Reference:
Finance for Non-Financial Managers by Gene Siciliano, CMC, CPA
Copyright 2003, The McGraw-Hill Companies
Current Ratio – The ratio of current assets to current liabilities. The larger the ratio the better.
Current Assets - Assets that are cash or will be cash "currently," that is, within 12 months. Includes Cash, Accounts Receivable, Allowance or Bad Debts, Inventory, Prepaid Expenses.
Current Liabilities - All debts of the company expected to be repaid over the next 12 months.
Debt to Worth Ratio – The ratio of Total Liabilities to Net Worth. The smaller the ratio the better.
Total Liabilities – All debts of the company, including accounts payable, accrued payroll, benefits, and taxes, contracts payable for leased equipment, long-term notes payable, other accrued liabilities.
Net Worth – The calculated amount of assets of a company would theoretically remain if all assets were sold off and all liabilities were paid off. Typically the total amount invested in the company by its owners plus the accumulated profits of the business since inception.
Stockholder’s Equity – Another name for Net Worth.
Gross Margin Percent – The ratio of gross profit to total sales. The higher the percent the better.
Gross Profit – The difference between the wholesale selling price and the cost of goods sold (COGS).
COGS – Cost of goods sold; the summation of the expenses of 1.) direct manufacturing labor (including base salary, fringes/benefits, and taxes), 2.) material costs, and 3) applied manufacturing overhead.
Material COG – Material costs without burden.
Sales to Assets Ratio – The ratio of total sales to total assets. The larger the ratio the better.
Total Assets – All of the company’s assets, including cash, short-term investments, accounts receivable, fixed assets, accumulated depreciation, deposits, long-term investments.
Inventory Turnover Ratio – A measurement of how quickly inventory is leaving the plant and being replaced by new inventory. A high turnover rate means inventory moves quickly, which is good for cash flow and for minimizing inventory losses. It is the ratio of annual COGS to average inventory. The larger the ratio the better.
Inventory Turnover Days – An annualized value equivalent to 365 days divided by Inventory Turnover Ratio. The less days the better.
AP – Accounts Payable, includes all bills yet unpaid from all the suppliers and service providers.
AR – Accounts Receivable, the money due from customers as a result of sales made on credit. It’s expected that customers will pay for those sales in a short time (typically 30-60 days) so they are classified as “current,” even though some accounts may actually be past due.
Leverage - Gained by delaying payment beyond terms, in essence borrowing from creditors interest free. Works in reverse when your customers do not pay on time.
AP Turnover Days – An annualized value equivalent to 365 days divided by AP Turnover Ratio. The higher the better provided proper ethics and payment is made when agreed upon. (The national average for AP Turnover Days in normal economic times is 45 days.).
Quick Ratio – Similar to the Current Ratio, except that the current assets calculation excludes inventory. It’s thus a conservative version of the current ratio. Thus it is the sum of cash and accounts receivable (inventory takes longer to convert to cash) divided by Current Liabilities. The larger the ratio the better.
Net Profit Percent – The net income before taxes divided by the total sales. The larger the percent the better.
Net Income Before Taxes – The income that a company expects to pay taxes on, that is, the amount on which income tax estimate is based.
Return on Assets (ROA) – A measure of a company’s earning power. A ratio of the Net Income Before Taxes to Total Assets. The higher the ratio the better.
Return on Investment (ROI) – The ratio of the Net Income Before Taxes to Net Worth. The minimum should be what one could get in a savings account. The larger the ratio the better.
AR Turnover – The ratio of Total Sales to Accounts Receivable. The higher the number the better as that means that cash is being collected faster and this is good for cash flow. It also means that a company has more cash to work with and thus does not have to borrow as much (and pay interest on it).
AR Turnover Turn Days - Also known as Day-Sales-Outstanding. It is calculated as 365 days divided by the AR Turnover Ratio. The more days, the longer recipient of your goods sold gets to use your money for his purposes.
EBITDA - Earnings before interest, taxes, depreciation, amortization. A modification of "operating income" without the burden of other financial charges. The higher the number the better.
Budget - A projection of the detailed income and expenses estimated to occur, usually month to month, for one year.
General Ledger - The principal accounting record into which all transactions of the company are recorded and summarized (and equal zero).
GAAP - Generally Accepted Accounting Principles (established by Federal Accounting Standards Board).
Finance Dept. - Manages the company's financial resources, especially cash management, bank relations and investments.
Accounting Dept. - Recording and reporting of all company financial transactions.
ARTistic Financial Reports - Accurate, Relevant, Timely.
Chart of Accounts - A systematic listing of all ledger account names - customarily Assets, Liabilities, Owner's Equity or Stockholder's Equity, Revenue, and Expenses.
General Ledger - Balancing the items on the chart of accounts where Total Assets - Total Liabilities = Stockholder's Equity.
Balance Sheet - An itemized summary of assets and liabilities as of a given date, usually the end of a month, quarter, or year.
Income Statement - An accounting of revenue, expenses, and profit for a given period, usually a month, quarter, or year. (also known as P&L statement)
Statement of Cash Flow - A report that shows the effect of all transactions that involved or influenced cash, but didn’t appear on the income statement.
Accrual Method of Accounting - Recording transactions when an economic event has occurred (buying decision by customer or company for supplies) rather than when payment is made/received - which might be much later.
