Finance Glossary

Welcome to our comprehensive Finance Glossary, designed specifically for small and medium-sized business owners and executives. Understanding financial terminology is essential for making informed decisions and ensuring the financial health of your company.

Our Finance Glossary serves as your go-to resource, providing clear and concise explanations of key financial terms and concepts. Whether you're navigating profit margins, assessing liquidity, or planning for growth, our glossary is here to demystify the world of finance. Explore definitions, ratios, and concepts that matter most to SMBs, helping you manage your finances with confidence. From profitability metrics to solvency ratios and everything in between, our glossary is your trusted companion on your financial journey.

Start exploring now and begin to equip yourself with the financial expertise needed to drive your business forward.

Browse By Section

Accounting : Terms related to financial reporting, accounting principles, and the preparation of financial statements
Budgeting and Forecasting : Terminology related to budget creation, variance analysis, and financial forecasting
Financial Ratios and Analysis : Ratios used to assess a company's financial health and performance, such as liquidity, profitability, and solvency ratios
Taxes : Tax-related terminology, including tax planning, deductions, credits, and tax compliance
Finance Glossary

Accounting

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Accounts Payable (A/P)

Money owed by a business to its suppliers or creditors for goods and services received

Example: If you order office supplies and agree to pay the invoice in 30 days, the amount is recorded under accounts payable
Accounts Receivable (A/R)

Money owed to a business by its customers for goods or services delivered but not yet paid for

Example: If you sell products on credit, the amount your customers owe you is listed under accounts receivable
Accrual Basis Accounting

Accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged

Example: Recording revenue when a service is completed, not when the payment is received
Amortization

The process of spreading out a loan into a series of fixed payments over time

Example: Amortizing a $10,000 loan over 5 years, where each payment covers part of the principal and interest
Audit

An official inspection of an individual's or organization's accounts, typically by an independent body

Example: An external audit firm might review your financial statements to ensure they are accurate
Balance Sheet

A financial statement that shows the assets, liabilities, and equity of a business at a particular point in time

Example: A balance sheet might show assets like cash, inventory, and equipment, liabilities like loans, and equity like retained earnings
Bookkeeping

The recording of financial transactions and is part of the process of accounting in business

Example: Tracking all purchases, sales, payments, and receipts in a company's books
Break-even Analysis

A calculation to determine the point at which revenue received equals the costs associated with receiving the revenue

Example: If your fixed costs are $10,000 and each product sold contributes $100 to cover these, you break even at 100 units sold
Capital Expenditure (CapEx)

Funds used by a company to acquire or upgrade physical assets like property, industrial buildings, or equipment

Example: Purchasing a new manufacturing machine for a factory is considered a capital expenditure
Cash Basis Accounting

An accounting method where revenues and expenses are recorded when they are actually received or paid

Example: Recording revenue when you receive cash from a customer, not when the sale is made
Cash Flow

The total amount of money being transferred in and out of a business, especially affecting liquidity

Example: A cash flow statement will show the cash inflows from sales and outflows for expenses, providing a view of the business's liquidity
Contra Account

An account used in the general ledger to reduce the value of a related account

Example: Accumulated depreciation is a contra account that reduces the value of fixed assets
Cost of Goods Sold (COGS)

The direct costs attributable to the production of the goods sold in a company

Example: If you manufacture bicycles, the COGS includes the cost of materials like metal and tires, and direct labor costs
Credit

An entry recording an amount received, traditionally on the right-hand side in accounting

Example: When a company borrows money from a bank, the cash account is credited (increased)
Debit

An entry recording an amount owed, traditionally on the left-hand side in accounting

Example: When you purchase supplies, the supplies account is debited (increased)
Deferred Expenses

Expenses that have been incurred but not yet paid

Example: Salaries payable or utilities that have been used but the bills haven’t been paid yet
Deferred Revenue

Money received for goods or services which have not yet been delivered or provided

Example: Prepayments received from customers for orders to be fulfilled in the future
Depreciation

The process of allocating the cost of a tangible asset over its useful life

Example: If you buy a computer for your business for $1,000 and expect it to last 5 years, you might depreciate it at $200 per year
Double-Entry Bookkeeping

A system of bookkeeping where every entry to an account requires a corresponding and opposite entry to a different account

Example: If you sell a product for cash, you debit the cash account and credit the sales revenue account
Equity

The residual interest in the assets of a business after deducting liabilities It represents ownership interest

Example: If your business has total assets of $100,000 and liabilities of $60,000, the equity is $40,000
Fair Value

An estimate of the market value of a property, asset, or liability

Example: The fair value of a stock might be determined by its current selling price on the stock market
Fiscal Policy

Government policy that attempts to influence the direction of the economy through changes in government spending or taxes

Example: Increasing government spending or cutting taxes to stimulate economic growth
Fiscal Year

A one-year period that companies and governments use for financial reporting and budgeting

Example: A company might operate on a fiscal year that runs from July 1st to June 30th
Fixed Asset

Long-term tangible property that a firm owns and uses in its operations and is not expected to be consumed or converted into cash in a short period

Example: Buildings, machinery, and vehicles
Fixed Costs

Business expenses that remain the same regardless of the number of goods or services produced

