Overview of Terms on Accounting Based on Corporate Finance Glossary

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Overview of Terms on Accounting Based on Corporate Finance Glossary

Balance Sheet

A balance sheet shows the financial standing of a company, it can be used as a summary of assets and liabilities and shows the balance of income and expenditure over a given period of time. A simple way to present a balance sheet is by using the equation: Assets = Liabilities + Equity. To present an effective balance sheet, under assets and liabilities, respectively divide into two sections, current, and non-current (long term). An example of some current/liquid accounts would be Inventory, Cash, or Trades Payable. An example of non-current/illiquid accounts would be Plant, Property, Equipment, and Long-Term Debt. (Corporate Finance Institute, 2018)

Break-Even

Break-Even is the point at which a business’s profits are equal to their expenditures. In other words, the business is not losing money, however, they are not making money at the same time. This occurs mostly when a company is first starting out and is a place where they can sit comfortably for a time, but they may find it difficult to innovate and ‘move forwards’ as they do not have the extra profit to do so. This is why it is best for a company to find a way to innovate without using too much money and thereby tipping the balance so that they can move forward and start making a profit again.

Budgeting

Budgeting is the planning of a company’s expenditures, in detail, to ensure sufficient cash flow. Business Budgets can include short-range and long-range plans to be most effective, as this can be a good way to keep track of cash flow but to predict it as well. Budgets are mostly made up of variable and fixed costs, these can be laid out in different sections as fixed costs cannot be reshaped but variable costs can. Budgets allow companies to look at their expenditures and compare against money coming in to see where they made need to make some changes to their variable costs to ensure more profit. (Entrepreneur, 2020)

CAGR

CAGR is an acronym for Compound Annual Growth Rate and it refers to the measurement of an investment’s growth over time. It is mostly used to measure and compare performance, but can also be used to predict future growth. The CAGR formula is: CAGR = CAGR is best for showing if an investment is worth making and can identify any trends worth keeping an eye on. It allows companies to ‘stay ahead of the game’ when taking potential risks. (Corporate Finance Institute, 2020)

Capacity Management

Capacity Management is a theory that consists of the planning, IT monitoring, and administration that goes into ensuring the information technology recourses have the capability to, across a service lifecycle, handle the necessary data processing. There are three main types: product capacity planning, workforce capacity planning, and tool capacity planning. (OmniSci, 2020)

Capital Expenditure

Capital Expenditures are funds used by companies to purchase, improve or maintain long-term assets. These long-term assets are usually things such as land, buildings, and equipment, which are all physical, fixed, and non-consumable. To ensure the most effective use of capital expenditure a company must have a structured plan of deadlines, prices, and resources. A company needs to be able to think long-term and to be able to capture accurate data to be able to make realistic predictions on a budget. (Corporate Finance Institute, 2018)

Competitor Analysis

Competitor Analysis is used in the understanding of a company’s competitors within the industry and their strategies and aims and therefore enabling the company to ‘stay ahead of the competition. A company needs to identify their competition and then analyze them, their business background, facilities, and locations, products, pricing, marketing, sales, etc. Then identify which of these competitors are primary (direct) or secondary (similar) competition, determine any business opportunities. (Square Up, 2019)

Costing

Costing is a way of assigning costs to an area of the business; this may usually involve variable costs (e.g. sales or number of employees) and fixed costs (e.g. rent or insurance). The main two purposes of costing are to be able to improve profit by refining operations and to be able to show detailed data of inventory on a balance sheet at the end of a time period. (Accounting Tools, 2019)

Decision Making

Decision Making is the process by which a company processes and decides on something important. It can be seen as an ongoing process that keeps the company growing and seeking new goals. A decision for a company cannot be made instantly, it must go through a process of defining a problem, collecting data about said problem, looking into different options, choosing the best possible option to solve the problem, and then making a plan and executing said plan. It is also important to follow up on a new decision to ensure that everything is going as intended and no more problems are arising. (Management Study Guide, 2015)

Fixed Costs

Fixed costs are a ‘locked’ value and tend not to change over time, but may change when a business starts to expand. As variable costs are based on volume or operations, fixed costs are less controllable than variable costs. Some examples of fixed costs for a company could be insurance, rent of a building, taxes, etc. (My Accounting Course, 2020)