Working Capital - Liquidity of a company; the difference between current assets and current liabilities. (A negative value is insolvency.)
Loan Covenants - Clauses in a loan agreement with a bank requiring the company to do and/or not do certain things during the term of the loan.
Gross Profit - The gain realized between the sale of a product and the cost of the sale. This gain normally pays all of the operating expenses.
Interest Coverage: EBIDTA divided by interest expense. This ratio should not drop below 8 to 10. Poor numbers here show a lender that an announcement for debt restructuring may be forthcoming.
Measures of Productivity: Measures of how well a company spends its sales dollar.
Sales per Customer (when cost to process orders is fixed or controllable)
Sales per Employee (for strongly sales driven organizations)
Sales per Square Foot of Floor Space (used in Retail)
Cost Accounting: An area of management accounting that deals with the costs of a business in terms of enabling the managers to identify, measure, and control gross profit.
Business Plan: A generic name for a plan written for a business. It will generally include a statement of the overall objective of the plan, the period it covers, and the goals to be achieved.
Strategic Plan: A type of business plan designed to define the overall vision and mission of a business, its strategy and long-term objectives, and will typically be intended to drive the company's strategy for several years and will serve as the basis for the company’s operating plan.
Operating Plan: A detailed description of what the company will do to pursue the objectives of its strategic plan for the next operating period, usually one year. It will contain enough detail that the operating managers of the company can use it to guide their daily and monthly activities.
Financial Plan: A special version of a strategic plan written for the express purpose of attracting outside financial resources to the company, usually intended for equity investors, but sometimes written or lenders as well. This version will emphasize the amount of money needed, how it will be used, and how the investors will receive a return on their money.
Vision: Vision is the world as you define it and arranged as you like to see it sometime in the future.
Mission: The role of the organization in achieving the vision.
Strategy: Setting direction.
Long-Term Goals: The path to the mission.
SMART Goals:
Specific - The goal is identified clearly, by how much and when.
Measurable - Must be able to measure success with available data.
Achievable - Must be challenging and stretching but still reachable with effort.
Relevant - To get to the vision, the goal must be consistent with the vision, mission, and strategy.
Trackable - Establish milestones to track progress to the goal.
Short-Term Goals and Milestones: The Operating Plan
The Production Plan: Getting the product ready to sell and supporting the sales plan.
Marketing and Sales Plan: Generating interest and making the sale.
The Quality Plan: The system by which you manage the organization and measure its effectiveness.
R&D/Product Development Plan: Bringing new ideas to market.
Financial Plan: The budget.
Parkinson's Law: Work expands to fill the time available for its completion.
Extension of Parkinson's Law applied to money: There is always a good reason to spend money.
Budget Variance: The significant difference on a budget from forecast to actual.
Three Magic Questions for Variance Control:
Why did the variance occur?
What action do I need to take now to reverse a negative variance or protect a positive variance?
What am I learning from the first two questions to make my budget next year a more effective management tool?
Factoring: The selling of a company's accounts receivables at a discount to a business (a factor) that assumes the credit risk of the accounts and receives cash as the debtors pay off their accounts. Also known as accounts receivable financing.
Two Rules of Borrowing:
#1 - Lending is a very competitive business. Always shop for a loan.
#2 - Borrow short-term money only for short-term needs.
From an Internet Search...
What is a Corporation? A Corporation is a separate legal entity that is owned by people or other business entities, known as owners or shareholders. Corporations may offer many benefits to owners and shareholders, such as limited liability, tax benefits, prestige, and ease of transfer of ownership. There are several types of corporations, including Close, C and S.
What is a C Corporation? This is the most common corporate structure and is also known as a general corporation. A "C" corporation may have an unlimited number of shareholders. It is normally chosen by those businesses that are planning to have more than 30 shareholders or planning a large, public stock offering. These general corporations usually pay taxes at two levels. First, the corporation is required to pay taxes based on the corporation's profits. Additionally, the owner or shareholder is taxed when the corporation distributes profits, known as dividends, to the individual. This is commonly known as "double taxation."
What is an S Corporation? An S Corporation is a general corporation (C Corporation) that has elected a special tax designation by the IRS. The S designation is chosen after the corporation has been formed and allows it to avoid double taxation. The designation allows the owners or shareholders to be taxed only at the individual level, rather than at the corporate and individual levels. All income for the business is only taxed at the individual shareholder or owner level. This designation is often ideal for small businesses and entrepreneurs since it prevents double taxation while providing limited liability and an enduring structure.
What are the differences between officers, directors and shareholders? A corporation consists of all three: officers, directors and shareholders. Shareholders are the owners of the corporation and elect the directors. Directors guide and are involved in the fundamental decisions of the corporation on behalf of the shareholders. Officers are selected by the directors and run the day-to-day operations of the corporation. These do not need to be separate people. Any person can fill all three positions. In small businesses, one person can be the only shareholder, the only director, and the only officer.
What is an LLC? An LLC is a type of legal business structure. The LLC is designed for small and large owner-operated businesses. It is very easy to manage. Its members, who are called owners, manage an LLC. They do not have to establish a board of directors. The members are not personally liable for the debts of the company. The LLC has a significant tax advantage over the traditional C Corporation because the LLC itself is not taxed. The owners pay taxes on distributions they receive from the LLC.