Example: Rent, salaries, and insurance are typically fixed costs
General Ledger

The master set of accounts that summarize all transactions occurring within a business

Example: The general ledger includes all the transaction data needed to prepare the financial statements
Goodwill

An intangible asset that arises when a buyer acquires an existing business

Example: If a company is purchased for more than the value of its tangible and intangible assets, the excess is recorded as goodwill
Gross Margin

The difference between revenue and the cost of goods sold (COGS), divided by revenue

Example: If you make $200,000 in sales and the COGS is $100,000, the gross margin is 50%
Income Statement (Profit and Loss Statement)

A financial statement that shows a company's revenue and expenses over a specific period

Example: An income statement for the year might show total sales, cost of goods sold, gross profit, operating expenses, and net income
Insolvency

The inability of a person or company to pay their debts as they fall due

Example: A company might be insolvent if it cannot pay its bills when they are due
Intangible Asset

A non-physical asset owned by a business

Example: Patents, trademarks, and copyrights
Inventory

The raw materials, work-in-process products, and finished goods considered to be part of a business's assets

Example: For a retailer, inventory includes all the goods available for sale
Inventory Turnover

A ratio showing how many times a company has sold and replaced inventory during a given period

Example: A high turnover rate may indicate strong sales or ineffective buying
Journal

The first place where transactions are recorded using the double-entry or single-entry method of bookkeeping

Example: When a sale is made, it is first recorded in the sales journal
Journal Entry

A record of a business transaction in the accounting books

Example: When you pay a utility bill, you make a journal entry to decrease cash and record the utility expense
Leverage

The use of borrowed funds to increase the return on investment

Example: Using a mortgage to buy a property with a small down payment
Liability

A company's legal financial debts or obligations that arise during the course of business operations

Example: Loans, accounts payable, mortgages, deferred revenues, and accrued expenses are all liabilities
Liquidity

The ability of a business to meet its short-term obligations and debts

Example: High liquidity is having enough cash or easily convertible assets to pay upcoming bills
Liquidity Ratio

A measure of a company's ability to pay its short-term debts

Example: Current ratio and quick ratio are common liquidity ratios
Marginal Cost

The cost of producing one additional unit of a product

Example: If adding one more unit of production increases total cost by $100, the marginal cost of the unit is $100
Market Capitalization

The total value of a company's outstanding shares of stock

Example: Calculated by multiplying the current stock price by the total number of shares
Monetary Policy

The process by which the central bank or monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency

Example: Changing interest rates to control inflation
Net Income

The total profit of a company after all expenses and taxes have been deducted from revenue

Example: If a company earns $100,000 in revenue and has $80,000 in expenses, the net income is $20,000
Opportunity Cost

The cost of foregoing the next best alternative when making a decision

Example: If you invest in stock A instead of stock B, the opportunity cost is the foregone profit from stock B
Payroll

The total of all compensation a business must pay to its employees for a set period or on a given date

Example: Salaries, wages, bonuses, and withheld taxes are part of payroll
Present Value

The current value of a future sum of money or stream of cash flows, given a specified rate of return

Example: Calculating the present value of future cash flows from an investment
Return on Investment (ROI)

A measure used to evaluate the efficiency or profitability of an investment

Example: If you invest $1,000 in a business and make $100 in profit, the ROI is 10%
Retained Earnings

The portion of net income that is retained by the corporation rather than distributed to its owners as dividends

Example: If a company earns $50,000 in profit and pays out $20,000 in dividends, $30,000 will be added to retained earnings
Trial Balance

A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal

Example: A document showing all the debit and credit balances from various accounts to ensure they match and that the ledger is balanced
Variable Costs

Costs that vary in direct proportion to changes in the level of production or sales

Example: Raw materials costs are variable, as they increase with higher production levels
Working Capital

The difference between a company’s current assets and current liabilities

Example: If a company has $100,000 in current assets and $80,000 in current liabilities, its working capital is $20,000

Return to top of section

Return to top of page

Financial Glossary

Budgeting and Forecasting

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Absorption Costing

A method of costing that includes all manufacturing costs - both direct costs and overhead costs - in the cost of a product

Example: A furniture manufacturer includes the cost of wood, labor, and factory overhead in the cost of making a chair
Activity-Based Budgeting (ABB)

A budgeting approach based on activities that incur costs in every functional area

Example: Allocating costs based on the number of customer service calls handled, manufacturing units produced, or square footage of space used
Bottom-Up Budgeting

A budgeting process where the budget is prepared by individual departments and then consolidated

Example: Each department submits its budget requirements, and the finance team combines them into the company's overall budget
Budget

A detailed financial plan that outlines expected revenues and expenditures over a specific period

Example: A company's annual budget might include projected sales revenue, manufacturing costs, and marketing expenses for the year
Budget Adjustment

Modifications made to a budget in response to changes in the financial or operational environment

Example: Mid-year, a company might adjust its budget to account for unexpected increases in raw material costs
Budget Approval Process

The procedure through which a budget is reviewed and authorized

Example: In a municipal government, the city council might review and approve the annual budget presented by the city manager
Budget Committee

