Business and Financial Terms

Business education Business general

Business and Financial Terms

Shortlist of the most common business and financial terms.

A – B

Account Balance– The amount currently in an account.

Accounts Payable– Money owed to suppliers for purchases made on credit.

Accounts Receivable – Money owed by customers for goods or services purchased on credit.

Acquisitions – Purchase of another company with cash or stock.

Activity Ratio – A ratio which measures how effectively a corporation is using its assets. Also referred to as a turnover ratio.

After Tax Income – An analysis which focuses on what is left after income tax is paid.

Amortization – Repayment of a loan by installments or the depreciation of an intangible asset.

Assets – Total resources of a corporation, such as cash, fixtures, real estate, etc.

Asset Turnover – Ratio of net sales to average assets.

Audit – Examination of the accounting and financial documents of a firm by an objective auditor. The audit is usually done to determine the accuracy, consistency and conformity to legal, tax and accounting principles.

Balance Sheet – The statement of financial position that shows total assets equal to total liabilities plus owners’ equity.

Bond – A certificate to show evidence of debt where there is a trustee to represent the lenders. Bonds pay interest to their creditors.

Book Value – The value of something on the books. Typically refers to stockholders’ equity or plant and equipment net of depreciation. The net asset value divided by the number of shares of common stock outstanding equals the book value per share, which may be higher or lower than the stock’s market value.

Break Even Analysis – Analysis of the level (volume) of sales at which a project’s revenues equal its expenses.

Break Even Point – Activity or volume level at which net income equals zero. Volume level at which a corporation covers its fixed costs.

Break Even Volume – Volume level at which a corporation reaches its breakeven point, measured by the total fixed costs divided by the contribution margin per unit.

C – E

Capital – Permanent money invested in a business. Can also refer to the long term assets of a business.

Capital Gain/Loss – The difference between the sales price and the purchase price of a capital asset. When positive, the difference is a capital gain, when negative it is a capital loss.

Capital Turnover – The productivity of capital or sales divided by invested capital.

Capitalization – A term used by investment analysts to indicate stockholders’ equity plus bonds outstanding. Can also mean that a cost is considered an asset on the balance sheet.

Cash Flow – The amount of cash that flows into or from a project. Can also mean net income plus depreciation.

Cash Inflow – Cash coming into the company as the result of a previous investment.

Cash Outflow – Cash invested in a project.

Common Size Analysis – Analysis which expresses each expense on the income statement as a percentage of total revenues, and each asset, liability, or equity account on the balance sheet as a percent of total assets.

Common Stock – Stock representing the class of owners who have residual claims on the assets and earnings of a corporation after all debt and preferred stockholders’ claims have been met.

Concentration – Number of firms in an industry, measured by the number of firms producing fifty percent of output in the industry.

Contributed Capital – Direct method of raising equity by issuing stock. The amount of money raised from stockholders.

Contribution Margin Per Unit – Equals revenue per unit minus variable costs per unit.

Convertible Bonds – Bonds which can be converted at the holder’s option into common stock.

Cost Leadership – A strategy which emphasizes low costs, low prices and high volumes to attract customers.

Cost of Goods Sold – The level of expenditure on the production of goods and services which were sold (not produced) in this operating period.

Current Ratio – Current assets divided by current liabilities. Measures liquidity.

Debentures – Unsecured bond, usually with a maturity of fifteen years or more.

Debt – Short, informal term for liabilities.

Debt Ratio – Total debt to total assets.

Debt/Equity Ratio – Total liabilities divided by total equity.

Deferred Revenue – Money received from customers in advance of performance of revenue activities. This amount will be spent on goods or services, or will be repaid to the customer.

Depreciation – Reduction in the amortization describes the depreciation of an intangible asset (e.g., patents).

Diversification – Attempt to reduce business risk by entering other businesses which are in some way unrelated.

Dividend – Payment by a company to its stock/shareholders. Preferred stock dividends are usually fixed while common shares dividends may vary.

Dividend Payout Ratio – Common stock dividend divided by net income. It is a measure of the percentage of income paid out as dividends.

Dividends Payable – Money owed to stockholders.

Equity – The market value of a property or business less all claims and liens upon it. Common stock and preferred stock, often used to refer to common stock only. See Net Worth.

Equity Investors – Investors who are owners of the business.

F – J

Financial Leverage – Use of debt to increase the expected return on equity, measured by the ratio of assets to equity.

Financial Statements – The balance sheet, income statement, statement of changes in financial position, statement of changes in owners’ equity accounts, and notes thereto.

Fixed Production Cost – Production expense that does not vary with volume.

Forecasting – An estimating or projecting of costs or revenues or both. May also relate to estimating the trend of the economy or any other variable.

Funds – Generally, working capital or current assets less current liabilities. Sometimes used to refer to cash or to cash and marketable securities.

