Anything owned by the company having a monetary value; eg, 'fixed'
assets like buildings, plant and machinery, vehicles (these are not
assets if rented and not owned) and potentially including
intangibles like trade marks and brand names, and 'current' assets,
such as stock, debtors and cash.
Measure of operational efficiency - shows how much revenue is
produced per $ of assets available to the business. (sales
revenue/total assets less current liabilities)
The Balance Sheet is one of the three essential measurement reports
for the performance and health of a company along with the Profit
and Loss Account and the Cashflow Statement. The Balance Sheet is a
'snapshot' in time of who owns what in the company, and what assets
and debts represent the value of the company. (It can only ever be a
snapshot because the picture is always changing.) The Balance Sheet
is where to look for information about short-term and long-term
debts, gearing (the ratio of debt to equity), reserves, stock values
(materials and finished goods), capital assets, cash on hand, along
with the value of shareholders' funds. The term 'balance sheet' is
derived from the simple purpose of detailing where the money came
from, and where it is now. The balance sheet equation is
fundamentally: (where the money came from) Capital + Liabilities =
Assets (where the money is now). Hence the term 'double entry' - for
every change on one side of the balance sheet, so there must be a
corresponding change on the other side - it must always balance. The
Balance Sheet does not show how much profit the company is making
(the P&L does this), although pervious years' retained profits will
add to the company's reserves, which are shown in the balance sheet.
In a financial planning context the word 'budget' (as a noun)
strictly speaking means an amount of money that is planned to spend
on a particularly activity or resource, usually over a trading year,
although budgets apply to shorter and longer periods. An overall
organizational plan therefore contains the budgets within it for all
the different departments and costs held by them. The verb 'to
budget' means to calculate and set a budget, although in a looser
context it also means to be careful with money and find reductions
(effectively by setting a lower budgeted level of expenditure). The
word budget is also more loosely used by many people to mean the
whole plan. In which context a budget means the same as a plan. For
example in the UK the Government's annual plan is called 'The
Budget'. A 'forecast' in certain contexts means the same as a budget
- either a planned individual activity/resource cost, or a whole
business/ corporate/organizational plan. A 'forecast' more commonly
(and precisely in my view) means a prediction of performance - costs
and/or revenues, or other data such as headcount, % performance,
etc., especially when the 'forecast' is made during the trading
period, and normally after the plan or 'budget' has been approved.
In simple terms: budget = plan or a cost element within a plan;
forecast = updated budget or plan. The verb forms are also used,
meaning the act of calculating the budget or forecast.
The value of all resources available to the company, typically
comprising share capital, retained profits and reserves, long-term
loans and deferred taxation. Viewed from the other side of the
balance sheet, capital employed comprises fixed assets, investments
and the net investment in working capital (current assets less
current liabilities). In other words: the total long-term funds
invested in or lent to the business and used by it in carrying out
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.
cash flow statement
One of the three essential reporting and measurement systems for any
company. The cash flow statement provides a third perspective
alongside the Profit and Loss account and Balance Sheet. The Cash
flow statement shows the movement and availability of cash through
and to the business over a given period, certainly for a trading
year, and often also monthly and cumulatively. The availability of
cash in a company that is necessary to meet payments to suppliers,
staff and other creditors is essential for any business to survive,
and so the reliable forecasting and reporting of cash movement and
availability is crucial.
cost of debt ratio (average cost of debt ratio)
Despite the different variations used for this term (cost of debt,
cost of debt ratio, average cost of debt ratio, etc) the 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, ie., cost of interest divided by average outstanding debt.
cost of goods sold (COGS)
The directly attributable costs of products or services sold,
(usually materials, labour, and direct production costs). Sales less
COGS = gross profit. Effectively the same as cost of sales (COS) see
below for fuller explanation.
cost of sales (COS)
Commonly arrived at via the formula: opening stock + stock purchased
- closing stock.
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). In all accounts, particularly
the P&L (trading account) it's important that costs are attributed
reliably to the relevant revenues, or the report is distorted and
potentially meaningless. To use simply the total value of stock
purchases during the period in question would not produce the
correct and relevant figure, as some product sold was already held
in stock before the period began, and some product bought during the
period remains unsold at the end of it. Some stock held before the
period often remains unsold at the end of it too. The formula is the
most logical way of calculating the value at cost of all goods sold,
irrespective of when the stock was purchased. The value of the stock
attributable to the sales in the period (cost of sales) is the total
of what we started with in stock (opening stock), and what we
purchased (stock purchases), minus what stock we have left over at
the end of the period (closing stock).
Cash and anything that is expected to be converted into cash within
twelve months of the balance sheet date.