A group of individuals responsible for overseeing the creation and implementation of a budget

Example: In a corporation, the budget committee might include members from different departments who collaborate to formulate the annual budget
Budget Model

A representation, often in spreadsheet form, that consolidates all the various budgets of an organization into one

Example: A large corporation uses a budget model to integrate departmental budgets into a comprehensive organizational budget
Budget Variance Report

A document comparing budgeted figures to actual figures, explaining the reasons for any variances

Example: A report showing that the sales department exceeded its travel budget due to unexpected client meetings
Budgetary Control

Comparing actual financial results with the budgeted amounts and taking corrective action as needed

Example: A company reviews monthly spending against its budget and adjusts future spending to stay on track
Capital Budgeting

The process of planning and managing a company's long-term investments

Example: Deciding whether to invest in new manufacturing equipment based on its potential to increase productivity
Capital Expenditure (CapEx)

Funds used by a company to acquire or upgrade physical assets

Example: Investing in new machinery or building renovations
Capital Rationing

The process of selecting the best projects to invest in when funding is limited

Example: A business might use capital rationing to decide between several potential projects, choosing the ones with the highest expected returns
Cash Budget

Estimation of the cash inflows and outflows for a business over a specific period

Example: A business prepares a monthly cash budget to ensure it has sufficient cash to meet its obligations
Cash Flow Forecasting

Estimating the flow of cash in and out of the business

Example: A business forecasts that it will receive $20,000 from customers next month but needs to pay $15,000 in expenses
Contribution Margin

The selling price per unit minus the variable cost per unit

Example: If a product sells for $100 and the variable cost is $60, the contribution margin is $40
Cost Accounting

The process of tracking, recording, and analyzing costs associated with the products or activities of an organization

Example: A manufacturing company uses cost accounting to determine the cost of producing each unit of its products
Cost Control

Managing and monitoring expenses to keep them within the limits of the budget

Example: A project manager ensuring that construction costs do not exceed the allocated budget
Cost of Capital

The cost of funds used for financing a business

Example: A company calculates its cost of capital to determine the minimum return required to justify an investment
Cost-Benefit Analysis

Analyzing business decisions to understand their benefits versus costs

Example: Evaluating whether the benefits of a new software system outweigh its implementation costs
Debt Service Coverage Ratio (DSCR)

A measurement of the cash flow available to pay current debt obligations

Example: A company seeking a loan may calculate its DSCR to demonstrate its ability to repay the loan
Direct Costs

Costs directly attributable to the production of specific goods or services

Example: The cost of wood and nails for a furniture manufacturer
Dividend Policy

A company's approach to distributing profits back to its shareholders

Example: A corporation might have a policy of distributing 40% of its net income as dividends to shareholders
EBITDA Forecasting

Projecting Earnings Before Interest, Taxes, Depreciation, and Amortization

Example: A company forecasts EBITDA to evaluate its operating performance without the impact of financial and accounting decisions
Expense Forecast

An estimate of future costs incurred by a business

Example: A software company forecasts that it will spend $200,000 on research and development over the next quarter
Favorable Variance

A variance where actual revenues are higher than planned or actual expenses are lower

Example: A department planned to spend $10,000 but only spent $8,000, resulting in a favorable variance of $2,000
Financial Modeling

Creating a spreadsheet summary of a company's expenses and earnings to calculate the impact of future events

Example: Developing a model to assess the financial impact of launching a new product line
Financial Planning and Analysis (FP&A)

A set of activities that support a company's financial health, including budgeting, forecasting, and analysis

Example: The FP&A team at a company might analyze budget variances and advise on financial strategies
Fixed Budget

A budget that remains constant, regardless of changes in business activity levels

Example: A small business might have a fixed budget of $5,000 per month for rent, regardless of its sales volume
Flexible Budget

A budget that adjusts with changes in volume or activity

Example: A manufacturing company's budget for raw materials increases as production volume rises
Forecast Accuracy

The degree to which a forecast predicts the actual outcomes

Example: A company measures the accuracy of its sales forecast by comparing the forecasted figures to the actual sales achieved
Forecast Variance

The difference between actual results and forecasted figures

Example: A company forecasts $100,000 in sales but achieves only $90,000, resulting in a forecast variance of $10,000
Forecasting

The process of making predictions about future financial outcomes based on historical data and analysis

Example: A retail store forecasts next quarter's sales based on past seasonal trends and upcoming marketing campaigns
Gross Margin Analysis

Analyzing the difference between sales and the cost of goods sold

Example: A retailer calculates gross margin to determine the profitability of its products, excluding overhead and administrative expenses
Historical Costing

Using historical costs as the base for projecting future costs

Example: A manufacturer may use the cost of raw materials from previous years to estimate the budget for the next year
Incremental Budgeting

A budgeting method where the previous period's budget is used as a base with incremental amounts added

Example: If a department's budget was $100,000 last year, it might receive a 5% increase to $105,000 this year without a detailed review
Indirect Costs

Costs not directly accountable to a cost object

Example: The rent for the office space of a company that produces multiple products
Key Performance Indicator (KPI)

