Lexicon for business entrepreneurs, managers and financial personnel
Designed by our charactered accountants, it makes a census of terms you should know.
"Plan comptable général" French chart of accounts and accounting rules
These are adopted by "Conseil National de la Comptabilité" - the French National Accounting Council - and oblige commercial and industrial businesses and entities legally required to prepare annual accounts, to publish their income statements, balance sheets and notes to the accounts according to a fairly strictly defined accounts presentation format, and in accordance with the accounting rules that it lays down.
Account
The smallest unit used for classifying and recording accounting items. By extension, the word account is also used to mean groupings of accounts.
Accountancy
A system for organising financial information for: inputting, classifying and recording basic numerical type data and to provide, after appropriate processing, a body of information meeting the needs of the various users and stakeholders.
Accounting period
The period of time in the life of the business that elapses between drawing up two successive sets of annual financial statements. This therefore involves splitting the company's life up into periods of time (generally of 12 months) to work out the profit or loss made in them, without having to wait for the company to be wound up.
Amortisation
Amortisation is the recognition in the accounts of the loss in value of an asset held or used by the business. This loss of value can be explained by two phenomena: wear and exhaustion (machines, fittings, quarries, vehicles, buildings, etc.) and gradual obsolescence due to technological progress in the sector of activity.
See : Reducing balance amortisation Straight-line amortisation
Amortisation charge
Recognition in the accounting records of the irreversible impairment of an asset. It reflects the annual loss in value of fixed assets. It is recorded under expenses in the income statement.
Annual repayment
The annual repayment for a loan is the cash paid out in a year to repay the loan and the finance expense represented by interest.
See : Borrowings
Assets
All goods or rights belonging to the business, which are generated by its sources of finance - equity and liabilities (Passif). In particular, it usually includes tangible assets, financial assets, receivables, etc.
Balance sheet
The balance sheet is a snapshot, at a given date, of the business' net assets and their allocation. Privately-owned companies are required to publish their balance sheets annually. The balance sheet is a summary document describing assets, equity and liabilities separately.
Balance sheet liquidity
The business' capacity to meet bank or supplier liabilities as they fall due. It is measured by the speed with which assets are turned over compared with that for liabilities. A company's balance sheet is liquid when, for each due date, the duration of sources of finance is greater than the duration of uses.
Borrowings
Loans are sources of funds provided to the business by lenders (also called creditors) and not by shareholders. In consideration for this contribution, the business undertakes to repay the capital borrowed and to pay interest, according to a pre-determined schedule.
Business capital
All funds contributed and made permanently available to the business by the owners or shareholders.
Calculated expenses
Expenses reducing revenues in arriving at net profit. They have no effect on cash. These are just an accounting estimate of a reduction in the value. Calculated expenses mainly comprise: charges for amortisation and provisions If you add all of these expenses together, net of write backs, to year-end profit, you get the funds generated by operations.
See : Operating cash flow
Capital expenditure
Acquisition by businesses of the means of production to replace or increase their output capacity.
See : Fixed assets
Capital intensity
The relationship between revenues and the capital invested to generate them. This equals the inverse of the economic assets turnover ratio.
Cash
A business' cash position at a given moment is equal to the difference between cash assets and cash liabilities, that is to say, between its uses of cash and cash equivalents (short term investments and cash) and its short-term financial liabilities (also called credit facilities). This then means cash that it holds come what may (even if the bank decides to withdraw its short term loans) and near-cash items (needing only the time to realise short term investments). Finally, by extension, cash equals the difference between the business' operating working capital and its working capital requirement.
Cash account
The cash account records the inflows and outflows of funds for a given period. The balance of this account represents the cash position at the period end (opening cash + receipts - payments). If it is positive, it means that there are available funds, in other words cash in the cash box or bank, and it therefore appears on the assets side. If it is negative, but there is a bank overdraft (a liability in respect of the bank), called bank credit facilities in the balance sheet, so it appears on the equity/liabilities side.
See : Cash
Cash and cash equivalents
A business' cash and cash equivalents are its most liquid assets. These are made up of the cash account and credit balances on bank accounts.
