B211- Key Business Terms

ROI

A financial ratio measuring the cash return from an investment relative to its cost. It is calculated as: (increase in investment - cost of investment) / cost of investment.

Accrual-basis Accounting

An accounting method whereby income and expenses are booked when they are incurred, regardless of when they are actually received or paid. Revenues are recognized during the period in which the sales activity occurred; expenses are recognized in the same period as their associated revenues.

Income Statement

A financial statement that shows a company's Revenue, Expenses, and Net Income. The income statement shows how much profit or loss a company generates over a period of time— a month, a quarter, or a year. The income statement is sometimes referred to as the earnings statement, profit, and loss statement or P&L. The layout is Revenue - Expenses = Net Income (or Net Profit). It closes out to Retained Earnings after the end of the year.

Emergency Loan

A loan automatically given in the simulation when a company runs out of cash. In the real world, emergency loans do not exist. When you run out of cash, you have a "Liquidity Crisis," "Chapter 11," or "Bankruptcy" on your hands.

Balance Sheet

A means of summarizing a company's financial position at a specific point in time. The Balance Sheet equation is: Assets = Liabilities + Owners' Equity. The "left side" of the Balance Sheet (Assets) shows what the company owns. The "right-side", or liabilities an equity, shows who paid for the assets. The Balance Sheet is considered a "snapshot" of company's current financial position.

Quick Ratio

A measure of a company's assets that can be quickly liquidated and used to pay debts. It is sometimes called the acid-test ratio, because it measures a company's ability to deal instantly with its liabilities. To calculate: (cash + receivables + marketable securities) ÷ current liabilities.

Productivity

A measure of your workforce output

Dividend

A payment (usually occurring quarterly) to the stockholders of a company, as a return on their investment. Dividends reduce retained earnings and are NOT an expense on the income statement.

Liabilities

Accounts Payable, Current Debt and Notes Payable (shown on the right side of the Balance Sheet). Represents how much of company assets were paid for by bankers, bond holders, or other creditors.

Cash-basis Accounting

An accounting process that records transactions when cash actually changes hands. This practice is less conservative than accrual accounting when it comes to expense recognition, but sometimes more conservative when it comes to revenue recognition.

Retained Earnings

An accumulation of annual net income left after payments of dividends reported on a company's balance sheet. Basis computation is: Previous year's Retained Earnings + Net Profit - Dividends = Ending Retained Earnings.

SWOT

An analysis of a company's strengths, weaknesses, opportunities, and threats.

Capital Expenditure

Capital investment. The payment required to acquire or improve a capital asset (Fixed Asset).

Free Cash Flow

Cash Flow from Operations - Capital Expenditures

Equity

Comprised mainly of Common Stock and Retained Earnings (shown on the right side of the Balance Sheet). Represents how much of company assets were paid for by owners or shareholders. On a balance sheet, equity is referred to as shareholders' equity or owner's equity.

Net Margin

Contribution Margin (Revenue - COGS) less Period Costs (aka Fixed Costs). In other words: revenue - variable costs - fixed costs = Net Margin

Contribution Margin Percentage

Contribution Margin divided by Sales.

Period Costs

Costs that are not tied directly to the cost of producing a unit. Examples include administration, salespeople, managers, and depreciation. These costs are also known as fixed costs.

Working Capital

Current Assets minus Current Liabilities. A measure of a business's ability to pay its financial obligations, working capital equals the difference between a company's current assets (easily sellable goods, cash, and bank deposits) and its current liabilities (debt due in less than a year, interest payments, etc.). Shortages of working capital are often relieved by short-term loans. It is calcualted as current assets - current liabilites.

Current Ratio

Current Assets ÷ Current Liabilities. This is a prime measure of how solvent a company is. It's so popular with lenders that it's sometimes called the banker's ratio. Generally speaking, the higher the ratio, the better financial condition a company is in.

Market Capitalization

Current stock price × number of shares outstanding

Price-Earnings Ratio

Current stock price ÷ EPS

Dividend Yield

Dividend per share ÷ Stock Price

Sales

Dollar amount given in exchange for product (aka Revenue, Top Line)

Investment in PP&E

Dollars spent on property, plant, and equipment. Sometimes called capital investment or capital expenditures.

Sales Budget

Drives accessibility, which governs everything during and after the sale.

EBIT

Earnings Before Interest and Taxes.

EBITDA

Earnings Before Interest, Taxes, Depreciation and Amortization

EPS

Earnings per share. One of the most commonly watched indicators of a company's financial performance, it equals net income divided by the number of shares outstanding. When it falls, it usually takes the stock's price down with it.

Variable Costs

Expenses that are tied to the sale of each unit, primarily direct labor and materials costs

Cost of Goods Sold

Expenses that are tied to the sale of each unit, primarily direct labor and materials costs.