Quantifiable measures used to gauge a company's overall long-term performance

Example: Sales growth, customer retention rates, and cost of customer acquisition
Liquidity Forecasting

Estimating the ability of a business to meet its short-term obligations

Example: A business forecasts its cash flow to ensure it has enough liquidity to cover upcoming expenses
Master Budget

A comprehensive financial planning document that includes all smaller, individual budgets within a company

Example: Includes the sales, production, and capital budgets, and summarizes the company's overall financial plan
Net Income Projection

Estimating the future net income by deducting projected expenses from projected revenues

Example: A startup might project net income for the next year by estimating revenues from sales and subtracting anticipated operational costs
Operating Budget

A detailed projection of all anticipated income and expenses based on forecasted sales revenue

Example: A restaurant's operating budget includes expected revenue from sales and expenses like labor, ingredients, and utilities
Opportunity Cost

The cost of an alternative that must be forgone to pursue a certain action

Example: Choosing to invest in new equipment rather than in market expansion, the opportunity cost is the potential revenue from expanding the market
Revenue Forecast

An estimate of future revenue over a specific period

Example: An e-commerce store anticipates earning $500,000 in revenue next quarter based on current growth trends
Revenue Recognition

The accounting principle defining the specific conditions under which revenue is recognized

Example: A software company recognizes revenue when it delivers a software license to the customer, not when the initial contract is signed
Rolling Budget

A budget that is continuously updated by adding a new budget period as the last period is completed

Example: Each month, a company updates its 12-month budget by adding a new month at the end of the period
Rolling Forecast

Continuously updated data throughout the year to reflect changes

Example: A company updates its sales forecast every month, incorporating the latest market trends and sales data
Sales Forecasting

The process of estimating future sales

Example: A car dealership predicts it will sell 50 vehicles next month based on last year's data and current market conditions
Scenario Planning

Preparing different scenarios in forecasting to anticipate various future conditions

Example: A company prepares several financial forecasts based on different potential market conditions like economic boom, recession, or steady growth
Sensitivity Analysis

Determining how different values of an independent variable impact a dependent variable under given assumptions

Example: Analyzing how a 10% increase in raw material costs would affect product pricing and profitability
Strategic Planning

The process of defining a company's direction and making decisions on allocating resources to pursue this strategy

Example: A technology firm engages in strategic planning to decide which new markets to enter over the next five years
Sunk Cost

A cost that has already been incurred and cannot be recovered

Example: Money spent on a marketing campaign that cannot be recovered, regardless of the campaign's success
Top-Down Budgeting

A budgeting process where the budget is imposed by upper management

Example: The CEO of a company sets a limit on total expenditure, and departments allocate funds within this limit
Trend Analysis

A method of financial analysis that involves looking at historical data over a period of time to identify patterns or trends

Example: An analyst might review five years of sales data to forecast future sales trends
Unfavorable Variance

A variance where actual revenues are lower than planned or actual expenses are higher

Example: If sales were forecasted to be $100,000 but only reached $90,000, it's an unfavorable variance of $10,000
Variance

The difference between planned and actual figures in a budget

Example: If a company planned to spend $50,000 but actually spent $55,000, the variance is $5,000
Variance Analysis

Investigating the difference between actual financial outcomes and budgeted amounts

Example: If a company budgeted $10,000 for marketing but actually spent $12,000, variance analysis helps understand why this occurred
Variance Reporting

The process of documenting and explaining variances between budgeted and actual figures

Example: At the end of a quarter, a company might create a variance report to explain why actual sales differed from budgeted sales
Variable Costs

Costs that vary directly with the level of production or sales

Example: A bakery's cost for ingredients increases as it bakes more bread
Working Capital Management

The management of a company's short-term assets and liabilities to ensure its financial stability

Example: A company manages its working capital by optimizing inventory levels and ensuring timely collection of receivables
Zero-Based Budgeting (ZBB)

A budgeting approach where all expenses must be justified for each new period

Example: Each department in a company must justify its entire budget from scratch each year, rather than basing it on last year's figures

Return to top of section

Return to top of page

Financial Glossary

Financial Ratios and Analysis

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Acid-Test Ratio (Quick Ratio)

A measure of a company's ability to meet its short-term obligations with its most liquid assets

Example: A company with $100,000 in liquid assets and $50,000 in current liabilities has an acid-test ratio of 20
Asset Turnover Ratio

Indicates how efficiently a company uses its assets to generate sales

Example: A business with total assets of $500,000 and sales of $1,000,000 has an asset turnover ratio of 2
Book Value per Share

Represents the equity available to common shareholders divided by the number of outstanding shares

Example: A firm with total equity of $500,000 and 100,000 shares outstanding has a book value per share of $5
Capital Intensity Ratio

Indicates the amount of assets needed to generate a dollar of sales

Example: A company with total assets of $5 million and sales of $25 million has a capital intensity ratio of 2
Capitalization Ratio

Indicates a company's financial structure or solvency by dividing long-term debt by the sum of long-term debt and shareholders' equity

Example: A firm with long-term debt of $50,000 and shareholder equity of $100,000 has a capitalization ratio of 033
Cash Conversion Cycle (CCC)

