Financial Flash Cards

GROSS PROFIT/MARGIN

Gross profit is a company's total sales revenue minus its cost of goods sold (COGS). To get your Gross margin, you would divide gross profit by total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services it sells. The higher the percentage, the more the company retains on each dollar of sales. Companies use gross margin to measure how their production costs relate to their revenues. If a company's gross margin is falling, it may look for processes that allow it to cut costs for labor or materials, or it may decide to increase prices to boost revenue.

INVENTORY MANAGEMENT

Inventory management is the process of ordering, storing, and using a company's inventory including raw materials, components, and finished products. Inventory management includes knowing when to restock certain items, what amounts to purchase or produce, what price to pay, and when to sell and at what price. The goal is to optimally utilize and minimize the risk around one of a company's most valuable assets - its inventory. Managing inventory effectively is critical for a successful business.

INVENTORY TURNS

Inventory turns measure the number of times inventory is sold or used in a defined time period. The equation for inventory turnover equals the cost of goods sold divided by the average inventory. The resulting ratio shows how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the number of days it takes to sell the inventory on hand or "inventory turnover days." Monitoring inventory turns is an essential part of inventory management.

CREDIT ANALYSIS

Investors perform credit analysis on companies to measure the company's ability to meet its debt obligations. Various tools such as financial ratios, cash flow analysis, trend analysis, and financial projections are used to judge a company's ability to pay its debt. The goal of the credit analysis is to identify the level of default risk associated with investing in that company.

ORDER MANAGEMENT

Order management is the process of efficiently tracking and fulfilling sales orders. Order management includes the people, processes, and suppliers that create the customer experience. Order management starts when a customer places an order and continues through to fulfillment and shipping. An order management system (OMS) automates and streamlines order processing for businesses.

CASH FLOW STATEMENT

The statement of cash flows, or cash flow statement summarizes the amount of cash and cash equivalents entering and leaving a company. The cash flow statement measures how well the company generates cash to pay its debt and fund its operating expenses. The cash flow statement complements the balance sheet and income statement and is a mandatory part of a company's financial reports. The main components of the cash flow statement are cash from operating activities, cash from investing activities, cash from financing activities, and disclosure of noncash activities. The cash flow statement is an important tool for helping investors determine whether a company is on solid ground from a financial perspective.