The relationship between current assets and current liabilities,
indicating the liquidity of a business, ie its ability to meet its
short-term obligations. Also referred to as the Liquidity Ratio.
Money owed by the business that is generally due for payment within
12 months of balance sheet date. Examples: creditors, bank
The apportionment of cost of a (usually large) capital item over an
agreed period, (based on life expectancy or obsolescence), for
example, a piece of equipment costing $10k having a life of five
years might be depreciated over five years at a cost of $2k per
year. (In which case the P&L would show a depreciation cost of $2k
per year; the balance sheet would show an asset value of $8k at the
end of year one, reducing by $2k per year; and the cash flow
statement would show all $10k being used to pay for it in year one.)
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
of the profits, arrived at by the directors and voted at the
company's annual general meeting. A company can choose to pay a
dividend from reserves following a loss-making year, and conversely
a company can choose to pay no dividend after a profit-making year,
depending on what is believed to be in the best interests of the
company. Keeping shareholders happy and committed to their
investment is always an issue in deciding dividend payments. Along
with the increase in value of a stock or share, the annual dividend
provides the shareholder with a return on the shareholding
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. (Earnings =
operating and non-operating profits (eg interest, dividends received
from other investments). Depreciation is the non-cash charge to the
balance sheet which is made in writing off an asset over a period.
Amortisation is the payment of a loan in instalments.
Assets held for use by the business rather than for sale or
conversion into cash, eg, fixtures and fittings, equipment,
cost which does not vary with changing sales or production volumes,
eg, building lease costs, permanent staff wages, rates, depreciation
of capital items.
See 'budget' above.
The ratio of debt to equity, usually the relationship between
long-term borrowings and shareholders' funds.
Any surplus money paid to acquire a company that exceeds its net
tangible assets value.
Sales less cost of goods or services sold. Also referred to as gross
profit margin, or gross profit, and often abbreviated to simply
'margin'. See also 'net profit'.
initial public offering (ipo)
An Initial Public Offering (IPO being the Stock Exchange and
corporate acronym) is the first sale of privately owned equity
(stock or shares) in a company via the issue of shares to the public
and other investing institutions. In other words an IPO is the first
sale of stock by a private company to the public. IPOs typically
involve small, young companies raising capital to finance growth.
For investors IPO's can risky as it is difficult to predict the
value of the stock (shares) when they open for trading. An IPO is
effectively 'going public' or 'taking a company public'.
letters of credit
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 (using the customer's
money of course) provided the goods or services are supplied in
accordance with the terms stipulated in the letter, which should
obviously reflect the agreement between the seller and buyer. This
gives the supplier an assurance that their invoice will be paid,
beyond any other assurances or contracts made with the customer.
Letters of credit are often complex documents that require careful
drafting to protect the interests of buyer and seller. The
customer's bank charges a fee to issue a letter of credit, and the
customer pays this cost.
The seller should also approve the wording of the buyer's letter of
credit, and often should seek professional advice and guarantees to
this effect from their own financial services provider.
In short, a letter of credit is a guarantee from the issuing bank's
to the seller that if compliant documents are presented by the
seller to the buyer's bank, then the buyer's bank will pay the
seller the amount due. The 'compliance' of the seller's
documentation covers not only the goods or services supplied, but
also the timescales involved, method for, format of and place at
which the documents are presented. It is common for exporters to
experience delays in obtaining payment against letters of credit
because they have either failed to understand the terms within the
letter of credit, failed to meet the terms, or both. It is important
therefore for sellers to understand all aspects of letters of credit
and to ensure letters of credit are properly drafted, checked,
approved and their conditions met. It is also important for sellers
to use appropriate professional services to validate the
authenticity of any unknown bank issuing a letter of credit.
letters of guarantee
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
Typical obligations covered by letters of guarantee are concerned
Tender Guarantees (Bid Bonds) - whereby the bank assures the buyer
that the supplier will not refuse a contract if awarded.
Performance Guarantee - This guarantees that the goods or services
are delivered in accordance with contract terms and timescales.
Advance Payment Guarantee - This guarantees that any advance
payment received by the supplier will be used by the supplier in
accordance with the terms of contract between seller and buyer.
There are other types of letters of guarantee, including obligations
concerning customs and tax, etc, and as with letters of credit,
these are complex documents with extremely serious implications. For
this reasons suppliers and customers alike must check and obtain
necessary validation of any issued letters of guarantee.
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 . Long term
liabilities, along with Share Capital and Reserves make up one side
of the balance sheet equation showing where the money came from. The
other side of the balance sheet will show Current Liabilities along
with various Assets, showing where the money is now.