Charge to the impairment provision
Charges to the impairment provision recognise the loss of value of an asset not arising from its current use, that is to say, on the face of it, that is unforeseeable. They are recorded in the income statement.
See : Calculated expenses
Commercial bill
An instrument representing a customer debt. It may take several forms, depending on who issued it and whether it is payable "outside" or at an agreed maturity date. The letter of credit or draft is issued by the supplier. The supplier sends it to their customer for acceptance, and after acceptance passes it to their bank for encashment on maturity. The promissory notes, like cheques, are issued by customers and do not require acceptance. A check is payable immediately, whilst the promissory note stipulates a maturity date. There again encashment is done through the intermediary of the bank.
Cost of debt
Relationship of finance expenses net of finance income over financial liabilities.
Cumulative amortisation
Cumulative amortisation is the total of the amortisation charges recorded since the asset was put into service. It represents the total value of amortisation applied.
Current assets
Current assets are made up of stocks, customer and other receivables, short-term financial investments [Valeurs Mobilières de Placement (VMP)] and the business' cash and cash equivalents (cash, post office accounts, etc). The term "circulating" reflects the fact that these assets are intended to be turned over in the operating cycle, unlike fixed assets which are not destroyed in the operating cycle.
See : Fixed assets
Current assets (sometimes known as circulating assets)
Current assets are made up of stocks, customer and other receivables, short-term financial investments [Valeurs Mobilières de Placement (VMP)] and the business' cash and cash equivalents (cash, post office accounts, etc). The term "circulating" reflects the fact that these assets are intended to be turned over in the operating cycle, unlike fixed assets which are not destroyed in the operating cycle.
See : Fixed assets
Customer receivables
Customer receivables arise from the time lag between recognising revenues in the accounting system and the corresponding movement of funds. The receivable is usually recorded at the date of invoice or delivery.
Days purchases outstanding
The ratio represents the number of days of purchases outstanding. It is equal to an adjusted supplier payables/VAT inclusive total of purchases multiplied by * 360. According to the Bank of France, this ratio is on average about 70 days sales.
Days sales outstanding
The days sales outstanding ratio shows the number of days sales awaiting payment.It is the total of adjusted customer receivables/sales inclusive of VAT * 360. According to the Bank of France, this ratio is on average about 60 days sales.
Debt
A right by which a person called a "debtor" can require payment of a sum of money from another person. In accountancy, the most common debt is the customer receivable; it represents the right to require payment from the customer, generally within a short time period (30, 60 or 90 days).
Discounted
This is a short-term credit procedure which consists of obtaining immediate payment from the bank after the deduction of bank charges - for customer receivables for which a commercial bill is held. Note that in the event of non-payment, the banker will demand repayment: the business therefore retains the risk of non-payment.
See : Commercial bill
Discounted items not yet due EENE Effet escompté non échu (Discounted items not yet due)
See : Discounting
Discounting
This is a short-term credit procedure which consists of obtaining immediate payment from the bank - after deduction of bank charges - for customer receivables for which a commercial bill is held. Note that in the event of non-payment, the banker will demand repayment: the business therefore retains the risk of non-payment.
See : Commercial bill
Dividend
The amount appropriated from profit by shareholders, to provide minimum remuneration on the capital that they make available to the business. The amount of the dividend is fixed during the Annual General Meeting dealing with the appropriation of profits.
Dividends
Dividends remunerate providers of equity (shareholders); they are usually distributed out of the profit of the previous year, but may also be appropriated from retained earnings or reserves. The amount is set at the Annual General Meeting for the year. The "gross" dividend is the amount of the distribution declared by the company plus the tax credit - in favour of the shareholder - equal to 50% of dividend paid.
Earnings Before Interest, Taxes, Depreciation and Amortisation EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) is the English-speaking world's equivalent of gross operating earnings minus employee profit-sharing and incentive plans.
See : Gross operating earnings
Earnings Before Interest and Taxes EBIT
EBIT (Earnings Before Interest and Taxes) is the English-speaking world's equivalent of operating profit minus employee profit-sharing and incentive plans.
Earnings Before Interests, Taxes, Depreciation and Amortization EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) is the English-speaking world's equivalent of gross operating earnings minus employee profit-sharing and incentive plans.
