Definitions and terms used in business sales, business acquisitions, financial analysis and return on investment decisions:
Abnormal items Income or expenses which are outside the normal course of a company’s business and which may or may not be shown separately from the annual profit calculations.
Accelerated depreciation Any depreciation method that produces larger deductions for depreciation in the early years of a project’s life.
Accounts payable Money owed to suppliers.
Accounts receivable Money owed by customers.
Accrued interest Interest that has been earned but not yet paid.
Acquisition The purchase of an asset, whole business or company shares
Adjusted EBIT/profit Earnings/profit that have been adjusted for abnormal/extraordinary/non-recurring expense or income items
Amortisation Repayment of loan by instalments; periodic writing off costs of intangible assets.
Asset backing Net assets divided by the number of issued shares.
Asset sale/purchase Sale/purchase of a business by purchasing the operating assets of the business (refer Share sale/purchase).
Basis Point 0.01 percent.
Bear Market Widespread decline of share prices.
Blue-chip company Large and credit-worthy company.
Boilerplate Standard terms and conditions.
Break-even analysis Analysis of the level of sales at which a project would just break even,
Bull market Widespread rise in security prices.
Business acquisition The purchase of an operating business, including all necessary assets used in its operations.
Business broker/agent A person or company licensed by the appropriate governing authority to act as an agent in business sales and business acquisitions.
Business opportunity An opportunity to purchase an operating business or invest in a new business venture
Business search The search for a business or business opportunity.
Business valuation The valuation of a business with reference to established ranges of market price for similar businesses.
Buy a business The act of buying a business involving the purchase of all the assets required to operate a business.
Call option Option to buy an asset at a specified exercise price on or before a specified date.
Capital budget List of planned investment projects, usually prepared annually.
Carrying amount The amount at which an asset is recorded in the books at a particular date after deduction of any accumulated depreciation.
Collateral Assets that are given as security for a loan.
Compliance Adherence to statutory requirements, regulations, rules and ordinances imposed by external authorities on a company.
Compound interest Reinvestment of each interest payment on money in vested, to earn more interest.
Conglomerate merger Merger between two companies in unrelated businesses. See also horizontal merger and vertical merger.
Consumer Price Index A price-level index of consumer goods and services.
Contingent liability A potential obligation, the eventual occurrence of which usually depends on some future event beyond the control of the firm. May origin ate with lawsuits, credit guarantees, contested income tax assessments.
Continuous compounding Interest compounded continuously rather than at fixed intervals.
Contribution margin The excess of revenue over variable costs and available to cover fixed costs.
Cost of goods sold Calculated by adding the beginning (opening) inventory and the cost of purchases and deducting the ending (closing) inventory.
Current asset Asset that will normally be used or turned into cash within a year.
Current liability Liability that will normally be repaid within a year.
Current ratio Current assets divided by current liabilities – a measure of liquidity.
DCF Discounted cash flow.
Debt-to-equity ratio A measure of a company’s gearing, or borrowing. Calculated by dividing all financial debt by shareholders’ funds (equity).
Debtor financing Arrangement whereby a financial institution provides finance secured by a company’s accounts receivable and collects the debtors.
Depreciation Reduction in the book or market value of an asset; charge made to allocate the cost of an asset over its expected useful life; portion of an investment that can be deducted from taxable income.
Discount factor Present value of $1 to be received at stated future date.
Discount rate Rate used to calculate the present value of future cash flows.
Discounted cash flow Future cash flows multiplied by discount factors to obtain present value.
Dividend Payment by a company to its shareholders usually out of net profit or retained earnings.
Dividend imputation The tax rule that allows dividends to be taxed only once, either by the company or, if the company does not pay tax, by the shareholder.
Dividend yield Annual dividend divided by share price.
Due diligence In business sales relates to a purchaser’s process of checking and verifying accounting, legal and operational details contained in information provided by the owners of a business.
EBIT Earnings before interest and tax.
Economic Entity A group of companies (entities) comprising a controlling company and one or more controlled companies operating together to achieve objectives consistent with those of the controlling company.
EPS Earnings per share.
Equity Net worth of a company (assets less liabilities).
Escrow A deed delivered subject to a condition that it is not to operate until that condition is fulfilled.
Exercise price Price at which a call option or a put option may be exercised.
