidity Ratio

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Current Liabilities

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Money owed by the business that is generally due for payment within 12 months of balance sheet date. Examples include creditors, bank overdraft and taxation.

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Depreciation

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The apportionment of a cost of a capital item over an agreed period.

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Dividend

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A dividend is a payment made per share, to a company's shareholders by a company, based on the profits of the year, but not necessarily all the profits, arrived at by the directors and voted at the company's annual general meeting.

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Earnings Before

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There are several 'Earnings Before' Ratios and Acronyms : EBT = Earnings Before Taxes; EBIT = Earnings Before Interest and Taxes; EBIAT = Earnings Before Interest after Taxes; EBITD = Earnings Before Interest, Taxes and Depreciation; and EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization.

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Fixed Assets

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Assets held for use by the business rather than for sale or conversion into cash, eg, fixtures and fittings, equipment, buildings.

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Fixed Cost

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A cost which does not vary with changing sales or production volumes, eg, building lease costs, permanent staff wages, rates, depreciation of capital items.

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FOB - 'Free on Board'

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The FOB (Free On Board) abbreviation is an import/export term relating to the point at which responsibility for goods passes from seller (exporter) to buyer (importer). It's in this listing because it's commonly misunderstood and also has potentially significant financial implications.

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Gearing

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The ration of debt to equity, usually the relationship between long-term borrowings and shareholders' funds.

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Goodwill

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Any surplus money paid to acquire a company that exceeds its net tangible assets value.

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Gross Profit

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Sales less cost of goods or services sold. Also referred to as gross profit margin.

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Initial Public Offering (IPO)

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An Initial Public Offering is the first sale of privately owned equity in a company via the issue of shares to the public and other investing institutions.

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Letters of Credit

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These mechanisms are used by exporters and importers, and usually provided by the importing company's bank to the exporter to safeguard the contractual expectations and particularly financial exposure of the exporter of the goods or services. (Also called 'export letters of credit, and 'import letters of credit'.)

When an exporter agrees to supply a customer in another country, the exporter needs to know that the goods will be paid for.

The common system, which has been in use for many years, is for the customer's bank to issue a 'letter of credit' at the request of the buyer, to the seller. The letter of credit essentially guarantees that the bank will pay the seller's invoice

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Letters of Guarantee

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There are many types of letters of guarantee. These types of letters of guarantee are concerned with providing safeguards to buyers that suppliers will meet their obligations or vice-versa, and are issued by the supplier's or customer's bank depending on which party seeks the guarantee. While a letter of credit essentially guarantees payment to the exporter, a letter of guarantee provides safeguard that other aspects of the supplier's or customer's obligations will be met. The supplier's or customer's bank is effectively giving a direct guarantee on behalf of the supplier or customer that the supplier's or customer's obligations will be met, and in the event of the supplier's or customer's failure to meet obligations to the other party then the bank undertakes the responsibility for those obligations.

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Liabilities

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General term for what the business owes. Liabilities are long-term loans of the type used to finance the business and short-term debts or money owing as a result of trading activities to date.

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Liquidity Ratio

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Indicates the company's ability to pay its short term debts, by measuring the relationship between current assets against the short-term debt value. Also referred to as the Current Ratio.

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Net Assets (Also Known as Total Net Assets)

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Total Assets less current liabilities and long-term liabilities that have not been capitalised

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Net Current Assets

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Current Assets less Current Liabilities

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Net Pressure Value (NPV)

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NPV is a significant measurement in business investment decisions. NPV is essentially a measurement of all future cashflow (revenues minus costs, also referred to as net benefits) that will be derived from a particular investment (whether in the form of a project, a new product line, a proposition, or an entire business), minus the cost of the investment.

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Net Profit

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Net profit can mean different things so it always needs clarifying. Net strictly means 'after all deductions' (as opposed to just certain deductions used to arrive at a gross profit or margin). Net profit normally refers to profit after deduction of all operating expenses, notably after deduction of fixed costs or fixed overheads. This contrasts with the term 'gross profit' which normally refers to the difference between sales and direct cost of product or service sold

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Profit and Loss Account (P&L)

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One of the three principal business reporting and measuring tools (along with the balance sheet and cashflow statement). The P&L is essentially a trading account for a period, usually a year, but also can be monthly and cumulative. It shows profit performance, which often has little to do with cash, stocks and assets (which must be viewed from a separate perspective using balance sheet and cashflow statement). The P&L typically shows sales revenues, cost of sales/cost of goods sold, generally a gross profit margin (sometimes called 'contribution'), fixed overheads and or operating expenses, and then a profit before tax figure (PBT).

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Overhead

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An expense that cannot be attributed to any one single part of the company's activities.

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Quick Ratio

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Same as the Acid Test. The relationship between current assets readily convertible into cast and current liabilities. A sterner test of liquidity.

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Restricted Funds

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These are funds used by an organisation that are restricted or earmarked by a donor for a specific purpose, which can be extremely specific or quite broad, eg., endowment or pensions investment; research (in the case of donations to a charity or research organisation); or a particular project with agreed terms of reference and outputs such as to meet the criteria or terms of the donation or award or grant.

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Return on Capital Employed (ROCE)

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A fundamental financial performance measure. A percentage figure representing profit before interest against the money that is invested in the business.

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Return on Investment

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Profits derived as a proportion of and directly attributable to cost or 'book value' of an asset, liability or activity, net of depreciation.

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Share Capital

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The balance sheet nominal value paid into the company by shareholders at the time(s) shares were issued.

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Shareholders' funds

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A measure of the shareholder's total interest in the company represented by the total share capital plus reserves.

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T/T (Telegraphic Transfer)

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Interntional banking payment method: a telegraphic transfer payment, commonly used/required for import/export trade, between a bank and an overseas party enabling transfer of local or foreign currency by telegraph, cable or telex. Also called a cable transfer. The terminology dates from times when such communications were literally 'wired' - before wireless communications technology.

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Variable Cost

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A cost which varies with sales or operational volumes, e.g materials, fuel and commission payments.

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Working Capital

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Current assets less current liabilities, representing the required investment, continually circulating, to finance stock, debtors, and work in progress.