Glossary of nancial terms

Cross references are in small capitals. Accounting period Accounting policies The length of time between two reporting dates, typically a year. The accounting principles chosen by the board of directors and shown in the annual reports and accounts. A US term for amounts payable to suppliers, usually due within one year.

Accounts payable

Accounts receivable A US term for amounts receivable from customers, usually due within one year. Accrual A type of payable where the products or services have been received in one accounting period, but the invoicing and payment take place in a subsequent accounting period. The allocation of indirect costs to products or services in proportion to the activities that drove the cost to be incurred. The writing off of an intangible asset over a period. A review of a business comprising chairmans statement, report of directors, review of operations, together with nancial statements, notes and disclosures. These are produced for the shareholders, although they are used by many other stakeholders. The spreading of overheads across various cost centres as part of calculating the cost of a product or service. Something owned or controlled that has a future economic benet.

Activity-based costing (abc) Amortisation Annual reports and accounts

Apportionment

Asset

294

GLOSSARY OF FINANCIAL TERMS

Audit report

A report by an auditor on whether the nancial statements provide a true and fair view of the business. A statement at a specied date showing the nancial position of a business in terms of its assets, liabilities and shareholders funds (equity). Shares issued to existing shareholders in proportion to their existing shareholding at no charge. The recording and summarising of business transactions. The volume of activity at which the total revenue of a product, service or business equals the total costs, and neither a prot nor a loss is made. A nancial plan comprising an estimation of the revenue and costs for a future period of time. The comparison of a budget with actual results, using variance analysis. The evaluation of an investment opportunity. The blueprint for achievement in a business over a 35 year horizon.

Balance sheet

Bonus issue

Bookkeeping Break-even point

Budget Budgetary control Business case Business plan

Capital expenditure The purchase of fixed assets, typically involving (capex) justication with a business case. Cash ow statement A statement showing the funds generated by the operations and funds from other sources. It also indicates how funds have been applied and whether there is a net surplus or deciency. Common stock Company Consolidation Contribution See ordinary share. A legal entity that is separate from its owners. The adding together of the nancial statements of a group of companies as if it were one company. The surplus after deducting variable costs from revenue.

295

GUIDE TO FINANCIAL MANAGEMENT

Contribution analysis

A method of preparing analyses based on the identifying variable costs and fixed costs, which can be used to evaluate the most protable areas of a business and how best to use scarce resources. A department or function to which costs can be allocated for control purposes. The required return for investors used in the evaluation of capital projects. Also known as the weighted average cost of capital (wacc). The direct costs involved in providing goods or services (also known as cost of goods). Amounts owing to suppliers and usually payable within one year. The short-term operating assets, including inventory, receivables, short-term investments, bank and cash balances. The liabilities arising as a consequence of trade, including payables and bank overdrafts. The ratio of current assets divided by current liabilities. It indicates a companys ability to meet its short-term obligations. A loan secured on assets which is usually issued at a xed rate of interest and repayable on a specic date. Amounts owed to a company by its customers and usually collectible within one year. Amounts owed to loan providers. An accounting estimate to take account of the diminution in value of a fixed asset and to spread its cost over its estimated useful life. (See also reducing-balance depreciation; straight-line depreciation.) Costs such as raw materials specically used in the creation of a product or service.

Cost centre Cost of capital

Cost of sales Creditors Current assets

Current liabilities Current ratio

Debenture

Debtors Debts Depreciation

Direct costs

296

GLOSSARY OF FINANCIAL TERMS

Director

A member of a companys board who is appointed by the shareholders as a steward of their investment. A director has responsibility for running a company and setting and implementing its strategy. Labour costs specically associated with the provision of a product or service. A technique used to value future cash ows (see time value of money, net present value and internal rate of return). The distribution in cash of company prots to shareholders. A ratio multiple showing the number of times the dividend of a company could be paid out of the prot attributable to shareholders. A measure of the cash return to investors in a company. It is calculated by taking the ordinary dividend as a percentage of the market price of the share. Prot attributable to shareholders divided by the average number of shares in issue during the year. Earnings before interest, tax, depreciation and amortisation, an approximation for cash generation by a business. An individual who creates a business to capitalise on a perceived market opportunity. Also known as shareholders funds, or net worth, it is the sum of issued share capital and reserves. The process of letting another party assume responsibility for collecting receivables.

Direct labour Discounted cash ow Dividend Dividend cover

Dividend yield

Earnings per share ebitda

Entrepreneur Equity Factoring

Financial statements The income statement, the balance sheet and the cash flow statement. Finished goods Goods ready for sale to customers as distinct from work in progress (unnished goods).

297

GUIDE TO FINANCIAL MANAGEMENT

Fixed assets

The infrastructure of a business consisting of tangible assets, such as property, plant and equipment, xtures and ttings, and intangible assets, such as goodwill and brands. The security provided for a debt that is tied to a specic asset or group of assets. Costs which are unaffected by the level of business activity (within a relevant range). A UK term for leverage. The difference between the amount paid for a company and the fair value of the net assets acquired. Comparing actual or budgeted revenue and costs with previous years in the form of percentage growth. A statement of revenue and costs that is also known as a profit and loss account. Costs or overheads incurred in running a business that are not directly attributable to a product or service. Assets which have no physical form, such as brands and patents. The average rate of return achieved over the life of a project, calculated by nding the discount rate where the sum of the discounted cash flows minus the capital outlay is equal to zero. The International Accounting Standards Board produces the guidance (ifrs) on accounting used in reports and accounts. The prescriptive rules on preparing and presenting nancial statements.