Indicates the company's ability to pay its short term debts, by
measuring the relationship between current assets (ie those which
can be turned into cash) against the short-term debt value. (current
assets/current liabilities) Also referred to as the Current Ratio.
assets (also called total net assets)
(fixed and current) less current liabilities and long-term
liabilities that have not been capitalised (eg, short-term loans).
Current Assets less Current Liabilities.
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 (also referred to as gross margin or gross profit margin) and
certainly before the deduction of operating costs or overheads. Net
profit normally refers to the profit figure before deduction of
corporation tax, in which case the term is often extended to 'net
profit before tax' or PBT.
See explanation under Cost of Sales.
ratio (price per earnings)
The P/E ratio is an important indicator as to how the investing
market views the health, performance, prospects and investment risk
of a public company listed on a stock exchange (a listed company).
The P/E ratio is also a highly complex concept - it's a guide to use
alongside other indicators, not an absolute measure to rely on by
itself. The P/E ratio is arrived at by dividing the stock or share
price by the earnings per share (profit after tax and interest
divided by the number of ordinary shares in issue). As earnings per
share are a yearly total, the P/E ratio is also an expression of how
many years it will take for earnings to cover the stock price
investment. P/E ratios are best viewed over time so that they can be
seen as a trend. A steadily increasing P/E ratio is seen by the
investors as increasingly speculative (high risk) because it takes
longer for earnings to cover the stock price. Obviously whenever the
stock price changes, so does the P/E ratio. More meaningful P/E
analysis is conducted by looking at earnings over a period of
several years. P/E ratios should also be compared over time, with
other company's P/E ratios in the same market sector, and with the
market as a whole. Step by step, to calculate the P/E ratio:
Establish total profit after tax and interest for the past year.
Divide this by the number of shares issued.
This gives you the earnings per share.
Divide the price of the stock or share by the earnings per share.
This gives the Price/Earnings or P/E ratio.
profit and loss account (P&L)
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). A fully detailed P&L can
be highly complex, but only because of all the weird and wonderful
policies and conventions that the company employs. Basically the P&L
shows how well the company has performed in its trading activities.
An expense that cannot be attributed to any one single part of the
Same as the Acid Test. The relationship between current assets
readily convertible into cash (usually current assets less stock)
and current liabilities. A sterner test of liquidity.
The accumulated and retained difference between profits and losses
year on year since the company's formation.
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. The source of restricted funds can be
from government, foundations and trusts, grant-awarding bodies,
philanthropic organisations, private donations, bequests from wills,
etc. The practical implication is that restricted funds are
ring-fenced and must not be used for any other than their designated
purpose, which may also entail specific reporting and timescales,
with which the organisation using the funds must comply. A glaring
example of misuse of restricted funds would be when Maxwell spent
Mirror Group pension funds on Mirror Group development.
return on capital employed (ROCE)
fundamental financial performance measure. A percentage figure
representing profit before interest against the money that is
invested in the business. (profit before interest and tax/capital
employed x 100)
return on investment
Another fundamental financial and business performance measure. This
term means different things to different people (often depending on
perspective and what is actually being judged) so it's important to
clarify understanding if interpretation has serious implications.
Many business managers and owners use the term in a general sense as
a means of assessing the merit of an investment or business
decision. 'Return' generally means profit before tax, but clarify
this with the person using the term - profit depends on various
circumstances, not least the accounting conventions used in the
business. In this sense most CEO's and business owners regard ROI as
the ultimate measure of any business or any business proposition,
after all it's what most business is aimed at producing - maximum
return on investment, otherise you might as well put your money in a
bank savings account. Strictly speaking Return On Investment is
Profits derived as a proportion of and directly attributable to cost
or 'book value' of an asset, liability or activity, net of
In simple terms this the profit made from an investment. The
'investment' could be the value of a whole business (in which case
the value is generally regarded as the company's total assets minus
intangible assets, such as goodwill, trademarks, etc and
liabilities, such as debt. N.B. A company's book value might be
higher or lower than its market value); or the investment could
relate to a part of a business, a new product, a new factory, a new
piece of plant, or any activity or asset with a cost attached to it.
The main point is that the term seeks to define the profit made from
a business investment or business decision. Bear in mind that costs
and profits can be ongoing and accumulating for several years, which
needs to be taken into account when arriving at the correct figures.
The balance sheet nominal value paid into the company by
shareholders at the time(s) shares were issued.
measure of the shareholders' total interest in the company
represented by the total share capital plus reserves.
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.
cost which varies with sales or operational volumes, eg materials,
fuel, commission payments.
Current assets less current liabilities, representing the required
investment, continually circulating, to finance stock, debtors, and
work in progress.