See : Gross operating earnings
Economic assets
All economic resources used the business. It includes fixed assets, working capital requirement and cash. Economic assets are financed by sources of funds, which are made up of the business' liabilities and equity.
See : Fixed assets Working capital requirement Cash and cash equivalents Liabilities and equity
Economic assets turnover ratio
This is equal to the following relationship: revenues/economic assets. By noting that this is the opposite of the extent of use of capital, this indicates the revenues produced per euro invested.
Economic assets turnover ratio
This is the relationship of revenues to the total economic assets. Note that this is the opposite of the intensity of use of capital, it instead shows the revenues produced per euro invested.
Economic return
This is measured by the relationship of operating profit after tax over economic assets. This rate is also the product of the two ratios, operating margin and the rate of turnover of economic assets. It is not affected by the financial structure of the business. It is an accounting measure which does not therefore incorporate the concept of risk. Its usefulness in taking financial decisions is therefore limited.
Equity/liabilities plus equity ratio
The net debt ratio/gross operating earnings reflects, as a number of years of gross operating earnings, the business' ability to repay its debts from gross operating earnings. Except for exceptional circumstances, a ratio of higher than 5 years means that borrowings are too high in comparison to the wealth generated by the business. The annual debt repayment/operating cash flow measures the burden of annual debt repayments on the business' internal resources. A ratio of greater than 50% would usually indicate excessive borrowings in relation to the business' operating cash flow, in the sense that it would have to divert an excessive proportion of its operating cash flow to repaying borrowings.
See : Net debt
Establishment Costs
Establishment costs would most usually be an expense of the accounting period in which they were incurred. It is however possible to capitalise these costs and to put them on the balance sheet to the extent that the existence or development of the business depends upon them, and it is compulsory to amortise them over a maximum period of 5 years.
Exceptional expenses
Exceptional expenses are costs that arise from exceptional, non-recurring events that do not form part of the business’ cycles: operating, investment and finance.
Exceptional income
Exceptional income is income arising from events of an exceptional nature which do not form part of the company's ordinary activities: flows arising from past events, gains on the sale of assets, etc.
Exceptional profit/loss
This is the sum of the items of an exceptional nature (litigation, fire, income or expenditure from past events), and in particular the gains or losses on the sale of fixed assets.
Expenses
Expenses represent the cost of all goods and services that have been consumed, used up during the accounting period
Finance expense
Finance expenses correspond to the remuneration of sources of finance raised by borrowing. They therefore depend on the level of borrowings and rates of interest.
Finance income
Income arising on investment of cash in the business (particularly accounts in credit, short term investments, etc)
Finance leases
A finance lease is a fixed-term leasing contract, between a business (industrial or training) and a bank or specialised finance company, with an option to buy at the end of the lease. The user is therefore not legally the owner of the asset but it is available to them throughout the term of the lease. Economically, assets on finance leases are similar to capital expenditure financed by borrowing. In accounting terms, finance leases appear amongst off-balance-sheet commitments.
Finance profit/loss
The finance profit or loss shows the impact of financing methods at the income statement level. >From a financial point of view, only the income and expenses relating directly to the business' borrowing and investment activity are included, with the other items being reclassified as operating or exceptional. As finance is not the main activity of most companies, in most cases we refer to net finance expense (finance expense net of finance income).
Financial Structure
The financial structure means the combination of net financial liabilities and equity that the business uses to finance itself.
Financial analysis
By describing certain economic and financial data, financial analysis makes it possible to assess the business' state and prospects. On the practical level, financial analysis initially situates the business in its economic environment: market, business sector, production system, distribution network, staff motivation, etc. The then analysis goes on to study the creation of wealth, and investment and financing policies, to finally reach a verdict on the business' profitability.
Financial assets
Financial assets are mainly made up of equity investments in the share capital of other companies, deposits and guarantees paid or loans granted to third party businesses.
Financial leveraging (effect of)
Improvement in return on equity through appropriate use of borrowing. It is important to understand that there is an improvement only if the economic return from the activity is higher than the cost of borrowing.
Finished goods stock turnover ratio
The finished goods stock turnover ratio is equal to average stock/sales ex VAT * 360. This ratio gives the number of days needed for stock to run out if the business ceased production.