Fixed charge Fixed costs Gearing Goodwill

Horizontal analysis

Income statement Indirect costs

Intangible assets Internal rate of return (IRR)

International Accounting Standards Board (iasb) International Financial Reporting Standards (ifrs)

298

GLOSSARY OF FINANCIAL TERMS

Inventory

The US term for stock, which includes raw materials, work in progress and finished goods. Inventory is valued at the lower of cost or market value. The evaluation of proposed capital projects using a business case. A payment guarantee from a customers bank that is used in international trade. The proportion of investment provided to a company by its shareholders versus the proportion of investment provided by other sources which usually bears interest. High leverage (gearing) means there is a high proportion of debt. A claim on a business as a result of a past transaction or event. Bank borrowings. The volume of sales above the break-even point. The market value of shares multiplied by the number of shares issued. This is the value of the company. The shares in subsidiary companies which are not owned by the holding company. The sum of the future cash ows discounted at the cost of capital minus the capital outlay. The cost of day-to-day items such as payroll, rent, marketing, distribution and so on. Shares which are entitled to the prots after all other costs. The US term is common stock. Amounts owing to suppliers and usually payable within one year. The time taken for the cash receipts from a project to exceed the cash payments. It is normally expressed in years.

Investment appraisal Letter of credit (loc) Leverage

Liability Loans Margin of safety Market capitalisation Minority interest Net present value (NPV) Operating expenditure (opex) Ordinary shares Payables Payback period

299

GUIDE TO FINANCIAL MANAGEMENT

Prepayment

A type of receivable where the payment for goods has taken place in one accounting period but the goods and services will not be received until a subsequent accounting period. The share price divided by the last reported earnings per share. The p/e is a multiple which shows the number of years earnings the market is willing to pay for a companys shares. Surplus of revenue less costs. The prot of a product or service expressed as a percentage of revenue. A statement showing the revenue minus the costs for the period under review. Now known as the income statement. An estimated amount to cover an expected liability even if the exact amount of the liability or its timing is uncertain. Unprocessed inventory, which forms the input to the production process for conversion to nished products. A US term for debtors. A method of depreciation whereby the annual amount written off is a percentage of the reduced balance. This results in higher charges for depreciation during the earlier years of the fixed asset and lower charges in the later years. A process carried out part way through the budget year to produce an estimate of the anticipated results for the whole year. Costs that will change as a consequence of making a decision. The range of production volumes over which revenue and cost relationships do not change.

Price/earnings ratio (P/E)

Prot Prot margin Prot and loss account Provision

Raw materials

Receivables Reducing-balance depreciation

Reforecast

Relevant costs Relevant range

300

GLOSSARY OF FINANCIAL TERMS

Reserves: capital

Reserves which are not generated through normal trading activities. They include one-off items such as share premium and revaluation of properties. There are limits on their distribution. The accumulated undistributed income, also known as retained earnings. The anticipated value of a fixed asset at the end of its useful life. See reserves: revenue. Operating income expressed as a percentage of the investment used to earn that income. Income receivable from selling products or services, net of sales taxes. Revenue is reported in the income statement. An issue of ordinary shares to existing shareholders who have a right to a number of new shares in proportion to their existing holding. The new shares are normally issued at a price below the current trading price. The average monthly cost for an item of expenditure. A term for revenue or turnover. US law that came into force in 2002 and established new standards for corporate governance with regard to internal nancial controls. See bonus issue. The process of building a portfolio of receivables and selling them to a group of investors. A technique used when appraising investments to explore the risk inherent in the assumptions. The generation of an investment return greater than wacc.

Reserves: revenue Residual value Retained earnings Return on investment (roi) Revenue

Rights issue

Run rate Sales Sarbanes-Oxley Act

Scrip issue Securitise Sensitivity analysis

Shareholders funds A term for equity. Shareholder value

301

GUIDE TO FINANCIAL MANAGEMENT

Share premium Stock Stock turn

The difference between the price paid for a share and its nominal value. A UK term for inventory. In the US the term is used to describe shares. A ratio calculated from cost of sales divided by inventory. It indicates the number of times inventory is sold in one year. A method of depreciation where an equal amount is written off a fixed asset during its estimated useful life. Costs that have already been spent and will not change as result of making a decision. Assets with a physical form, such as property, plant and equipment. A concept used in discounted cash flow analysis. Cash ows in the future are less valuable than those today. A term for sales or revenue. Creation of a consumer perception where the benets of a product or service are greater than its cost. Costs which vary in proportion to the volume of activity. The difference between an actual result and a budgeted result. The process of letting a supplier have responsibility to replenish inventory on your site. Expressing costs as a proportion of revenue or of total cost. The average return that is required by investors in the business. The sum of inventory plus receivables minus payables.

Straight-line depreciation Sunk costs Tangible assets Time value of money Turnover Value

Variable costs Variance Vendor managed inventory (vmi) Vertical analysis Weighted average cost of capital (wacc) Working capital

302

GLOSSARY OF FINANCIAL TERMS

Work in progress

Goods in the process of being manufactured. The value of work in progress is based on the materials and labour invested. A budgeting process which requires all resources to be justied and no reference is made to continuing with budgets from previous years.

Zero-based budgeting

303