GAAP

Generally accepted accounting principles. The rules and conventions that accountants follow in recording and summarizing transactions and preparing financial statements.

Accounts Payable

Money owed by the company to suppliers, vendors or creditors.

Accounts Receivable

Money owed to the company for goods or services sold. A sale has occurred, but the company has not received the cash yet.

Net Earnings

Net Earnings (See Net Income)

ROA

Net Income ÷ Total Assets. Expressed as a percentage, ROA is a quantitative description of how well a company has invested in its assets. To calculate it, divide the net income for a given time period by the total assets. The larger the ROA, the better a company is performing.

ROE

Net Income ÷ Total Equity. This measure shows the return on the portion of the company's financing that is provided by owners. It answers the question, "How profitable have management's efforts been?". To calculate ROE, divide the total income by total owners' equity.

ROS

Net Income ÷ Total Sales. Also known as profit margin, ROS is a way to measure a company's operational efficiency—how its sales translate into profit.

Net Profit

Net Profit. (See Net Income or Net Earnings)

Owner's Equity

Owner's equity. See equity.

Gross Margin

Percentage See Contribution Margin Percentage

PP&E

Property, plant, and equipment. A line item on a balance sheet that lists the book value of a business's land, buildings, machinery, equipment, and natural resources that are used for the purpose of producing products or providing services.

Financial Statements

Reports of a company's financial performance. The three basic types of statements included in an annual report are: the Income Statement, the Balance Sheet, and the Cash Flow Statement. These statements provide different financial perspectives on a company's performance.

Asset Turnover

Sales (within a given year) ÷ Total Assets. A measure of how efficiently a company uses its assets. The higher the number, the better.

Contribution Margin

Sales less variable costs.

Gross Profit

See Contribution Margin (revenue - costs of goods sold).

Banker's Ratio

See Current Ratio.

Shareholder's Equity

Shareholders' equity. See equity.

Cash Flow Statement

Shows a company's sources and uses of cash as well as the net change in cash for a company in a given period. It's categories are cash from (1) operating activities, (2) investing activities and (3) financing activities. It shows the flow of cash in, through, and out of the company.

Fixed Assets

Tangible Assets that are difficult to convert to cash—for example, buildings, and equipment. Sometimes called plant assets or PP&E for property, plant and equipment..Forecasting

Revenue

The amount recognized on the sale of a product or service. (aka Sales)

Forecasting

The art and science of predicting demand such that you supply adequate products to satisfy demand and yet not accumulate excess inventory.

Depreciation Expense

The decrease in value of a Fixed or Tangible Assets over time or use. (CapSim uses 15 year straight-line depreciation with no salvage value.) It is calcuated as: (Cost - Salvage Value) ÷ Life

Leverage.

Total Assets ÷ Total Equity. Provides insights into a company's Financial Structure. It is a measure of risk for investors and creditors. Investors tend to like high leverage, while creditors tend to like low leverage. For the simulation the ideal range for leverage is greater than 1.8 and less than 2.8.

Assets

The economic resources of a company. Listed on the Balance Sheet and commonly include cash, accounts receivable, notes receivable, inventories, land, buildings, machinery, equipment, and other investments.

Amortization Expense

The expense of intangible asset (copyrights, trademarks, etc.) over time.

Net Income

The income (or loss) of an organization after deducting the expenses, including interest and taxes, incurred in earning that income. It is usually the last amount on the Income Statement.

Promotion

The process of creating product awareness before customers shop (driven by the Promo Budget in the simulation)

Placement

The process of making the product accessible in a way which is convenient for consumers. (driven by the Sales Budget in the simulation)

Cumulative Profits

The sum of all company profits over multiple periods.

Cumulative Free Cash Flow

The sum of all the Free Cash Flows since you took over management of the company

Inventory

The supplies of the company that are or will become its product. Examples include raw materials, work-in-progress, the merchandise in a shop, and the finished goods in a warehouse.

Breakeven

The volume level at which the total contribution from a product line or investment equals total fixed costs. To calculate the volume, subtract the variable cost per unit from the selling price to determine the unit contribution, and then divide the total fixed costs by the unit contribution.

Acid Test Ratio

This is calcualted as (cash + receivables + marketable securities) / current liabilities. See quick ratio.

Book Value & Book Value per Share

This term can be used in various ways. In the simulation, Book Value sometimes refers to Book Value per Share, which is Total Equity divided by number of shares outstanding. Sometimes Book Value is stated as Total Equity. Furthermore, the book value of an assets is the value at which an asset is carried on a balance sheet (historical cost less accumulated depreciation).

Days of Working Capital

Working Capital divided by daily sales: (Current Assets - Current Liabilites) ÷ (Sales / 365) or may be presented as (Current Assets - Current Liabilites) X 365 ÷ Sales.

Financial Structure

Your company's relationship between Debt and Equity (or how your company pays for its assets).