Measures how long a firm takes to convert resource inputs into cash flows

Example: A company with a CCC of 45 days takes that long to turn its investments in inventory and other resources into cash flows from sales
Cash Flow Margin

Indicates the percentage of each sales dollar that results in cash flow

Example: A business with cash flow from operations of $40,000 and sales of $200,000 has a cash flow margin of 20%
Cash Flow to Debt Ratio

Measures the ability of a company to cover its debts with its operating cash flows

Example: A company with operating cash flow of $150,000 and total debt of $500,000 has a cash flow to debt ratio of 03
Cash Per Share

The amount of cash and cash equivalents a company has per share of its stock

Example: A company with $1 million in cash and 200,000 shares outstanding has cash per share of $5
Cash Ratio

Measures a company's ability to pay its short-term liabilities with its cash and cash equivalents

Example: A company with cash and equivalents of $50,000 and short-term liabilities of $25,000 has a cash ratio of 2
Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations

Example: A firm with current assets of $200,000 and current liabilities of $100,000 has a current ratio of 2
Debt Ratio

Indicates what proportion of a company's assets are financed through debt

Example: A company with total liabilities of $1 million and total assets of $2 million has a debt ratio of 05
Debt-to-Equity Ratio

Compares a company's total liabilities to its shareholder equity

Example: A company with $200,000 in liabilities and $100,000 in equity has a debt-to-equity ratio of 2
Dividend Cover

Measures how many times a company can cover its dividend payment with its net profit

Example: A firm with net income of $200,000 and dividends of $50,000 has a dividend cover of 4 times
Dividend Payout Ratio

Indicates the percentage of earnings distributed to shareholders in the form of dividends

Example: A company that earns $100,000 and pays out $25,000 in dividends has a dividend payout ratio of 25%
Dividend Yield

Shows how much a company pays out in dividends each year relative to its stock price

Example: A company with a dividend of $5 per share and a stock price of $100 has a dividend yield of 5%
DuPont Analysis

A framework for analyzing fundamental performance developed by the DuPont Corporation

Example: Breaking down ROE into three parts: operating efficiency, asset use efficiency, and financial leverage
Earnings Before Interest and Taxes (EBIT)

A measure of a firm's profit that includes all expenses except interest and income tax expenses

Example: A company with revenues of $100,000 and operating expenses of $75,000 has an EBIT of $25,000
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

An indicator of a company's financial performance

Example: A company with net income of $50,000, interest of $5,000, taxes of $15,000, depreciation of $10,000, and amortization of $4,000 has an EBITDA of $84,000
Earnings Per Share (EPS)

Indicates how much money a company makes for each share of its stock

Example: A company with a net income of $2 million and 1 million outstanding shares has an EPS of $2
Economic Value Added (EVA)

Calculates the value created beyond the required return of the company’s investors

Example: A company with a net operating profit after taxes of $50,000 and a capital charge of $30,000 has an EVA of $20,000
Efficiency Ratio

Measures how well a company uses its assets and liabilities internally

Example: A bank with non-interest expenses of $3 million and revenue of $5 million has an efficiency ratio of 60%
Equity Multiplier

A measure of a company's financial leverage calculated by dividing a firm's total assets by its total equity

Example: A company with total assets of $2 million and total shareholder's equity of $1 million has an equity multiplier of 2
Fixed Asset Turnover Ratio

Measures how effectively a firm uses its fixed assets to generate sales

Example: A company with sales of $500,000 and fixed assets of $250,000 has a fixed asset turnover ratio of 2
Free Cash Flow (FCF)

Represents the cash a company generates after cash outflows to support operations and maintain its capital assets

Example: A company with operating cash flow of $100,000 and capital expenditures of $30,000 has an FCF of $70,000
Free Cash Flow to Equity (FCFE)

The cash flow available to the company’s common stockholders after all expenses, reinvestment, and debt repayments

Example: A firm with cash flow from operations of $50,000, capital expenditures of $10,000, and debt repayments of $5,000 has an FCFE of $35,000
Free Cash Flow to the Firm (FCFF)

Represents the cash flow available to all the company’s security holders, including equity and debt holders

Example: A company with an EBIT of $100,000, taxes of $25,000, depreciation of $10,000, and capital expenditures of $20,000 has an FCFF of $65,000
Gearing Ratio

A measure of a company's financial leverage

Example: A company with total debt of $100,000 and total equity of $200,000 has a gearing ratio of 05
Gross Margin Ratio

Measures the proportion of money left over from revenues after accounting for the cost of goods sold

Example: A company with revenue of $500,000 and cost of goods sold of $300,000 has a gross margin ratio of 40%
Gross Profit Margin

Shows the percentage of revenue that exceeds the cost of goods sold (COGS)

Example: A company with revenues of $1 million and COGS of $600,000 has a gross profit margin of 40%
Interest Coverage Ratio

Measures how easily a company can pay interest expenses on outstanding debt

Example: A company with earnings before interest and taxes (EBIT) of $40,000 and interest expenses of $10,000 has an interest coverage ratio of 4
Inventory Days