Goals – Specific objectives which relate to specific time periods, stated in terms of facts.

Gross Margin – Gross profit as a percentage of sales.

Gross Profit – Sales revenue minus the cost of goods sold.

Income Statement – The statement of revenues, expenses, gains and losses for the period, ending with the net income for the period.

Intangibles – Patents, goodwill and other non-physical, hard-to-measure costs.

Interest – The charge or cost for using money, expressed as a rate per period, usually one year, called the interest rate, or amount of interest paid (interest expense).

Interest Coverage – Earnings before interest and taxes divided by interest expense.

Internal Analysis – An analysis of the strengths and weaknesses of the company. Includes an analysis of the company’s manufacturing, marketing, technological, financial and human resources.

Inventory – Assets held in stock for future use in production or sales. The amount of money already spent to purchase or manufacture goods which will later be sold to customers but are currently unsold. Inventory can be divided into as many as four subcategories: raw materials, work-in-process, finished goods, and supplies.

Inventory Days – Number of days of inventory on hand. It is inventory turnover ratio divided into the number of days in the period.

Inventory Turnover – Number of times the average inventory has been sold during a period, measured by the cost of goods sold for a period divided by the average inventory for the period.

Invested Capital – The money long-term investors have put into the business. It is equal to long-term liabilities plus owners’ equity.

K – N

Leverage – See Operating Leverage and Financial Leverage.

Leverage Ratios – See Solvency Ratios.

Liability – Total value of financial claims on a firm’s assets equal to:

  1. current liabilities plus long-term liabilities;
  2. total assets minus stockholders’ equity.

Liquidity (short-term) – Having sufficient cash to meet short-term claims, or the ease with which an asset or security can be converted into cash without loss of principal.

Liquidity Ratios – Measures the firm’s ability to meet maturing short-term obligations. Includes current ratio and quick ratio.

Marginal Cost – Cost incurred from manufacturing or providing each additional unit; includes normal profit.

Marginal Revenue – Revenue generated from selling each additional unit.

Marketable Securities – Stocks and bonds that can be readily sold on stock exchanges or over-the-counter markets. Classified as current assets and as part of working capital if the company plans to sell for cash as needed. Classified as long-term if it represents a permanent investment.

Market/Book Ratio – Equal to the return on equity multiplied by the price/earnings ratio. It is the relationship between the value the stock market has placed on the company relative to the money invested by stockholders (stockholders’ equity).

Merger – A combination of two or more business enterprises into a single enterprise.

Monopoly – A company which is the only one in an industry and has exclusive control of the commodity or service in that industry.

Mortgage – A bond secured against plant and equipment.

Net Assets – See Net Worth.

Net Income – The amount of money left over after all expenses have been subtracted from Revenue: “The Bottom Line”.

Net Worth – Book value of a company’s common stock, surplus, and retained earnings. The same as stockholders’ equity and Net Assets.

Notes Payable – Money owed to lenders. Can be short or long term.

O – Q

Objectives – Broad statements of direction which are externally focused. Usually stated in terms of image, style, and self-perception. Quantitative measures are stated relative to other corporations.

Oligopoly – An industry where a few (three or four) major firms produce a high (80%) proportion of industry output. This allows every firm to charge a higher price, produce fewer goods, and earn higher profits.

Operating Income – The amount of revenue remaining after the Cost of Goods Sold and Selling, General and Administrative expenses have been subtracted from Sales Revenue.

Operating Leverage – Fixed operating costs, so called because they accentuate variations in profits. Expressed as fixed costs as a percentage of total costs at breakeven volume.

Operating Margin – Operating profit (before interest and taxes) divided by sales.

Operational Planning – Planning related to the near term which focuses on the implementation of the strategic plan.

Overhead – Costs incurred in providing a capacity to carry on productive activities, but that are not directly associated with identifiable units of product.

Owners’ Equity – Stockholders’ equity; assets minus liabilities; contributed capital plus retained earnings of a corporation. See Net Worth.

Payables – Money owed by a company. Money is typically owed to trade suppliers, employees, taxes, and banks.

Payout Ratio – See Dividend Payout Ratio.

Percent Change Analysis – An analysis which focuses on the differences in year-to-year results. Allows a firm to track changes in key income statement or balance sheet accounts from one reporting period to the next. Useful in diagnosing key problem areas relative to specific balance sheet and income statement accounts.

Plant and Equipment – Factories and equipment recorded at their original cost less accumulated depreciation.

Preferred Stock – Stock with fixed dividend payment. Takes priority over common stock as regards dividends. Dividends may not be paid on common stock unless they have already been paid on all preferred stock.

Prepaid Expenses – Services which have been paid for but have not been consumed and are therefore an asset.

Pretax Income – An analysis which focuses on operating results before income taxes have been deducted.

Price/Earnings Ratio – At a given time, the market value of a company’s common stock, per share, divided by the earnings per common share for the past year.

