Wise Business

Business Terms

Business Planning Terms


Acid test: Sometimes referred to as a “quick ratio,” an acid test measures the company’s capacity to pay short-term debts, excluding stock from its asset value.

Assets: An asset is something the company owns that has a monetary value, including stock, cash and even intangible items related to company identity.

Asset turnover: Asset turnover measures revenue produced against the value of the company’s available assets and is used to define the company’s operational efficiency.



Balance sheet: The balance sheet indicates who owns what and how assets and debts affect the value of the company. The balance sheet equation is capital plus liabilities equal assets (where the money is now). The balance sheet doesn’t show how much the company is making in profits – that function belongs to the P&L.

Budget: Amounts of money set aside to spend on particular items, usually over the course of a fiscal year, but sometimes for certain projects or timeframes.



Capital employed: The value of fixed assets plus working capital, making up the total amount of funds invested in or borrowed by the company.

Cash flow: The movement of monies into and out of the company.

Cash flow statement: This statement demonstrates the movement of cash within and out of the business over a defined period of time.

Cost of debt ratio: Expense incurred as interest over a defined amount of time as a percentage of the average debt over the same time period.

Cost of goods sold (COGS): The costs of products, materials or services sold.

Cost of sales (COS): The cost value of the goods or services sold during a defined period of time.

Current assets: Cash along with anything expected to be converted into cash within twelve months.

Current ratio: The ratio of current assets to current liabilities.

Current liabilities: Money owed and expected to be paid within 12 months.



Depreciation: The defined amount of value that an item loses over an indicated amount of time.

Dividend: A payment made to shareholders per share that’s based on profits, though not necessarily all profits. An annual dividend gives shareholders a return on their investments.



Earnings before: Among the many “Earnings Before” acronyms are EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization; EBIT: Earnings Before Interest and Taxes; EBT: Earnings Before

Taxes; EBIAT: Earnings Before Interest after Taxes; EBITD: Earnings Before Interest, Taxes and Depreciation. Earnings are defined as profits.



Fixed assets: Assets held for use by the company.

Fixed cost: A cost which does not change with fluctuating sales or other processes or volumes.

FOB (free on board): An import/export term meaning including or assuming delivery without charge to the buyer’s named destination.



Gearing: Debt to equity ratio.

Goodwill: Surplus funds paid to acquire a business in excess of its net tangible assets.

Gross profit: Sales minus the cost of items sold.



Initial public offering (IPO): The initial sale of privately owned stock or shares through the issue of shares to the public. Sometimes referred to as taking a company public.



Letters of credit: Letters of credit are a guarantee that, if the appropriate documents are presented to the buyer’s bank, the bank will pay the seller the amount due.

Liabilities: What the company owes.

Liquidity ratio: A measurement of the relationship between current assets and short-term debt, as an indicator of the business’s ability to pay short those short-term debts.



Net assets: Total assets, both current and fixed, minus current and long-term liabilities that have not been capitalized.

Net current assets: Current Assets minus Current Liabilities.

Net present value (NPV): All future cash flow from a specific investment less the cost of the investment.

Net profit: Usually refers to profit after the deduction of operating expenses, particularly fixed costs or overhead.



Overhead: Ongoing expenses that cannot be attributed to labor, materials or expenses that are billed to customers.



Price per earnings (P/E) ratio: The stock or share price divided by the earnings (after-tax profit and interest divided by the number of shares) per share.

Profit and loss (P&L) statement: This vital statement summarizes the company’s revenues, costs and expenses for a defined time period.



Quick ratio: See Acid Test.



Reserves: The saved difference between profits and losses since the founding of the company.

Restricted funds: Funds earmarked for a specific purpose by the funding source.

Return on capital employed (ROCE): Percentage indicating profit before interest against invested funds.

Return on investment: Profit before tax derived from an investment.



Share capital: Value paid by shareholders when shares were issued.

Shareholders’ funds: The shareholders’ interest in the company (total share capital plus reserves).



Telegraphic transfer (T/T): Sometimes called a cable transfer or wiring money, this is the electronic transfer of funds abroad.



Variable cost: A cost that changes with sales or other operational variables and expenditures.



Working capital: Current assets minus current liabilities, or the funds used for.

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