The average number of days it takes for a company to turn over its inventory

Example: A company with an inventory turnover of 8 times per year has inventory days of approximately 456
Inventory Turnover Days

The average number of days a company takes to sell its inventory

Example: A company with inventory turnover of 6 times per year has inventory turnover days of approximately 61
Inventory Turnover Ratio

Shows how many times a company's inventory is sold and replaced over a period

Example: A company with cost of goods sold of $600,000 and average inventory of $150,000 has an inventory turnover ratio of 4
Leverage Ratio

Indicates the level of a company's debt related to its equity capital

Example: A business with total debt of $400,000 and total equity of $600,000 has a leverage ratio of 067
Market Value Added (MVA)

The difference between the market value of a company and the capital contributed by investors

Example: A firm with a market value of $500,000 and capital invested of $300,000 has an MVA of $200,000
Net Income Margin

Measures how much net income is generated as a percentage of revenues

Example: A firm with net income of $100,000 and revenues of $500,000 has a net income margin of 20%
Net Profit Margin

Shows how much of each dollar in revenues is translated into profits

Example: A firm with a net income of $50,000 on revenues of $200,000 has a net profit margin of 25%
Operating Cash Flow Ratio

Measures how well current liabilities are covered by the cash flow generated from a company's operations

Example: A business with operating cash flow of $100,000 and current liabilities of $50,000 has an operating cash flow ratio of 2
Operating Expense Ratio (OER)

Indicates what percentage of a property's gross income is being spent on operating expenses

Example: A rental property generating $100,000 in annual gross income with $35,000 in operating expenses has an OER of 35%
Operating Margin

Indicates the percentage of each dollar of revenue that remains after all operating expenses are paid

Example: A business with operating income of $60,000 and revenue of $300,000 has an operating margin of 20%
Payable Days

The average number of days it takes for a business to pay its invoices from suppliers

Example: A business with an accounts payable turnover of 12 times a year has payable days of about 30
Payback Period

The length of time required to recover the cost of an investment

Example: An investment of $50,000 that returns $10,000 annually has a payback period of 5 years
PEG Ratio (Price/Earnings to Growth)

Compares a company's P/E ratio to its expected earnings growth rate

Example: A company with a P/E ratio of 15 and projected annual earnings growth of 20% has a PEG ratio of 075
Price-to-Book (P/B) Ratio

Compares a firm's market capitalization to its book value

Example: A company with a market price of $100 per share and book value of $80 per share has a P/B ratio of 125
Price-to-Earnings (P/E) Ratio

Valuation ratio of a company's current share price compared to its per-share earnings

Example: A company with a share price of $40 and earnings per share of $8 has a P/E ratio of 5
Price-to-Sales (P/S) Ratio

A valuation ratio that compares a company’s stock price to its revenues

Example: A company with a stock price of $50 per share and annual sales of $10 per share has a P/S ratio of 5
Profit Margin

Indicates the percentage of revenue that exceeds the costs of goods sold

Example: A business with $200,000 in revenue and $150,000 in costs has a profit margin of 25%
Quick Ratio

Measures a company's ability to meet its short-term obligations with its most liquid assets

Example: A business with $100,000 in cash, marketable securities, and accounts receivable and $50,000 in current liabilities has a quick ratio of 2
Receivable Days

Measures the average number of days that a company takes to collect payment after a sale has been made

Example: A company with an accounts receivable turnover of 10 times a year has receivable days of about 365
Receivables Turnover Ratio

Indicates how efficiently a firm uses its assets

Example: A company with annual net credit sales of $100,000 and average accounts receivable of $25,000 has a receivables turnover ratio of 4
Return on Assets (ROA)

Indicates how profitable a company is relative to its total assets

Example: A company with net income of $50,000 and total assets of $250,000 has a ROA of 20%
Return on Capital (ROC)

Measures the return that an investment generates for capital contributors

Example: A firm with net operating profit of $60,000 and total invested capital of $300,000 has an ROC of 20%
Return on Equity (ROE)

Measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested

Example: A firm with net income of $100,000 and shareholder equity of $500,000 has an ROE of 20%
Return on Investment (ROI)

A performance measure used to evaluate the efficiency or profitability of an investment

Example: An investment that gains $10,000 on an initial investment of $50,000 has an ROI of 20%
Return on Net Assets (RONA)

Measures how efficiently a company utilizes its assets to generate earnings

Example: A company with net income of $50,000 and net assets of $250,000 has a RONA of 20%
Return on Sales (ROS)

A measure of how efficiently a company turns sales into profits

Example: A company with $20,000 of net income from $100,000 of sales has an ROS of 20%
Risk-Adjusted Return

Evaluates the return of an investment by measuring how much risk is involved in producing that return

Example: An investment with a return of 10% and a risk factor of 05 has a risk-adjusted return of 20%
Times Interest Earned (TIE) Ratio

Measures how well a company can meet its interest obligations

Example: A firm with $40,000 in operating income and $10,000 in interest expense has a TIE ratio of 4
Total Asset Turnover

Indicates the efficiency of a company in using its assets to generate revenue

Example: A firm with total sales of $1 million and average total assets of $5 million has a total asset turnover of 02
Total Debt to Capitalization Ratio

