GLOSSARY OF FINANCIAL MANAGEMENT TERMS

Accounting Includes bookkeeping and other accounting work to prepare financial statements for a business. A measurement and record keeping process to facilitate planning, decision-making and control. Includes preparation of journals and ledgers.

Accounts Payable amounts payable to carriers and suppliers for services rendered. Another word for accounts payable is "creditors".

Accounts Receivable amounts owed to the business by customers for services rendered (or goods sold). Another name for accounts receivable is "debtors".

Accrual Accounting accounting based on the period during which income was earned or costs incurred irrespective of when cash changes hands for these items. Based on the idea of matching costs and revenue for a period of time.

Administrative Expenses Costs incurred to provide management with goods and services to allow office functions to be performed.

Aged Debtors Listing a list of debts indicating amounts owed by debtors over set periods of time, eg. current, 30 days, 60 days, 90 days and over, etc.

Assets resources owned by an individual or a business that are used to generate sales activity.

Balance Sheet a financial statement prepared at a particular date reflecting the financial position of the business. It shows assets (things owned) and liabilities (things owed).

Break-even Point the point at which zero profit is made. That is, where the surplus of income over variable costs (called contribution) equals fixed costs.

Capital amounts invested in a business by its owners, partners or proprietor as a basis for operations. Sometimes called "shareholders' funds", "equity" or "proprietorship".

Cash includes monies in cheque or savings accounts as well as petty cash. Sometimes referred to as "cash at bank".

Contribution the surplus of sales revenue over variable costs. An amount available to meet fixed costs and profit.

Creditors amounts payable to carriers and suppliers for services rendered. Another expression for creditors is "accounts payable".

Current Assets resources owned by the business including cash and other resources that can be converted into cash in the short term (usually within 12 months). Normally includes cash, debtors, short term investments, stock, pre-payments.

Current Liabilities resources owed by the business including bank overdraft and other items that must be paid for in cash within the short term (usually within 12 months). Normally includes bank overdraft, creditors, accrued expenses, provision for dividend, provision for tax. For a travel agency deposits from customers are included.

Debtors amounts owed to the business by customers for services rendered (or goods sold). Another expression for debtors is "accounts receivable".

Deposits from Customers funds received by a travel agency in advance of a tour or cruise and reflected as a current liability since services are usually to be provided in less than one year.

Depreciation allocation of the original costs of a fixed asset over its estimated life to reflect obsolescence, wear and tear. A book entry and is not a funds item. It relates to purchase of a fixed asset some time in the past. The only impact on funds is when that asset was originally purchased.

Equity amounts invested in a business by its owners, partners or proprietor as a basis for operations. Sometimes called "capital", "shareholders' funds" or "proprietorship".

Expenses amounts expended while offering services to customers to earn income.

Financial Management planning and controlling the flows of financial resources to ensure that a business achieves profitable growth with appropriate liquidity and security.

Fixed Assets assets which were purchased for long term purposes for producing income. Not intended to be converted into cash within 12 months and therefore referred to as long term assets or capital expenditure.

Fixed Cost an expense or cost that tends to be relatively fixed in the short run (say 12 months).

Gearing related to "leverage" . We talk of companies being highly geared where their long term debt is far greater than their capital base and conversely of being lowly geared when it is only a fraction of the capital base.

Goodwill the amounts of money a purchaser pays for a business over and above the value of resources being purchased. It represents a premium for the intangible assets associated with the location of the business, its reputation and its logos and name, etc.

Gross Margin the excess of sales revenue over cost of sales where cost of sales includes the cost of raw materials and other costs involved in manufacturing. Sometimes referred to as "gross profit". Cost of sales is sometimes referred to as "cost of goods sold".

Income Statement a summary of the financial results of operations under the headings of income and expenses for a period of time highlighting net profit.

Leasehold Improvements expenditure associated with improving a rented property for use during a lease period. Classified as a fixed asset and carried out with the landlord's permission.

