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Financial Glossary Terms.

Please note that with some of these metrics, there are multiple accepted ways to perform the calculations. Sageworks chose to use the following calculations based on our work with thousands of accounting firms since 2001.

  • Accounting is a method of gathering financial information and reporting on the activities of a business. The ultimate end product of accounting is not good financial reports. Rather, the desired end points of accounting are an excellent understanding of your business and better management action. Remember, accounting does not equal bookkeeping.
  • Accounts Payable are amounts owed to suppliers or vendors.
  • Accounts Payable Days is calculated as Accounts Payable divided by Cost of Sales multiplied by 365. This metric represents the average number of days it takes for a company to pay its suppliers or vendors.
  • Accounts Receivable are amounts that customers owe the company for services rendered.
  • Accounts Receivable Days is calculated as Accounts Receivable divided by Sales multiplied by 365. This metric represents the average number of days it takes for a company to collect payments from customers.
  • Additional Paid-in Capital is the difference between the par value of the stock issued to owners and the total cash contributed in exchange for the issued stock.
  • ADRs (American Depository Receipts) are certificates issued by a U.S. depository bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share, or a bundle of shares of a foreign corporation. Because ADRs are quoted in U.S. dollars and traded just like any other stock, they make it simple for investors to diversify their holdings internationally for companies that are located outside the U.S. but traded on U.S. exchanges.
  • Amortization is an estimate for the amount by which an intangible asset category has decreased in value over a certain period of time.
  • Assets are resources that are owned by the firm and help earn profits. Many times, assets are buildings, machinery, inventory, or other resources that a company owns or holds. Assets are listed on the Balance Sheet. Remember that assets are not always tangible, something material that can be physically held. For example, accounts receivable is an asset, but it is not something tangible.
  • Balance Sheet is a listing of Assets, Liabilities, and Equity as of a certain date. The Balance Sheet is one of the three most important financial statements. The other important financial statements are the Income Statement and the Statement of Cash Flows.
  • Cash (Bank Funds) is the total funds available in a company's checking, savings, and marketable securities accounts that can be used to pay bills within 90 days.
  • Cash Flow Forecast is a month-by-month projection of all expected cash receipts and cash expenditures for a company. The difference between expected cash receipts and expected cash expenditures is referred to as Net Cash Flow. Managers prepare a cash flow forecast to anticipate cash balances in the future.
  • Cash Flow Statements are reports of the cash inflows and outflows for a particular period of time. In many instances, these cash flows are grouped into three categories: cash from operations, cash from investing activities, and cash from financing activities.
  • Common Size Ratios are used to compare financial statements of different companies by displaying items as a percentage of a common base figure. For common size analysis, Balance Sheet items are displayed using Total Assets as the base figure or denominator; Income Statement items are displayed using Total Sales as the base figure.
  • Common Stock represents ownership in a corporation and normally carries voting privileges.
  • Cost of Sales (COGS) is the direct cost of the products and services sold. The Cost of Sales section on the Income Statement may take on different formats. Typically, however, Cost of Sales (COGS) includes inventory costs, direct labor costs, material costs, sales commissions, and other costs directly associated with the generation of revenue.
  • Current Assets are assets that a company has for a short period of time before they are put into the business, such as cash, accounts receivable, and inventory. Other current assets include marketable securities and prepaid expenses.
  • Current Liabilities are amounts owed that must be paid for in the short term, usually within a year. Accounts payable is an example of a common current liability. Current liabilities are considered accrued (built-up) expenses.
  • Current Ratio equals Total Current Assets divided by Total Current Liabilities. The current ratio indicates the amount of liquid assets available to pay off current liabilities or the company's ability to pay its bills and meet its current obligations. Generally, the higher the current ratio is, the greater the company's liquidity.
  • Debt (Liability) is an obligation to pay money that is due under specified terms. It is an amount owed as of a certain date.
  • Debt-Service Coverage is EBITDA divided by a firm’s current portion of long-term debt and interest expense.
  • Depreciation is a reasonable estimate of how assets lose value over time. Depreciation expense is the amount by which a company estimates an asset decreases in value for an Income Statement period in question.
  • Direct Labor is the cost of salaries and wages incurred that vary in direct proportion to the level of production. It is included in the Cost of Sales. Most commonly this includes wages for workers in manufacturing plants, any foremen and supervisors, and any related support staff such as industrial engineers or mechanics. It is also applicable to some service industries.
  • Direct Materials are all expenses for materials (raw materials, operating supplies, components, etc.) directly associated with Cost of Sales.
  • Dividends Paid are distributions made to the company's shareholders or owners.
  • EBITDA is Earnings before Interest, Taxes, Depreciation and Amortization.
  • Employees + Contractors (FTE) are the full-time staff and full-time contractors who work for the company. They are sometimes referred to as FTE (full-time equivalents). To calculate FTE of several part-time employees, take the total hours worked by the part-time employees and divide by the full-time equivalent hours.
  • Equity (Owner's Equity, Net Worth, Shareholders' Equity) is the recorded ownership claim of common and preferred shareholders in a corporation as reflected on the Balance Sheet. It is defined as Total Assets minus Total Liabilities.
  • Expenses are the costs of doing business and are measured over a certain period of time. Expenses show up on the Income Statement and are subtracted from Sales to determine Net Profit.
  • Extraordinary Gain or Loss is an economic event in a company that has a financial result which would not normally occur during the normal operating cycle of a business.