Measures the proportion of debt used in a company’s capital structure

Example: A company with total debt of $400,000 and total capitalization (debt plus equity) of $1,000,000 has a total debt to capitalization ratio of 40%
Working Capital

The difference between a company’s current assets and current liabilities

Example: A company with $250,000 in current assets and $150,000 in current liabilities has a working capital of $100,000
Working Capital Ratio

Indicates whether a firm has enough short-term assets to cover its short-term debt

Example: A company with current assets of $250,000 and current liabilities of $150,000 has a working capital ratio of 167
Working Capital Turnover

A ratio indicating the efficiency of a company's use of its working capital

Example: A business with annual sales of $300,000 and average working capital of $150,000 has a working capital turnover of 2

Return to top of section

Return to top of page

Finance Glossary

Taxes

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A separate tax calculation that eliminates certain deductions and credits to ensure high-income individuals and businesses pay a minimum level of tax

Example: A high-income taxpayer calculates their regular income tax and AMT liability, paying the higher of the two amounts
Capital Gains Tax

A tax on the profit from the sale of assets such as stocks, real estate, or business assets

Example: If a small business owner sells company stock for a profit of $20,000, they may be subject to capital gains tax on that amount
Dependent

An individual, such as a child or spouse, who qualifies for certain tax benefits, including exemptions and credits, based on their relationship to the taxpayer

Example: A parent claims their child as a dependent on their tax return, allowing them to claim dependent-related tax credits
Depreciation

The gradual allocation of the cost of an asset over its useful life for tax purposes, reducing taxable income

Example: A small business purchases machinery for $10,000 and depreciates it over five years, resulting in an annual depreciation expense of $2,000
Economic Nexus

A concept in state sales tax laws where a business may be required to collect and remit sales tax based on its economic activity in a state, regardless of physical presence

Example: An e-commerce business with no physical presence in a state may have economic nexus if it generates significant sales to customers in that state, triggering sales tax obligations
Estimated Taxes

Quarterly payments made by small business owners to the IRS to cover income and self-employment tax obligations

Example: A small business owner estimates their annual tax liability at $20,000 and makes quarterly payments of $5,000 to the IRS
Fiscal Year vs Calendar Year

Fiscal year is a 12-month accounting period used by some businesses that doesn't necessarily align with the calendar year (January to December)

Example: A business may choose a fiscal year that runs from July 1st to June 30th to better align with its industry's seasonal trends
Foreign Tax Credit

A credit available to businesses for taxes paid to foreign governments to avoid double taxation on international income

Example: A multinational corporation operating in multiple countries claims a foreign tax credit for taxes paid to foreign governments
Form 1099

A series of tax forms used to report various types of income other than wages, such as contractor payments, dividends, and interest

Example: A small business contractor receives a Form 1099-NEC from a client, reporting the income earned for services rendered
Form W-2

A tax form provided to employees by their employer, summarizing their earnings and withholding for the year

Example: An employee receives a Form W-2 from their employer, which shows their total earnings and the amount of federal and state taxes withheld
Gift Tax

A tax imposed on the transfer of money or property to others, typically paid by the donor rather than the recipient

Example: If an individual gifts $15,000 to a friend in a single year, they may need to file a gift tax return, but no tax is owed unless the lifetime gift exclusion is exceeded
Income Tax

A tax levied on a business's profits or the personal income of business owners, depending on the business structure

Example: A small business with a taxable income of $80,000 owes income tax based on the applicable tax rates
Inheritance Tax

A tax on the value of property or assets received by heirs or beneficiaries of a deceased person's estate

Example: An heir inheriting a property worth $500,000 may owe inheritance tax based on the state's tax laws
Net Operating Loss (NOL)

When a business's allowable tax deductions exceed its taxable income, resulting in a negative taxable income, which can be carried forward or backward to offset future or past tax liabilities

Example: A small business experiences a net operating loss of $5,000 in one year and carries it forward to offset taxable income in the following year
Payroll Tax

Taxes paid by employers to fund Social Security, Medicare, and unemployment insurance

Example: An employer withholds 62% of an employee's salary for Social Security and 145% for Medicare, and matches these amounts as their contribution
Property Tax

A tax levied on the value of real property, such as land and buildings, owned by a business

Example: A small business owns a commercial property valued at $500,000, and the property tax rate is 2%, resulting in an annual property tax of $10,000
Property Tax Assessment

The process of determining the value of real property for tax purposes, which influences the amount of property tax owed

Example: A county assessor assesses the value of a commercial property based on factors such as location, size, and condition to calculate property taxes
Quarterly Tax Filing

The practice of filing tax returns and making estimated tax payments on a quarterly basis, common for self-employed individuals and small businesses

Example: A self-employed consultant files quarterly tax returns and makes estimated tax payments to cover their tax obligations
Sales Tax

A tax imposed on the sale of goods and services, often collected by the business from customers and remitted to the government

Example: A small retail store collects 8% sales tax on a $100 sale, which amounts to $8 remitted to the state tax authority
Self-Employment Tax

A tax paid by self-employed individuals that covers Social Security and Medicare contributions