Inventory Control

Inventory Control in when a company aims to make the most profit off of little inventory investment, therefore, aims to maximize the company’s use of inventory. The most common areas for inventory control are: raw materials availability, finished goods availability, work in process, reorder point, bottleneck enchantment, and outsourcing. (Accounting Tools, 2019)

Operating Costs

Operating Costs refer to the maintenance and administration of a business on a day-to-day basis, this includes product sales, but also rent, employee wages, raw materials, and general maintenance expenses. Operating costs are shown on a company’s income statement and therefore can be easily found and analyzed. (Investopedia, 2020)

Macro Environment

A Macro Environment are external conditions that have an impact on the development of a business, these conditions can be uncontrollable and impact the overall performance of a business. An example of conditions that may impact the business are economic growth, inflation, social conditions, interest rates, government policies, technological developments, climate changes, etc. as these can all affect the environment around the business not just their immediate marketing environment. (My Accounting Course, 2020)

Micro Environment

The Micro Environment are the elements that are in a company’s immediate environment e.g. suppliers, competitors, the media, customers. This immediate environment can have an impact on the company’s performance and decision-making. (Monash Business School, 2018)

PEST

PEST is an acronym for Political, Economic, Social, Technological. The PEST Analysis is used to assess the external factors that could impact the competitive marketing of a company and their products. It is most effective on larger companies that may feel the impact of the macro-environment more, therefore finding the best way to deal with the impacts of events. (Investopedia, 2020)

Profit and Loss Statement

A Profit and Loss Statement, also known as an Income Statement, is a summary of revenues, expenses, and profits and losses over a period of time. It is different from a cash flow because it is based on accounting principles. The Statement best shows the company’s ability to generate sales, manage expenses, and create a profit. An example of categories that are good to include on a statement are revenue, cost of goods sold, selling, general and administrative expenses, marketing and advertising, technology/research and development, interest expense, taxes, and net income. (Corporate Finance Institute, 2018)

Resources

A Resource is a stock or supply of money, materials, staff, and other assets that can be used effectively by a company for a specific function to generate a profit or outcome.

Revenue Management

Revenue Management is a way in which to predict customer behaviour by analyzing the micro-market and optimising product availability and price. The main aim is to ‘sell the right product to the right customer at the right time and for the right price. (Wikipedia, 2020)

ROI

ROI is an acronym for Return on Investment, which refers to the money invested in a business and the return based on the net profit of the business. This isn’t necessarily the same as profit, which measures the performance of the business. The best way to determine ROI is to divide the net profit by the total number of assets, however, there are several other ways in which to do this. (Entrepreneur, 2020)

ROO

ROO is an acronym for Return on Objective, which refers to a business’s ability to define and achieve measurable goals and objectives. Types of objectives can include global-level strategic objectives, individual section objectives, meeting, presentations, and activities objectives, and objectives for each segment of a given population. (Roberts Event Group, 2016)

Supply Chain

A Supply Chain is a detailed plan which lays out the system of producing and delivering a product or service, this includes anything involved at each stage, information needing to be communicated, natural resources being transformed into useful materials, human resources, and other components to achieve the finished product or service. Two examples of a supply chain could be a general supply chain and a supply chain for an e-commerce company which sells a variety of products and orders are processed by technology. A general supply chain would consist of raw materials to supplier to manufacturer to distributer to retailer and then to the consumer. Whereas an e-commerce supply would be e-commerce to product orders to warehouse to shipping to the customer. (Corporate Finance Institute, 2020)

SWOT

SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats. A SWOT Analysis focuses on internal and external factors that could affect the business, which also evaluates the company’s competitive position within the industry and develop a strategic plan. The analysis works best when a wide range of realistic feedback and data is given so that it can be used as a guide for the company rather than a set list of rules. (Investopedia, 2020)

Variable Costs

Variable Costs are costs that can always be changing, they are based on production and therefore how much or how little is being produced by a company. Variable costs can be lowered and changed when a company needs to make more profit or when costs aren’t necessary and can be scrapped. For example, a company when catering for an event for 200 people and a meal per person is £35, the variable cost would be £7,000. However, if there is a better venue that cannot hold 200 and is more expensive to rent, then the variable cost can be adapted and come down to cater for 100 people which would then be £3,500 and there would be more money to be able to spend on the better-preferred venue. (My Accounting Course, 2020)

