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
Assets
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
Budget
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
Debtors
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
Depreciation
The decline in the estimated value of a noncurrent asset over time
Dividends
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
Factoring
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
Goodwill
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
Insolvent
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
Leasing
Obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period
Liabilities
A financial obligation of a business that it is required to pay in the future
Liquid assets
Current assets – stocks
Liquidation
- 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
Liquidity
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
Outflows
Payments in cash made by a business, such as those to suppliers and workers
Overdraft
Bank agrees to a business borrowing up to an agreed limit as and when required
Overtrading
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