Extraordinary items Income or expenses which are quite outside the normal course of a company’s business and which are shown separately from the annual profit or loss calculations.
Factoring Arrangement whereby a financial institution buys a company’s accounts receivable and collects the debt.
Finance lease Lease under which the lessor effectively transfers to the lessee substantially all the risks and benefits incident to ownership of the leased asset and where legal ownership may or may not eventually be transferred (see operating lease).
Financial leverage Use of debt to increase the expected return on equity. Measured by the ratio of debt to debt plus equity.
FIS Free into store – the terms of sale by which the vendor agrees to pay all freight charges incurred to get the goods to the purchaser.
Fixed costs Costs whose total remains constant even though the volume of activity may vary.
FOB Free on board – the point (factory, ship) in the delivery of merchandise from which the purchaser bears freight costs.
Forward cover Purchase or sale of forward foreign currency in order to offset a known future cash flow.
Franked dividends Dividends paid out of company profits on which the full tax has been paid, so that the dividends are tax-free in the hands of shareholders.
Garnishment A procedure allowing debt to be paid off by deductions from the debtor’s wages.
Gearing See Financial leverage.
Going concern An accounting principle dictating that in the absence of evidence to the contrary a business is assumed to have an indefinite life.
Goodwill The value that derives from the ability of a business to earn more than a normal rate of return on its physical assets; represented by the total value of a business less plant and equipment and inventory.
Gross Profit / Gross Margin The excess of sales price over the net delivered direct input costs of the product sold.
Gross yield Return on an investment before tax is deducted.
Holding company Company whose sole function is to hold shares in other companies or subsidiaries.
Horizontal merger/ integration Merger between two companies that manufacture or market similar products or provide similar services. See also vertical merger/integration, conglomerate merger.
Hurdle rate Minimum acceptable rate of return on a project.
Information memorandum A written document providing information about a business for sale.
Initial public offering (IPO) A company’s first public issue of shares.
Intangible assets Nonmaterial assets such as technical expertise, trademarks, brand names, patents, copyrights and goodwill.
Internal rate of return (IRR) Discount rate at which investment has zero net present value.
In-the-money option An option that would be worth exercising if it expired immediately.
Inventory Goods, other property and services held for resale in the ordinary course of operations, and those to be used up in the in the production of goods, other property or services (also, refer to Stock).
IPO Initial public offering.
IRR Internal rate of return.
Joint venture An unincorporated contractual association between two or more parties to undertake a specific business project.
Just in time (JIT) A system of managing inventory so that it is purchased or manufactured just before it is used in an attempt to minimise holding costs.
Leasehold improvements Expenditures made by the lessee to alter or improve leased property. Such improvements typically revert to the lessor on termination of the lease.
Lessee User of a leased asset.
Lessor Owner of a leased asset.
Leverage See Financial leverage.
Limited company A registered company in which the liability of each shareholder is limited to the uncalled capital liability on the shares.
Liquid assets Assets that are easily and cheaply turned into cash – notably cash itself and short-term securities.
M&A Merger and acquisition.
Marginal cost The cost associated with completing one more unit of production or activity.
Market capitalisation The stock market’s assessment of a company’s value. Calculated by multiplying the number of shares on issue by the individual share price.
Merger Acquisition in which all assets and liabilities are absorbed by the buyer.
Mortgage A claim given by a borrower (mortgagor) to a lender (mortgagee) against the borrower’s property in return for a loan.
Natural resources Assets such as timber, petroleum, natural gas, coal, iron ore and other mineral deposits mine by the extractive industries.
Net assets Total assets less total liabilities, equals net worth.
Net present value A method of capital outlay analysis that compares a required investment amount with the present value of resulting net future cash flows discounted at the minimum desired rate of return; a project’s net contribution to wealth – present value minus initial investment.
Net working capital Current assets minus current liabilities.
Net worth Book value of a company’s issued shares, retained earnings and current profit.
Non-current asset Assets that do not represent a specific claim to a set sum of money such as plant, equipment, property and inventory.
Non-recurring item An item of income or expense that is not a normal item and which has a one-off effect and/or is unlikely to occur again.
Operating lease Lease under which the lessor effectively retains substantially all the risks and benefits incident to ownership of the leased asset (see finance lease).
Opportunity cost of capital Expected return that is foregone by investing in a particular project rather than in comparable financial securities.