References

Corporate Finance Institute (2018) Balance Sheet. Corporate Finance Institute [online]. Available from: https://corporatefinanceinstitute.com/resources/knowledge/accounting/balance-sheet/ [Accessed 13/11/2020].
Entrepreneur (2020) Budgeting. Entrepreneur [online]. Available from: https://www.entrepreneur.com/encyclopedia/budgeting [Accessed 13/11/2020].
Corporate Finance Institute (2020) What is CAGR. Corporate Finance Institute [online]. Available from: https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-cagr/ [Accessed 13/11/2020].
OmniSci (2020) Capacity Management. OmniSci [online]. Available from: https://www.omnisci.com/technical-glossary/capacity-management [Accessed 13/11/2020].
Corporate Finance Institute (2018) Capital Expenditures. Corporate Finance Institute [online]. Available from: https://corporatefinanceinstitute.com/resources/knowledge/accounting/capital-expenditures/ [Accessed 13/11/2020].
Square Up (2019) Competitor Analysis: A Definition and Guide. Square [online]. Available from: https://squareup.com/gb/en/townsquare/competitor-analysis-a-definition-and-guide [Accessed 13/11/2020].
Accounting Tools (2019) Costing Definition. Accounting Tools [online]. Available from: https://www.accountingtools.com/articles/what-is-costing.html [Accessed 13/11/2020].
Management Study Guide (2015) What is Decision Making. Management Study Guide [online]. Available from: https://www.managementstudyguide.com/what-is-decision-making.htm [Accessed 13/11/2020].
My Accounting Course (2020) What is a Fixed Cost. My Accounting Course [online]. Available from: https://www.myaccountingcourse.com/accounting-dictionary/fixed-cost [Accessed 13/11/2020].
Accounting Tools (2019) Inventory Control. Accounting Tools [online]. Available from: https://www.accountingtools.com/articles/what-is-inventory-control.html [Accessed 13/11/2020].
Investopedia (2020) Operating Cost. Investopedia [online]. Available from: https://www.investopedia.com/terms/o/operating-cost.asp [Accessed 13/11/2020].
My Accounting Course (2020) What is a Macro Environment. My Accounting Course [online]. Available from: https://www.myaccountingcourse.com/accounting-dictionary/macro-environment [Accessed 13/11/2020].
Monash Business School (2018) Micro Environment. Monash Business School [online]. Available from: https://www.monash.edu/business/marketing/marketing-dictionary/m/micro-environment#:~:text=the%20factors%20or%20elements%20in,marketing%20intermediaries%2C%20customers%20and%20publics [Accessed 13/11/2020].
Investopedia (2020) PEST Analysis. Investopedia [online]. Available from: https://www.investopedia.com/terms/p/pest-analysis.asp [Accessed 13/11/2020].
Corporate Finance Institute (2018) Profit and Loss Statement (P&L). Corporate Finance Institute [online]. Available from: https://corporatefinanceinstitute.com/resources/knowledge/accounting/profit-and-loss-statement-pl/ [Accessed 13/11/2020].
Wikipedia (2020) Revenue Management. Wikipedia [online]. Available from: https://en.wikipedia.org/wiki/Revenue_management [Accessed 13/11/2020].
Entrepreneur (2020) Return on Investment ROI. Entrepreneur [online]. Available from: https://www.entrepreneur.com/encyclopedia/return-on-investment-roi [Accessed 13/11/2020].
Roberts Event Group (2016) ROI, ROO, ROE – What do These Terms Really Mean. Roberts Event Group [online]. Available from: https://www.robertseventgroup.com/roi-roo-roe-what-do-these-terms-really-mean/#:~:text=Return%20on%20Objective%20focuses%20on%20defining%20and%20achieving%20specific%20measurable%20objectives.&text=%E2%80%9CMeeting%20participants%20will%20have%20gained,set%20for%20the%20meeting%20overall [Accessed 13/11/2020].
Corporate Finance Institute (2020) Supply Chain. Corporate Finance Institute [online]. Available from: https://corporatefinanceinstitute.com/resources/knowledge/strategy/supply-chain/ [Accessed 13/11/2020].
Investopedia (2020) Strength, Weakness, Opportunity, and Threat (SWOT) Analysis. Investopedia [online]. Available from: https://www.investopedia.com/terms/s/swot.asp [Accessed 13/11/2020].
My Accounting Course (2020) What are Variable Costs. My Accounting Course [online]. Available from: https://www.myaccountingcourse.com/accounting-dictionary/variable-costs [Accessed 13/11/2020].