Acid test ratio

Liquid assets / current liabilities

Adverse variance

Exists when the difference between the budgeted and actual figure leads to a lower than expected profit

Annual forecasted net cash flow

Forecasted cash inflow – forecasted cash outflows


Items of monetary value that are owned by a business

Average rate of return (ARR)

Measures the annual profitability of an investment as a percentage of the initial investment

Bad debt

Unpaid customers’ bills that are now very unlikely to ever be paid

Balance sheet

An accounting statement that records the values of a business’s assets, liabilities and shareholders’ equity at one point in time


A detailed financial plan for the future

Budget holder

Individual responsible for the initial setting and achievement of a budget

Capital Employed

(Non-current assets + current assets) − current liabilities OR non-current liabilities + shareholders equity

Cash flow

The sum of cash payments to a business (inflows) less the sum of cash payments made by it (outflows)

Cash-flow forecast

Estimate of a firm’s future cash inflows and outflows

Cash inflows

Payments in cash received by a business, such as those from customers (debtors) or from the bank

Closing cash balance

Cash held at the end of the month becomes next month’s opening balance

Cost of sales (or cost of goods sold)

This is the direct cost of purchasing the goods that were sold during the financial year

Credit control

Monitoring of debts to ensure that credit periods are not exceeded

Creditor days ratio

Trade creditors / credit purchases x 365

Criterion rate or level

The minimum level (maximum for payback period) set by management for investment appraisal results for a project to be accepted

Current ratio

Current assets / current liabilities

Debentures (or long-term bonds)

Bonds issued by companies to raise debt finance, often with a fixed rate of interest


Customers who have bought products on credit and will pay cash at an agreed date in the future

Debtor days (days’ sales in receivables)

Trade debtors (accounts receivable) / sales turnover × 365 (days)

Delegated budgets

Control over budgets is given to less senior management


The decline in the estimated value of a noncurrent asset over time


The share of the profits paid to shareholders as a return for investing in the company

Dividend per share

Total annual dividends / total number of issued shares

Dividend yield ratio (%)

Dividend per share / current share price × 100

Earning per share

Profit earned per share in the company

Equity finance

Permanent finance raised by companies through the sale of shares


Selling of claims over debtors to a debt factor in exchange for immediate liquidity

Favourable variance

Exists when the difference between the budgeted and actual figure leads to a higher than expected profit

First In First Out (FIFO)

Valuing stocks by assuming that the first ones bought in were sold first

Gearing ratio (%)

Long-term loans / capital employed × 100


Arises when a business is valued at or sold for more than the balance sheet values of its assets

Gross profit

Equal to sales revenue less cost of sales

Gross Profit Margin

Gross profit / sales revenue x 100

High-quality profit

Profit that can be repeated and sustained

Hire purchase

An asset is sold to a company which agrees to pay fixed repayments over an agreed time period

Income statement

Records the revenue, costs and profit (or loss) of a business over a given period of time

Incremental budgeting

Uses last year’s budget as a basis and an adjustment is made for the coming year


When a business cannot meet its short-term debts

Intellectual property

An intangible asset that has been developed from human ideas and knowledge

Investment appraisal

Evaluating the profitability or desirability of an investment project

Last In First Out (LIFO)

Valuing closing stocks by assuming that the last one purchased was sold first


Obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period


A financial obligation of a business that it is required to pay in the future

Liquid assets

Current assets – stocks


  • Turning assets into cash may be insisted on by courts if suppliers have not been paid
  • When a firm ceases trading and its assets are sold for cash


The ability of a firm to be able to pay its short-term debts

Long-term loans

Loans that do not have to be repaid for at least one year

Low-quality profit

One-off profit that cannot easily be repeated or sustained

Market value

The estimated total value of a company if it were taken over

Net book value

The current balance sheet value of a noncurrent asset = original cost – accumulated depreciation

Net monthly cash flow

Estimated difference between monthly cash inflows and outflows

Net present value (NPV)

Today’s value of the estimated cash flows resulting from an investment

Net Profit Margin

Net profit / sales revenue x 100

Opening cash balance

Cash held by the business at the start of the month

Operating profit (net profit)

Gross profit minus overhead expenses


Payments in cash made by a business, such as those to suppliers and workers


Bank agrees to a business borrowing up to an agreed limit as and when required


Expanding a business rapidly without obtaining all of the necessary finance so that a cash-flow shortage develops

Payback period

Length of time it takes for the net cash inflows to pay back the original capital cost of the investment

Profit after tax

Operating profit minus interest costs and corporation tax

Reducing balance method

Calculates depreciation by subtracting a fixed percentage from the previous year’s net book value

Retained profit

The profit left after all deductions, including dividends, have been made

Return On Capital Employed (ROCE)

Net profit / capital employed × 100

Right issue

Existing shareholders are given the right to buy additional shares at a discounted price

Sales revenue (or sales turnover)

The total value of sales made during the trading period

Share capital

The total value of capital raised from shareholders by the issue of shares

Share price

The quoted price of one share on the stock exchange

Shareholders’ equity

Total value of assets less total value of liabilities

Start-up capital

Capital needed by an entrepreneur to set up a business

Stock (inventory) turnover ratio

Cost of goods sold / value of stock (average)

Straight-line depreciation

A constant amount of depreciation is subtracted from the value of the asset each year

Variance analysis

The process of investigating any differences between budgeted figures and actual figures

Venture capital

Risk capital invested in business start-ups or expanding small businesses, that have good profit potential, but do not find it easy to gain finance from other sources

Working Capital

The capital needed to pay for raw materials, day-to-day running costs and credit offered to customers

Working capital cycle

The period of time between spending cash on the production process and receiving cash payments from customers

Zero budgeting

Setting budgets to zero each year and budget holders have to argue their case to receive any finance