Ordinary shares Fully paid shares which rank after debentures and preference shares for dividend payments.
Out-of-the-money option An option that would not be worth exercising if it matured immediately.
Owner’s equity The interest or claim of a company’s owner in the company’s assets; equal to the excess of assets over liabilities.
Paid-up capital The proportion of a company’s issued capital that has been paid for by its shareholders.
Partnership A voluntary association of two or more persons for the purpose of conducting business for a profit.
Payback period Time taken for a project/investment to recover its initial investment.
P/E (price earnings) ratio Measures the relationship between the market price of a company’s shares and the earnings per share; Share price divided by earnings per share.
P/EBIT (price earnings before interest and tax) ratio Measures the relationship between the market price of an operating business and the annual earnings/profit before interest and tax of the business.
Preference shares A class of company capital typically receiving priority over ordinary shares in dividend payment and distribution of assets should the company be liquidated. They rank below creditors and debentures.
Present value Discounted value of future cash flows.
Principal Amount of debt that must be repaid (excluding accrued interest).
Prospectus A written notice, circular or other instrument inviting applications or offers from the public to subscribe for or purchase shares in a corporation.
Put option Option to sell an asset at a specified exercise price on or before a specified exercise date.
R&D Research and development.
Receivable See Accounts receivable.
Retained earnings Earnings not paid out as dividends.
Return on assets Operating income (net profit) divided by total assets.
Return on equity Net income as a proportion of the book value of equity.
Return on investment (ROI) Net income as a proportion of net book value or of initial investment outlay.
Revenue Total sales income for a given period.
Rights issue Issue of shares that is offered to current shareholders in proportion to their holdings to raise money for the company.
Risk premium Expected additional return for making a risky investment rather than a safe one.
ROI Return on investment.
Salvage value Scrap value of plant and equipment.
Sell a business The act of selling a business involving the sale of all the assets required to operate a business.
Share register The record of a company’s shareholders showing their holdings.
Share sale/purchase Sale/purchase of all the issued shares of a company (thereby taking control, of any business owned by the vendor company.
Shareholders’ funds What belongs to the shareholders of a company – issued capital, reserves, retained profit. Equivalent to the value of Net Assets.
Simple interest Interest calculated only on the initial investment.
Stock Made up of raw materials, work in progress and finished goods used or produced and sold by a business (also, refer to Inventory).
Subsidiary A company under the control or parentage of another company which owns all or most of it.
Sunk costs Costs which have been incurred and cannot be reversed.
Takeover The acquisition of a controlling interest in a company by another company through the purchase of its shares.
Tangible assets Physical assets such as plant, machinery, office furniture.
Time value of money An expression of the ability of money to earn interest, the total potential for which is a function of the principal amount, the applicable interest rate and the time period involved.
Trade payables Amounts payable to regular trade suppliers.
Trade receivables Amount receivable from regular trade customers.
Trust deed A document conveying title to trust property to the trustee and setting out the purposes for which a trust has been formed, the rights and obligations of the trustee, of the trust’s manager and of the trust’s beneficiaries.
Trustee All trusts have a trustee who monitors the trust’s activities on behalf of the beneficiaries.
Trust fund Money held on behalf of investors or depositors to be used at the discretion of the trustee in their interest.
Turnover Total sales income for a given period.
Underwriter Firm which buys an issue of securities (shares) from a company and resells it to investors.
Unit trust An entity which allows investors to pool their funds before investing the funds (can be set up by a company to seek and invest funds from investors managed by a professional fund manager).
Variable costs Those costs whose total responds proportionately to changes in volume of activity.
Vendor The owner of an asset being sold.
Vertical merger/integration Where the buyer expands backward towards the source of raw materials or forward in the direction of the ultimate consumer.
Work in progress Products, services or contracts partially completed at a specified time. Can be included in stock/inventory in the balance sheet and usually valued at cost of direct inputs.
Working capital Current assets and current liabilities. Commonly used as synonymous with net working capital.
Dun & Bradstreet Business Who’s Who Help System, Glossary of business terms – Common use business terms, 2005 D&B Who’s Who in Australia on-line.
RA Brealey SC Myers Principles of Corporate Finance, 4th Ed 1991 McGraw-Hill.
M Gaffikin Principles of Accounting, 3rd Ed 1993 Harcourt Brace Jovanovich.