Abnormal Items

Income or expenses which are outside the normal course of a company’s business and which may or may not be shown separately from the annual profit and loss calculations

Accounts Payable /
Trade Creditors

Money owed to suppliers.

Accounts Receivable /
Trade Debtors

Money owed by customers.

Accrued Interest

Interest that has been earned but not yet paid.

Amortisation

The annual amount by which the cost of a non material asset is estimated to reduce e.g. goodwill, leasehold improvements, brand names, patents etc.

Contingent Liability

A potential obligation, the eventual occurrence of which usually depends on some future event beyond the control of the firm.  May arise from legal actions, credit guarantees, contested income tax assessments.

Contribution Margin

The excess of revenue over variable costs and available cover fixed costs.

Current Asset

Asset that will normally be used or turned into cash within a year.

Current Liability

Liability that will normally be repaid within a year.

Debtor Financing

Arrangement whereby a financial institution provides finance secured by a company’s accounts receivable and collects the debtors.

Depreciation

Reduction in the book or market value of an asset; charge made to allocate the cost of an asset over its expected useful life; depreciation costs can be deducted from taxable income.

Discount Rate

Rate used to calculate the present value of future cash flows.  The rate chosen seeks to estimate the effect of inflation over time.

Discounted Cash Flow

Future cash flows multiplied by discount rates to obtain present value.

Due Diligence

In business sales relates to a purchaser’s process of checking and verifying accounting, legal and operational details contained in information provided by the owners of a business.

EBIT

Earnings/Profit before interest and tax

EBITDA

Earnings/Profit before interest and tax, depreciation and amortization

EBT

Earnings before tax.

Extraordinary Items

Income or expenses which are quite outside the normal course of a company’s business and which are shown separately from the annual profit or loss calculations.

Factoring

Arrangements whereby a financial institution buys a company’s accounts receivable and collects the debts.

Finance Lease

Lease under which the lessor effectively transfers to the lessee all the risks and benefits incident to ownership of the leased asset and where ownership may or may not eventually be transferred (see operating lease).

FIS

Free into store – the terms of sale by which the vendor agrees to pay all costs incurred to get the goods to the purchaser.

Fixed Costs

Costs whose total remains constant even though the volume of activity or production may vary.

FOB

Free on board – the point (factory, ship) in the delivery of merchandise purchaser bears freight costs.

Forward Cover

Purchase or sale of forward foreign currency in order to offset changes in exchange rates between two currencies.

Franked Dividends

Dividends paid out of company profits on which the full company tax is paid so that the dividends are credited with the tax paid by the company in the hands of shareholders.

Going Concern

An accounting principle dictating that in the absence of evidence to the contrary a business is assumed to have an indefinite ongoing life.

Goodwill

The surplus of value of a business in excess of its net assets.

Interest Cover

A calculation used by bankers/lenders using the following formula:

Leasehold Improvements

Expenditures made by the lessee to alter or improve property.  Such improvements typically revert to the lessor on termination of the lease.

Liquid Assets

Assets that are easily and cheaply turned into cash – notably cash debtors and short-term securities.

Marginal Cost

The direct cost associated with completing one more unit of production or activity.

Net Assets

Total assets minus total liabilities, equals net worth/shareholders funds or shareholders equity.

Net Tangible Assets

Net assets less intangible assets

Intangible Assets

Non material assets such as patents, brand names, trademarks, registered designs, copyright, know-how and goodwill.

Non Current Asset

Assets that are long term in nature such as plant, equipment, property, long term loans and investments not held for resale within one year.

Non Current Liability

A debt, loan or other liability which is not repayable within a year.

Operating Lease

Lease under which the lessor effectively retains substantially all the risks and benefits incident to ownership of the leased asset (see Finance Lease).

Opportunity Cost of Capital

Expected return that is foregone by investing in a particular project or investment rather than in another investment.

PAT

Profit after tax

PBT

Profit before tax

PER

Price earnings ratio – see below PE Ratio.

PE Ratio

Retained Earnings

Earnings not paid out as dividends.

Shareholders Equity/Shareholders Funds

Equals net assets

Return to Owner

PAT + Salary + Benefits

Inventory/Stock

Finished goods or  work in progress and raw materials used up in production of goods for sale.

Current Ratio

Quick Asset/Liquidity Ratio

Equity/Net Assets Ratio %

Liability Ratio%

Debt Ratio %

Debt to Equity Ratio %

Interest Cover

This measures the ability to meet interest obligations in respect of debt financing (borrowings)

Price Earnings Ratio

Return on Total Assets

Return on Net Assets/Equity

Internal Rate of Return - IRR

The Discount rate at which an investment has a zero net present value.  Seeks to measure the real return on the future expected cash flow from an investment.

Return on Investment – ROI %

Return on Sales

a) Gross Profit Margin %

b) Net Profit Margin %

c) Gross Profit

Sales - Cost of goods

For retailers and wholesalers, cost of inventory (stock) purchases plus opening inventory less closing inventory.

Excludes selling, distribution and administration costs (including interest on borrowings)

Inventory Days

Stock Turn

Debtor Days

Creditor Days

Earn Out/Work Out

A staged sale – deposit plus instalments – over an extended handover period e.g. 2-3 years.

SAV

Stock at Valuation

Restraint of Trade

Restrictive covenant on vendor where vendor agrees not to compete with the business he has sold for an agreed period of time within agreed area or territory.