Example: A self-employed freelancer with a net income of $60,000 is responsible for both the employer and employee portions of self-employment tax
State Income Tax

Taxes levied by individual US states on residents' and businesses' income, rates and regulations varying by state

Example: A resident of California pays state income tax on their earnings in addition to federal income tax
Tax Audit

A review of a business's financial records and tax returns by the IRS or state tax authority to ensure compliance with tax laws

Example: The IRS conducts an audit of a small business's tax returns to verify income and deductions reported
Tax Audit Trail

A record-keeping system that tracks financial transactions and provides documentation to support tax filings in case of an audit

Example: A small business maintains an organized audit trail, including receipts and financial statements, to substantiate its tax deductions
Tax Bracket

A range of income levels at which specific tax rates apply, affecting how much tax a business or individual owes

Example: In a progressive tax system, a business may pay 10% tax on income up to $50,000 and 20% on income over $50,000
Tax Compliance

The act of following all applicable tax laws and regulations, including filing accurate and timely tax returns

Example: A small business ensures tax compliance by keeping meticulous records and meeting all filing deadlines
Tax Credit

A direct reduction in the amount of taxes owed, typically offered as an incentive for specific activities or investments

Example: A small business invests $10,000 in energy-efficient equipment and receives a tax credit of $2,000, reducing its tax liability by that amount
Tax Deduction

An expense that a small or medium-sized business can subtract from its income before calculating the amount of tax owed

Example: If a small business has $10,000 in deductible expenses, and its taxable income is $50,000, the deduction reduces the taxable income to $40,000
Tax Evasion

The illegal act of deliberately underreporting income or inflating deductions to reduce tax liability

Example: A business owner who hides cash income to avoid paying taxes is engaging in tax evasion
Tax Exemption

A status that grants a business or organization immunity from certain taxes, often applied to nonprofit organizations

Example: Nonprofit organizations are often exempt from paying federal income tax on their revenue
Tax Filing Status

A category that defines an individual's or business's eligibility for certain tax deductions and credits, such as single, married filing jointly, or head of household

Example: A married couple can choose to file jointly, potentially benefiting from lower tax rates and higher deductions
Tax Incentive

A government policy or program designed to encourage specific economic activities or investments by offering tax advantages

Example: A government offers a tax incentive for businesses that invest in renewable energy, allowing them to claim a tax credit for eligible expenses
Tax Liability

The total amount of taxes a business or individual owes to the government

Example: A small business calculates its tax liability to be $15,000 based on its taxable income and applicable tax rates
Tax Lien

A legal claim by a government entity against a business's property or assets to secure payment of unpaid taxes

Example: A small business may have a tax lien placed on its assets if it fails to pay its property taxes
Tax Levy

The legal seizure of a business's property or assets to satisfy unpaid tax debt

Example: If a business owes back taxes, tax authorities may levy and auction off its assets to collect the debt
Tax Loss Harvesting

An investment strategy to offset capital gains by selling investments at a loss to reduce overall tax liability

Example: An investor sells losing stocks in their portfolio to offset the capital gains they earned from selling winning stocks
Tax Penalty

A financial penalty imposed by tax authorities for violations of tax laws, such as late filing or underpayment of taxes

Example: If a business fails to file its tax return by the deadline, it may incur a late-filing penalty
Tax Planning

Strategic financial planning to minimize tax liability by utilizing deductions, credits, and legal tax strategies

Example: A small business owner engages in tax planning by optimizing their deductions and structuring their income to reduce overall tax liability
Tax Reform

Changes to tax laws and regulations made by the government to promote economic growth or address fiscal concerns

Example: A government enacts tax reform legislation to lower corporate tax rates and stimulate business investment
Tax Return

A document filed with the tax authorities that reports a business's income, expenses, and other financial information for the purpose of calculating taxes owed

Example: A small business files an annual tax return with the IRS to report its income and claim deductions
Tax Shelter

A legal strategy or investment used to reduce taxable income or gain

Example: Some small businesses invest in tax-advantaged retirement accounts as a tax shelter to reduce their taxable income
Tax Tribunal

A specialized court or administrative body where taxpayers can appeal tax-related decisions and disputes

Example: A taxpayer disputes a tax assessment and takes their case to a tax tribunal to seek a fair resolution
Tax Treaties

Agreements between countries that specify how taxes on income, dividends, and other financial transactions will be treated for residents of each country

Example: A US-based business with operations in a foreign country benefits from a tax treaty that reduces withholding tax on dividends
Tax Withholding

The process of deducting a portion of an employee's salary to cover their income tax liability, typically done by employers and remitted to tax authorities

Example: An employer withholds a portion of an employee's paycheck for federal and state income taxes and forwards it to the respective tax authorities
Tax Year

The specific calendar or fiscal year for which a business or individual calculates and reports their income and taxes

Example: The tax year for most businesses in the United States is the calendar year, running from January 1st to December 31st
Value Added Tax (VAT)

A consumption tax added to the price of goods and services at each stage of production or distribution

Example: In a VAT system, a manufacturer pays VAT when purchasing raw materials and charges VAT when selling the finished product to a retailer

Return to top of section

Return to top of page