Portions of this glossary are borrowed from: http://www.bizminer.com/resources/glossaries/

Accountants and investors speak their own language. Knowing a few of these terms will make your discussions easier, and avoid misunderstanding. First off, there are two types of financials: Balance Sheets and Pro Formas

Balance Sheet Glossary

  • Balance Sheets are for revenue generating companies. They are backward looking statements that show how the company performed (in the last month, quarter, etc). These are the type that are audited. Many of the terms below assume the company has sales and is generating revenues. Companies may do forecasts, but these are seldom in financial formats.
  • Pro Formas are forward looking statements in financial format listed the projected or expected costs and revenues from now to sometime in the future. These are the management's best estimate of what the company can do - IF it receives the financial investment it needs. These are often conservative in their outlook. Missing projections can have a very negative impact on the venture. Meeting or surpassing projected financial milestones is a plus.
  • Run Rate/ Burn Rate is the rate at which a venture expends investment capital (or creates debt) before making a profit. Again, coming in above or below the projected burn rate will have it's effect on continuing investment or raising future investment capital.  
  • Business Revenue in this format includes receipts from core business operations and interest income (Gov't) from private sources. Interest Income from government sources and Other income (such as rents and royalties) are generally detailed separately below Operating Income.
  • Cost of Sales includes materials and labor involved in the direct delivery of a product or service. Other costs are included in the cost of sales to the extent that they are involved in bringing goods to their location and condition ready to be sold. Non-production overheads such as development costs may be attributable to the cost of goods sold. The costs of services provided will consist primarily of personnel directly engaged in providing the service, including supervisory personnel and attributable overhead.
  • Gross Margin represents direct operating expenses plus net profit. In addition to the labor portion of Cost of Sales, wage costs are reflected in the Officers Compensation and Wages-Salary line items. In many cases, SG&A (Sales, General and Administrative) costs also include some overhead, administrative and supervisory wages.
  • Rent covers the rental cost of any business property, including land, buildings and equipment.
  • The Taxes paid line item includes payroll other paid-in tax items. Although it can be calculated in many ways and is a controversial measure, the EBITDA line item (Earnings before Interest Expense, income tax due, Depreciation and Amortization) adds back interest payments, depreciation, amortization and depletion allowances, and excludes income taxes due to reduce the effect of accounting decisions on the bottom line of the Profit and Loss Statement.
  • Net Profit represents net profit before income tax which will be assessed, in the case of small business s-corporations, after adding into any other personal owner income.
  • Advertising includes advertising, promotion and publicity for the reporting business, but not on behalf of others.
  • Benefits-Pension includes, but is not limited to, employee health care and retirement costs.
  • In addition to varying proportions of overhead, administrative and supervisory wages, some generally more minor expenses are aggregated under SG&A (Sales, General and Administrative).
  • Operating Expenses sums the individual expense line items above, yielding the Operating Income or net of core business operations, when subtracted from the Gross Margin.
  • Cash: Money on hand in checking, savings or redeemable certificate accounts.
  • Receivables: A short-term asset (to be collected within one year) in the form of accounts or notes receivable, and usually representing a credit for a completed sale or loan.
  • Inventory: The stockpile of unsold products.
  • Current Assets: The sum of a firm's cash, accounts and notes receivable, inventory, prepaid expenses and marketable securities which can be converted to cash within a single operating cycle.
  • Fixed Assets: Long-term assets such as building and machinery, net of accumulated amortization-depreciation-depletion.
  • Total Assets: The sum of current assets and fixed assets such as plant and equipment.
  • Accounts Payable: Invoices due to suppliers within the current business cycle.
  • Loans/Notes Payable: Loan amounts due to suppliers within the current business cycle.

Industry Profit & Loss Glossary

  • Business Revenue in this format includes receipts from core business operations and interest income (Gov't) from private sources. Interest Income from government sources and Other income (such as rents and royalties) are generally detailed separately below Operating Income.
  • Cost of Sales includes materials and labor involved in the direct delivery of a product or service. Other costs are included in the cost of sales to the extent that they are involved in bringing goods to their location and condition ready to be sold. Non-production overheads such as development costs may be attributable to the cost of goods sold. The costs of services provided will consist primarily of personnel directly engaged in providing the service, including supervisory personnel and attributable overhead.
  • Gross Margin represents direct operating expenses plus net profit. In addition to the labor portion of Cost of Sales, wage costs are reflected in the Officers Compensation and Wages-Salary line items. In many cases, SG&A (Sales, General and Administrative) costs also include some overhead, administrative and supervisory wages.
  • Rent covers the rental cost of any business property, including land, buildings and equipment.
  • The Taxes paid line item includes payroll other paid-in tax items. Although it can be calculated in many ways and is a controversial measure, the EBITDA line item (Earnings before Interest Expense, income tax due, Depreciation and Amortization) adds back interest payments, depreciation, amortization and depletion allowances, and excludes income taxes due to reduce the effect of accounting decisions on the bottom line of the Profit and Loss Statement.
  • Advertising includes advertising, promotion and publicity for the reporting business, but not on behalf of others.
  • Benefits-Pension includes, but is not limited to, employee health care and retirement costs.
  • In addition to varying proportions of overhead, administrative and supervisory wages, some generally more minor expenses are aggregated under SG&A (Sales, General and Administrative).
  • Operating Expenses sums the individual expense line items above, yielding the
  • Operating Income or net of core business operations, when subtracted from the Gross Margin, and before the addition of Other Income and Interest Income and Interest Expense.
  • The EBITDA line item (Earnings before Interest Expense, income tax due, Depreciation and Amortization) adds back interest payments, depreciation, amortization and depletion allowances, and excludes income taxes due to reduce the effect of accounting decisions on the bottom line of the Profit and Loss Statement.
  • Pre-Tax Net Profit represents net profit before income tax which will be assessed, in the case of small business s-corporations, after adding into any other personal owner income. After Tax Net Profit deducts Income Taxowed from the pre-tax net.

Financial Ratios Glossary

  • Accounts Payable: Business Revenue: Accounts Payable divided by Annual Business Revenue, measuring the speed with which a company pays vendors relative to business revenue. Numbers higher than typical industry ratios suggest that the company may be using suppliers to float operations.
  • Current Liabilities: Inventory: Current Liabilities divided by Inventory: A high ratio, relative to industry norms, suggests over-reliance on unsold goods to finance operations.
  • Current Liabilities: Net Worth: Current Liabilities divided by Net Worth, reflecting a level of security for creditors. The larger the ratio relative to industry norms, the less security there is for creditors.
  • Current Ratio: This is the same as Current Assets divided by Current Liabilities, measuring current assets available to cover current liabilities, a test of near-term solvency. The ratio indicates to what extent cash on hand and disposable assets are enough to pay off near term liabilities. The Quick Ratio is applied as a more stringent test.
  • Days Payables: 365/(Cost of Sales: Accounts Payable ratio): Reflects the average number of days for each payable before payment is made.
  • Quick Ratio: Cash plus Accounts Receivable, divided by Current Liabilities, indicating liquid assets available to cover current debt. Also known as the Acid Ratio. This is a harsher version of the Current Ratio, which balances short-term liabilities against cash and liquid instruments.
  • Total Liabilities: Net Worth: Total liabilities divided by Net Worth. This ratio helps to clarify the impact of long-term debt, which can be seen by comparing this ratio with Current Liabilities: Net Worth. Creditors are concerned to the extent that total liability levels exceed Net Worth.