Fixed assets
Fixed assets are made up of the business' long-term uses of finance. Fixed assets are divided into tangible assets, intangible assets and financial assets. The deterioration in fixed assets is recognised by the techniques of amortisation and impairment. Accounting choices at the fixed asset level can have a significant impact on some of the business' accounting and financial metrics (profit, solvency, etc).
French corporate income tax IS ( abbreviation of French corporate income tax)
Tax charged on companies’ profits. Its rate was 50% for a long time, but it is being gradually reduced as part of the harmonisation of European Community tax regimes. It is currently (2003) at 33.33%.
Funds generated by operations OCF
Operating cash flow is a measure of all internal resources generated by the business. It is calculated by adding back all net calculated expenses (charges before amortisation and provisions) to net profit, since they have no cash impact.
Note that it is important not to confuse OCF, which takes in account income receivable and expenses payable with cash flows, which deal with income received and expenses paid.
Gross operating earnings GROSS OPERATING PROFIT
Gross operating earnings is the balance between operating income and the operating expenses that have been consumed to obtain this income. It therefore relates to the results of the operating process, and is different from operating profit in so far as it does not take into account charges of amortisation and provisions. Gross operating earnings is a key performance indicator for income statement analysis. It is similar to the EBITDA of the English-speaking world.
See : EBITDA
Gross operating earnings Excédent brut d'exploitation (Gross operating earnings)
Gross operating earnings is the balance between operating income and the operating expenses that have been consumed to obtain this income. It therefore relates to the results of the operating process, and is different from operating profit in so far as it does not take into account charges for amortisation and provisions. Gross operating earnings is a key performance indicator for income statement analysis. It is similar to the English-speaking world's EBITDA.
See : EBITDA
Gross profit on production
This equals production sold + changes in levels of finished goods (or production into stock) + capitalised production from which are subtracted purchases of raw materials and direct sub contracting. This is meaningful only for industrial businesses and for service providers.
See : Overall gross profit
Gross profit on sales
Gross profit on sales is the difference between the total sales of goods the resale and the cost of buying them (sales of goods for resale - purchases of goods the resale + changes in the level of stocks of goods for resale). This is only meaningful for trading or retail businesses, etc. For these companies, gross profit on sales or gross profit ratio (ratio of gross profit on sales to revenues ex VAT), is a key performance indicator.
Gross profit on sales
Gross profit on sales is the difference between the total sales of goods for resale and the cost of buying them (sales of goods for resale - purchases of goods for resale + changes in the level of stocks of goods for resale). This is only meaningful for trading or retail businesses, etc. For these company, gross profit on sales or the gross profit ratio (ratio of gross profit on sales to revenues ex VAT), is a key performance indicator.
Gross value
Gross value, or initial value, is the price or purchase cost. It is the amount at which a fixed asset is recorded in the balance sheet on acquisition. Gross value less cumulative amortisation gives the net amount.
See : Net amount
Income Statement Intermediate Performance Subtotals [SIG] intermediate performance subtotals
The intermediate performance subtotals, prepared mainly using data from the general ledger system, relate to the main stages of the make-up of profit. It is essential to study them for financial analysis purposes. The main ones are overall gross profit [marge brute globale], value added, gross operating earnings, operating profit, profit on ordinary activities and net profit.
Income statement
The income statement summarises all the flows that make a positive or negative change to a company's net assets during a given period: Income, which generates resources, and expenses which destroy them. The balance of these flows, or profit or loss, is positive if the net assets of the business increase during the period in question. it is negative if net assets diminish. A positive balance is called a profit, a negative balance is called a loss.
Intangible assets
Intangible assets principally include: Establishment costs, capitalised research and development costs, concessions, patents and similar rights, leases, brands and market shares, software and goodwill.
Intangible assets
Non-monetary assets that have no physical substance (intangibles) intended for long-term use in the business. They notably include; Establishment costs, capitalised research and development costs , concessions, patents and similar rights, leases, brands and market shares, software and goodwill.
See : Fixed assets
Interest rate
Generally, the rate of interest, or cost of money, remunerates abstention from immediate consumption, so it therefore remunerates time. In the case of borrowings, the interest rate is typically the lender’s remuneration, which is determined by contract.