Liabilities amounts owed by a business for funds supplied on a short term or long term basis. Includes current liabilities, long term liabilities and capital.

Liquidity concerns access by a business to an adequate level of short term finance to meet short term financial needs.

Long Term Finance Long term finance is of two kinds, long term liabilities and capital. The former represents borrowing’s from outsiders whilst the latter represents funds supplied indefinitely by the owners of the business and includes profit that has been accumulated.

Long Term Liabilities amounts owing to outsiders for funds provided not due to be repaid within the short term, say 12 months. Sometimes called "deferred liabilities". Includes long term mortgages and debentures.

Net Profit the excess of income over expenses as shown by a profit and loss statement for a period of time.

Occupancy Expenses costs incurred to provide a business with a place to do business, eg. rent, lighting, etc.

Pay Back Period the number of years of net cash flow required to equal the initial investment. Expressed in number of years.

Personnel Expenses expenditures made on behalf of employees for wages, salaries, fringe benefits, payroll taxes, etc.

Pre-payments amounts paid in advance in respect to costs for future periods or by customers in anticipation of services to be rendered, eg. for a travel agency, pre-paid tour expenses are amounts paid to the agency by clients prior to their departure date.

Present Value the value of a dollar earned in the future in today's terms.

Profitability concerns the capacity of a business to provide owners and investors with an adequate return on their investment after satisfying the financial needs of customers, suppliers, employees and taxing authorities.

Profit & Loss Appropriation net profit earned in the past which owners have decided shall remain in the business for use in future operations. The amount "ploughed back" into the business to help finance future growth. The amount left over after income tax and dividends have been deducted from net profit from operations. Sometimes referred to as "retained earnings" or "accumulated profit".

Profit & Loss Statement (sometimes called an Income Statement or Revenue Statement) measures the profitability for a firm over a period of time by simply comparing income and expenses.

Proprietorship amounts invested in a business by its owners, partners or proprietor as a basis for operations. Sometimes called "shareholders' funds", "equity" or "capital".

Ratios relationships between financial figures expressed as multiples or percentages to simplify comparisons between accounting periods and with other businesses. They enable comparisons to be made despite great differences in the numbers involved.

Ratio Analysis ratio comparisons to help us form opinions as to whether business performance is "good" or "bad" or "better" or "worse" than previous performance or than that of others in the industry.

Retained Earnings net profit earned in the past which owners have decided shall remain in the business for use in future operations. The amount "ploughed back" into the business to help finance future growth. The amount left over after income tax and dividends have been deducted from net profit from operations. Sometimes called "profit & loss appropriation" or "accumulated profit".

Return on Investment a ratio which compares the return for a business (net profit) with the amount of investment in the business (assets or equity). There are two measures most often used. The first is ROI on assets managed. This compares net profit before tax with total assets and is a popular "internal" test of managerial efficiency. The second is ROI on capital. This compares net profit after tax with owners/shareholders' funds and is a test most often used by outsiders, eg. lenders, prospective shareholders. ROI is a function not only of earning power (as indicated by the Profit & Loss Statement) but also of asset turnover (of which Stock and Debtors are a part).

Security refers to having a reasonable foundation on which to build the financial structure of the business. Security refers to the relationship between long term liabilities and capital. The higher the former the less secure the financial foundation of the business (financial structure).

Shareholders' Funds amounts invested in a business by its owners, partners or proprietor as a basis for operations. Sometimes called "capital", "equity" or "proprietorship".

Variable Cost an expense or cost that tends to vary directly in proportion to the volume of business activity.

Working Capital The difference between current assets and current liabilities is called "Working Capital". It is the amount of liquid capital that we have to work with to meet our short term commitments. It represents a comfort zone or cushion to meet the demands of our current liabilities and operating expenses as they occur. It represents cash plus other current assets (which we expect will become cash in the short term) minus the short term commitments we have (current liabilities and operating expenses) which we expect will be paid for in cash in the short term.