Financial Tables Guide

Finance Terminology and explanations

Assets:
These include items of value that is owned, including tangible (physical) items, like cash, accounts receivable, inventory, land, buildings, equipment, etc.., and intangible (non-physical) items, like trademarks, licences, and goodwill. Your NEIS financial plan contains a list of both your personal assets and your proposed business assets.


Break-Even Point:
The level of sales where revenue equals total costs. The break even point should also be expressed as units, in other words how many products or units must I sell to cover my costs. This enables you to visualize easier what is required.


Cash Flow Statement:
A financial statement that shows when cash flows into and out of a business on a timely basis regardless of where it comes from or goes to. It measure also your solvency, how much cash do I need to cover my bills as they fall due?


Cost of Goods Sold (COGS):
COGS is calculated by adding all the expenses a business incurs as a result of producing its product or service. In a manufacturing business, cost of goods sold includes material, expenses and labour in producing the product ready for sale; in a retail or service business, labour is not part of COGS, but is an operating expense.


Current Assets:
Cash, accounts receivable, inventory, all term deposits and prepaid expenses or any other asset which may be converted into cash within one year and is available to pay the expenses the business incurs in operating.


Current Liabilities:
These include all operating loans, accounts payable and accrued charges including outstanding cheques, wages, long-term debt payments and taxes that are due within a year.

Current Ratio:
This ratio tells you of how easily your business can meet its debts as they fall due. To calculate the Current Ratio for your business, simply divide your current assets by your current liabilities (the higher the ratio, the better for your business). A starting benchmark is 2 currents assets to 1 current liability ($)


Debt/Equity Ratio:
A measure of how much debt your business has in relation to the amount of Owner's Equity invested in it. A high level of debt to equity can be of concern. To support your business, you can raise money either by borrowing it (incurring a debt) or by selling ownership in the business (equity). To calculate, divide total Liabilities by Owner's Equity.


Depreciation:
A charge against a fixed asset that writes off the cost of that asset over its useful life and as it is used. The depreciation amount is entered as an expense in your income statement but is a non-cash expense.


Equity Contribution (Capital):
The cash that the owner(s) has invested in the business in return for a share of the ownership.


Fixed Assets:
A fixed asset generally includes the land, building, furniture and fittings, equipment/machinery and motor vehicles that are likely to have a useful life to the company for more than one year.


Fixed Costs:
This is a cost your business pay that remains unchanged, whatever your level of sales, for example, the company's monthly rent, insurance, advertising etc


Goodwill:
An amount that represents the excess paid for a business, company shares, or other assets over its net asset value.


Gross Profit (of Gross Margin):
This is the profit your business makes before considering operation and administration expenses. It is calculated by subtracting the Cost of Goods Sold form Sales. It can also be expressed as a percentage by dividing a business's gross profit by its sales.


Income Statement:
(Also known as a profit & loss statement) Part of the financial statements, the Income Statement looks at all revenue that a business receives from selling products or services and then subtracts the total cost of operating the business. The income statement shows how much money a company has lost or made during a certain period of time (net profit). It is also used to calculate the business's taxation liability for that period.


Incorporation:
This is a process that legally makes a business a separate entity from its owners. The business operates as a corporation.

Intangible Asset:
This refers to the non-physical assets your company has, like incorporation costs, patents, trademarks, goodwill etc. Generally speaking it is the assets of the business that only have a value while the business trades. The moment the business ceases to operate then generally the value of the intangible assets disappear. There are exceptions to this.


Interest Coverage Ratio:
The ratio of net income (before extraordinary items and income tax) of the business, adjusted by adding back all amounts deducted in computing the net income on account of interest and income taxes divided by the interest payable.


Inventory Turnover:
This is a ratio that shows how well your inventory is selling and is an important cash driver for your business. It shows the number of times you sell your inventory in one year. You can calculate your company's Inventory Turnover by dividing the value of your inventory by your sales, and multiplying that number by 365.


Liquidity and solvency:
This describes how readily your assets can be converted into cash and whether or not the business can pay its bills as and when they fall due.


Long-Term Liabilities:
These are liabilities (like loans or debts) that are not payable within one year.


Net Worth:
Indicates the owner's equity in a business, calculated by deducting total liabilities from total assets. Similarly, the net worth of an individual is calculated by deducting all personal liabilities from personal assets.


Overdraft:
A negative account balance caused by withdrawing more money than is available in your bank account. Overdrafts can be temporary or permanent depending on the arrangement with your banker and are included as a current liability on the Balance Sheet.


Partnership:
A form of business ownership made up of two or more people. Partners share an agreed upon percentage in the responsibility, profits, and/or losses of their business. Should a NEIS business be a partnership then the NEIS participant/s must hold at least 50% of the partnership.


Payment Terms:
These are the conditions you negotiate for payment of your invoices, such as "net 30" (or payment due in 30 days). And also the terms you offer your customers.

Personal Guarantee:
A guarantee to the lender or supplier to the business that you will take personal responsibility for repaying the loan or any other debt obligation.


Profit Margin:
The ratio of profits (generally pre-tax) to sales. To calculate, divide pre-tax by sales/revenue


Quick Ratio:
This ratio measures how easily a business can raise cash by selling its most liquid assets to meet its liabilities. It is sometimes called an acid test ratio. It is calculated by subtracting your inventory from your current assets, and then dividing by your current liabilities.


Ratio Analysis:
The process of calculating financial ratios for your business in order to determine trends and to compare its performance with that of other businesses in the same industry. The most common ratios are Gross Profit Margin, Net Profit Margin, Current Ratio and Inventory Turnover.


Receivables:
Represent invoices that you have billed but have not been paid. Also known as accounts receivable, and sometimes debtors, they can be listed as current assets.


Receivables Turnover:
This is a ratio that shows how well your receivables are being paid and is an important cash driver for your business. Its shows the number of times you collect your receivables in one year. You can calculate your company's Receivables Turnover by dividing the value of your receivables by your sales and multiplying the number by 365.


Return on Investment (ROI):
ROI is commonly used as a test of a company's profitability. Investors can compare this figure to other types of investments. To calculate your ROI divide the net profits by total assets.


Sales Growth:
The difference between current and previous year's sales divided by the previous year's sales gives an indication of whether the business is meeting goals. Usually expressed as a percentage.


Security:
Asset(s) belonging to the business or to you personally, which are pledged to a lender in support of a loan.


Sole Proprietorship:
A form of business organisation in which one person is the sole owner. In effect, there is no distinction between the owner's and the business' responsibility regarding the commitments made on behalf of the business


Tangible Net Worth:
Indicates the owner's equity in a business, calculated by deducting total liabilities from total assets, less (but not limited to) goodwill, incorporation/prepaid expenses, leasehold improvements and deferred costs.


Term Loan:
A loan you obtain for a specified length of time (the term is usually not greater than the useful life of the asset being financed) to purchase fixed assets like machinery, equipment and buildings, or to renovate premises.


Trade Credit:
Credit a supplier gives to customers by allowing them a certain period in which to pay. An important aspect in managing your company's cash flow. Shown on your Balance Sheet as accounts payable or sometimes creditors.


Variable Costs:
Cost that change depending on the level of sales or production, which are generally your cost of goods, but can include commission for salespeople, sales discounts, etc.


Working Capital:
The money that you actually have to work with once you have considered your liabilities. Your net Working Capital is your business's current assets, less its current liabilities (the higher the amount, the better for your business).

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