Glossary of Key Financial Terms

PROFIT MASTERY
KEY TERM GLOSSARY

ACCRUAL BASIS ACCOUNTING

A system of tracing income and expenses that recognizes income when it is earned (regardless of when cash is received) and recognizes expenses when they are incurred (regardless of when they are paid).

ASSETS

Everything that the business owns — including such items as cash, inventory, prepaid expenses, and vehicles.

BALANCE SHEET

A statement of financial position that shows the assets, liabilities, and net worth of the business.

BREAK - EVEN

To have no profit and no loss; the point at which revenues exactly cover expenses.

CASH BASIS ACCOUNTING

A system of tracking income and expenses based on when cash is actually exchanged. Income is recognized only when cash is received, and expenses are recognized only when cash is paid.

CASH BUDGET

A projected accounting of the cash inflows and outflows for a given period — a projection of what the business “check book” will look like.

CASH FLOW

Cash coming into a business from revenues versus cash going out to pay expenses. Positive cash flow means more came in than went out; negative cash flow means the reverse.

CASH POSITION

The difference between cash inflows and outflows for any given period — without borrowing short term. How much cash the business has (or how much it is short) for the period.

CONTRIBUTION MARGIN

The amount left after variable costs are paid. The amount that is left to contribute to covering fixed costs (and profits).

CONTRIBUTION MARGIN PERCENTAGE

The percentage of each dollar of sales that is left after variable cost percentage has been deducted; the amount from each dollar of sales that is contributed to cover fixed costs and profits.

CURRENT ASSETS

What the business owns that is expected to be turned into cash within one year -- such as accounts receivable and inventory.

CURRENT LIABILITIES

Obligations which are due to be repaid within one year.

DEPRECIATION

The process of allocating the cost of a fixed asset (such as equipment) to the period that it benefits the business — “writing off” its cost over its “useful” life.

FINANCIAL GAP

The difference between the funds needed to buy new assets and the funds available. The amount that the company will have to borrow in order to support increased sales.

FINANCING PATTERNS

The relationship between the need for funds to support sales and the availability of those funds. The relationship between the use of profits, the use of debt, and the repayment of debt in acquiring assets to support sales.

FIXED ASSETS

Fixed assets are those that tend to be of a more permanent, long-term nature, such as equipment, vehicles, buildings, etc.

FIXED COSTS

Expenses that do not vary with sales; those costs that are incurred whether or not any sales are made.

FLUCTUATING CURRENT ASSETS

Current assets, cash, accounts receivable, inventory, etc., whose levels rise and fall in direct relation to annual seasonal sales increases and decreases.

GROSS PROFIT

Sales minus the Cost of Goods Sold, which is the cost of buying raw materials and producing finished goods.

INCOME STATEMENT

The summary of the revenues, costs, and expenses of a company during an accounting period. Also known as the profit and loss statement.

INTEREST

The cost of using money; the fee which is charged for the use of the principal.

INVENTORY TURNS

Inventory Turns or Inventory Turnover is the number of times that a companies inventory cycles or turns over per year.

LEVERAGE

The increased rate of return that is made on net worth when using debt to acquire assets.

LIABILITIES

What the business owes to creditors — to non-owners who supply funds that must be repaid. Debt is another term for liability.

LONG - TERM DEBT

Obligations that are scheduled to be repaid over a period greater than one year.

LONG - TERM FINANCING

Debt that is scheduled to be completely repaid at some point past one year in the future.

NET PROFIT

The amount remaining after all expenses have been met. The difference between total sales and total costs and expenses.

NET WORTH

What the business owes to the owners — the investment that the owners have in the company. Also called owners’ equity.

OPERATING CONTROL

Ownership — individual or collective — of 51% or more of the shares of a corporation. These “majority” owners can hire, fire, determine dividend policy, and make all operating decisions for the corporation.

PERCENT OF SALES

A method for measuring the variable assets and liabilities that a company needs to support a given level of sales. Each category of variable assets and variable liabilities for a completed year is divided by sales for that year. The resulting percentage can then be applied to projected sales for future years to determine the new investment needed for each category.

PERMANENT CURRENT ASSETS

The base level of current assets that the company maintains at all times. The level of cash, accounts receivable, and inventory that the company requires regardless of seasonal requirements.

PRINCIPAL

The face value of an obligation (such as a loan) that must be repaid at maturity, separate from interest.

PROFIT PLAN

A projected or “proforma” income statement detailing revenues and expenses that are expected for some future period.

RATIO

One number in relationship to another.

RETAINED EARNINGS

Net profits that are kept accumulating in the business (as opposed to being paid out to owners). These profits are generally not cash; instead, they have been used to purchase assets in the course of normal operations. The net profits (positive or negative) from the income statement that are left to accumulate in the business.

SEASONAL PATTERN

The rises and falls in sales, profits and cash caused by seasonal demands for a product or service.

SHORT - TERM FINANCING

Debt that is scheduled to be completely repaid within one year.

STRUCTURING LIABILITIES

Matching the life of the asset to the length of the financing. Short-term financing for current assets, long-term debt (or equity) for permanent current assets and fixed assets.

TARGET PROFIT

The amount of profit that is planned. The profit that is added to fixed costs to determine the sales goals -- in relation to a given contribution margin.

VARIABLE ASSET

An asset that increases (or decreases) as sales rise or fall. For example, more sales would mean more accounts receivable -- even though the company was collecting them just as efficiently as before the sales increase (in other words, the pie would be cut the same, but it would be a larger pie).

VARIABLE COSTS

Expenses that vary directly with sales; those costs that are incurred only if sales are made.

VARIABLE COST PERCENTAGE

The percent of each dollar of sales that goes to cover variable costs.

VARIABLE LIABILITY

A liability that increases to support the variable assets, which increase as a result of a sales increase. For example, more sales would require that more inventory be kept on hand (to avoid stock-outs). This, in turn, would mean carrying more accounts payable — if the company maintained its accounts payable turnover at the same rate as before the increase.