  • Financial Analysis is the act of evaluating a company's financial statements in order to understand the business better. The value of financial analysis is to help managers understand how the business is doing and how they might improve performance. It can also help investors better understand the financial performance of companies in which they might like to invest.
  • Fiscal Year is a twelve-month period during which the company reports income and expenses. Most companies use January 1 to December 31 as their fiscal year; their fiscal year equals the calendar year. Sometimes, however, companies may choose to select a twelve-month period other than the calendar year. Basically, it is important to note that fiscal year does not always mean calendar year.
  • Fixed Assets are any assets on the Balance Sheet considered to have a life or usefulness in excess of one year. Common examples include land, buildings, and machinery. It is best to enter gross fixed assets into our expert system. In other words; the Fixed Assets entry should not include any deductions for depreciation.
  • Fixed Costs are any costs or expenses that do not vary too much with changes in the volume of operations over a specified time. Rent expense is usually considered a fixed expense. However, no cost is fixed over the long term.
  • General & Administrative Expenses (G & A) are overhead costs such as rent, utilities, staff personnel, professional fees, and depreciation. G & A expenses are also referred to as "Operating Expenses."
  • Gross Profit is the difference between Sales and Cost of Sales. It is the profit earned before paying operating expenses.
  • Gross Profit Margin equals Gross Profit divided by Sales, expressed as a percentage. It represents the cents of gross profit per sales dollar.
  • Income Statement shows a company's sales, expenses, and profits or losses for a certain period of time. The Income Statement is also referred to as a Profit & Loss Statement. The Income Statement and Balance Sheet are the two most important financial statements.
  • Interest Expense is the cost of borrowed funds (debt). Companies must typically pay a premium for the use of another's money.
  • Inventory is the value of goods that have been produced or purchased for resale.
  • Inventory Days is calculated as Inventory divided by Cost of Sales multiplied by 365; this roughly measures the number of days a company holds its inventory before selling it.
  • Net Income is the bottom line net earnings (or losses) of a company.
  • Net Operating Income is the operating income for a company; how much profit is made from operations. Net Operating Income equals Gross Profit plus Other Operating Income, minus Depreciation, Amortization, Overhead and Other Operating Expenses.
  • Net Profit before Taxes is what is left over after all expenses are paid (except income taxes in our model). Profit is always expressed as monies earned during a certain period of time. It is probably a good idea to add back owner's compensation in excess of salary to Net Profit before Taxes.
  • Net Profit Margin equals Net Profit before Tax divided by Sales, expressed as a percentage. It represents the cents per dollar of sales that the company extracts in profits. Finance professionals view this metric as a critical gauge because it indicates operating efficiency. This shouldn’t be confused with Profit Growth, which refers to profits this year compared to profits last year and measures the rate of change. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private-company financials in order to provide a more accurate picture of the companies’ operational performance.
  • Operating Expenses are expenses that are paid from the gross profits of the company. They are often referred to as Selling, General & Administrative (S, G, & A) or Overhead Expenses.
  • Overhead or Selling, General, and Administrative Costs (S, G, & A) are the costs associated with the day-to-day operations of the company. These costs may include rent, advertising, utilities, staff personnel, and all selling, general, and administrative costs incurred that are not covered by COGS. Some people refer to S, G, & A expenses as "Operating Expenses."
  • Preferred Stock generally provides the shareholder with preferential payment of dividends but does not carry voting rights.
  • Principal is the original amount of a loan. The rate of interest is based on the original amount of the loan.
  • Quick Ratio is the sum of Cash and Accounts Receivables divided by Total Current Liabilities. Both the Quick Ratio and Current Ratio assess a company's ability to meet short-term obligations. The Current Ratio measures a company's overall liquidity, while the Quick Ratio measures liquidity by considering only readily liquid assets, items that can be quickly converted to cash. It should be noted that not one ratio or metric can in itself accurately depict liquidity, which is largely driven by future events, not present conditions.
  • Ratio Analysis is the use of a variety of ratios in analyzing the financial performance and condition of a company.
  • Retained Earnings are all profits that the company has earned and re-invested in itself.
  • Sales (Income) is the revenue a company earns over time and is sometimes referred to as Gross Sales. Sales is equal to the total funds or monies generated before expenses. It is measured by time. In other words, companies earn a certain amount of sales over a day, week, month, or year.
  • Sales Percent Change is the measure of how total sales or income for a company or industry has changed since the preceding period. In our model, we consider annual sales change, so it compares the sales volume for one, twelve-month period to sales during the next twelve-month period.
  • Selling, General, and Administrative Costs (S, G, & A) or Overhead are the costs associated with the day-to-day operations of the company. These costs may include rent, advertising, utilities, staff personnel, and all selling, general, and administrative costs incurred that are not covered by COGS. Some people refer to S, G, & A expenses as "Operating Expenses."
  • Total Assets is the sum of all assets a company has as of a certain date. Total Assets equals Total Current Assets plus Total Fixed Assets plus Other Assets.
  • Total Liabilities (Total Debt) is the total amount owed as of a certain date. Try not to confuse liabilities with expenses, which are the costs of doing business. Liabilities are accrued expenses: expenses that have added up over time. For example, a mortgage balance is a liability, but monthly mortgage payments are expenses. Expenses show up on an Income Statement while liabilities show up on a Balance Sheet.
  • Variable Costs are any costs or expenses that vary with changes in the volume of operations over a specified period. Raw materials is an example of a variable cost.