Production Costs – Expenses incurred by production. Includes both fixed and variable costs of production.

Productivity – The process by which a greater amount of output is generated from a given amount of input. Measured as sales volume per employee or sales dollar per employee wage dollar.

Profitability – The extent to which a company earns the highest return possible for resources used or capital employed, consistent with the desire and ability to assume risk.

Profit Margin – Net income as a percent of sales or the ratio of sales minus all expenses divided by sales.

Qualitified retirement plan – A pension, profit-sharing or qualified savings plan that is established by an employer for the benefit of the employees. These plans must be established in conformity with IRS rules.

Quick Ratio – Liquid assets divided by current liabilities. Measures liquidity. Liquid assets include cash, short-term marketable securities, and accounts receivable.

R – Z

Ratio – A number resulting when one number is divided by another. Used to assess aspects of profitability, solvency, liquidity, and efficiency. Commonly used financial ratios are essentially of two kinds:

  1. Those that summarize some aspect of operations for a period;
  2. Those that summarize some aspect of financial position at a given moment.

Ratio Analysis – Utilizes the data from all four financial statements and provides a broader perspective of the firm’s financial condition. Can ascertain the profitability of a firm, its ability to meet short-term obligations, the extent to which the company is financed by debt, and whether the management is utilizing its assets effectively.

Receivables – Any monies owed to the corporation, whether or not they are currently due. Long-term receivables appear as a long-term asset.

Receivables Turnover – An activity ratio measured by the ratio of credit sales to accounts receivable.

Replacement Decisions – A class of capital budgeting decisions involving replacement of equipment.

Research and Development – Research is an activity aimed at discovering new knowledge in hopes that such activity will be useful in creating a new product, process, or service, or improving a present product, process, or service. Development is the translation of research findings or other knowledge into a new or improved product, process, or service.

Resource Allocation – The process and decision of allocating money to a specific project or business unit.

Retained Earnings – The cumulative amount of income not paid out as dividends but kept by the firm.

Return on Assets – A profitability ratio measured by net income divided by assets. This is equivalent to return on sales multiplied by turnover.

Return on Capital – A profitability ratio measured by net income divided by invested capital. This is equivalent to return on assets multiplied by the leverage ratio (Assets/Equity).

Return on Equity – A profitability ratio measured as net income divided by equity. This is equivalent to return on assets multiplied by leverage (the ratio of assets to equity).

Return on Sales – A profitability ratio measured by net profit relative to revenues. Also identified as profit margin.

Revenue – The price of a product multiplied by the number of units sold. On long-term contracts, revenue is earned as a function of the percentage of the project completed during a specified period.

Risk – Business risk includes technological obsolescence, foreign competition, price competition, substitute products, as well as fluctuation and change in the economy.

  1. Catastrophic risks include fire, earthquakes, labor strikes, etc.
  2. Operating risk or operating leverage;
  3. Financial risk or financial leverage.

Scorekeeping – Analysis to discover how well the firm is doing.

Securities – Documents that indicate ownership or indebtedness, or potential ownership such as an option or warrant.

Selling, General and Administrative Expenses – Costs not specifically identifiable with or assigned to production. These include marketing, selling, research and development, pension, and administrative expenses.

Solvency (Long-Term) – Having sufficient cash and cash sources at times when long-term obligations and claims (bonds, pensions) become due.

Solvency or Leverage Ratios – Measure a firm’s ability to meet long-term obligations. They include debt to assets, debt to equity, and financial leverage ratios.

Specialized Assets – Assets which can only be used in a specific industry. The value of the asset depends upon the financial health of the industry.

Statement of Cash Flows – Statement summarizes activities that generate and consume cash (it illustrates net cash inflow and outflow activities).

Statement of Changes in Financial Position – Examines sources of funds and uses of funds during a period of operations.

Statement of Changes in Owners’ Equity – Links the income statement to the balance sheet; compares the beginning and ending balances for contributed capital and retained earnings while focusing on the changes that occurred during the year.

Statement of Changes in Retained Earnings – A statement that reconciles the beginning-of-period and end-of-period balances in the retained earnings account. It shows the effects of earnings, dividend declarations, and prior period adjustments.

Stockout – The point at which inventory levels reach zero and inventory demand exceeds supply.

Strategic Financial Analysis – Analyzing competitors’ financial statements with the goal of analyzing the strengths and weaknesses of competitors.

Strategic Planning – Planning focusing on long range objectives and goals. It is essentially direction-setting and focuses to find new products and new markets.

Supply – The amount on hand, in stock/inventory.

Tax deferred – Interest, dividends or capital gains that grow untaxed in certain accounts or plans until they are withdrawn.

Turnover – The number of times that assets, such as inventory or accounts receivable, are replaced on average during the period.

Variable Selling Costs – Selling expenses that change as activity levels change.