See : Finance expense
Labour costs
Labour costs include salaries and related social security and employee costs.
Liabilities
A business' liabilities represent the money made available to it by its creditors. A distinction is made between operating liabilities, which are generally short-term and do not bear interest (mainly supplier payables, tax and social security liabilities), and financial liabilities (borrowings). These are always repayable at some particular date, unlike equity. Furthermore, there remuneration is fixed by contract and is independent of business profits, so the creditors do not participate in the risk of the business venture. Furthermore, on the business being wound up, they will be repaid in priority to shareholders; in return, they do not take part in managing the business, and do not benefit from growth in the business when it is doing well.
See : Supplier payables Borrowings
Liabilities and equity
Liabilities and equity covers all the business' sources of funds, that is to say: equity contributed by the shareholders, operating, bank and financing liabilities for financing the assets of the enterprise.
Liquidity
The ability of the business to meet its financial liabilities out of current operations, or to find new sources of finance. Liquidity is related to the duration of sources of finance. It is measured both in terms of the structure of short-term finance and in terms of ability to repay medium and long-term liabilities. This is why conventional concepts and ratios are used: working capital, shareholders' equity, borrowings, short-term current assets/payables, etc
Loans
Loans are sources of funds provided to the business by lenders (also called creditors) and not by shareholders. In consideration for this contribution, the business undertakes to repay the capital borrowed and to pay interest, according to a pre-determined schedule.
Long-term capital
Long-term capital makes up the business' fixed sources of funds. These are broken down into equity, dividends payable, provisions for risks and charges, financial liabilities falling due in over one year, and quasi-shareholders' equity.
Loss
Describes a negative balance between the total income of a business and the total of its expenses.
See : Profit/(loss)
Negative working capital requirement Negative WCR
Companies with a negative working capital requirement are characterised by an operating cycle which results in them receiving funds prior to using them, by means of financial timing differences. They are a few and far between, and are found for example in mass retailing and catering. Low or negative working capital requirement is a very advantageous strategic factor for developing a self-financed growth policy.
Net amount
The net amount is the difference between the gross amount and the total of the amortisation and impairment provisions applied. In practice, it is often called residual value, or net book value.
See : Gross value
Net debt
A business' net debt is made up of the balance of its finance liabilities on one side, and of cash and cash equivalents and financial investments on the other. It represents the creditor or debtor position of the business in respect of third parties outside the operating cycle.
Net profit
Net profit or loss reflects the increase or decrease in the business' resources during the accounting period in question; it therefore relates to the net asset concept, not to cash. It is in fact the residual portion of operating profit accruing to shareholders after creditors and the government have received their share. Net profit can be distributed in the form of dividends, or transferred to reserves (thereby increasing the business' equity).
Non-operating working capital requirement Non-operating WCR
Cash differences arising from non-operating transactions (capital expenditure, exceptional items, etc) make up what is called non-operating working capital requirement. This is an ill-defined concept, and non-operating WCR is difficult to calculate and analyse because it is linked to individual transactions, unlike operating working capital requirement, which is ongoing. In practice, the non-operating WCR categorises the uncategorisable.
See : Working capital requirement Operating working capital requirement
Operating cash flow OCF
Operating cash flow is a measure of all the internal resources generated by the business. It is calculated by adding back all net calculated expenses (charges before amortisation and provisions) to net profit, since they have no cash impact.
Note, that it is important not to confuse OCF, which takes into account income receivable and expenses payable, and cash flows, which deals with income received and expenses paid.
Operating cycle
The operating cycle relates to the business' activity: Using, processing, sale. This cycle translates partly into the creation of wealth (gross operating profit) and partly into cash (positive operating cash flow).
Operating expense
Operating expenses represent the destruction of resources necessary for producing operating income. The main operating expenses are: consumption of raw materials, other external costs (transport, energy, advertising, fees, etc), personnel expenses, taxes and dues.
Operating expenses
Operating expenses relate to consumption of goods and services necessary for the creation of operating income. The main operating expenses are: consumption of raw materials, other external costs (transport, energy, advertising, fees, etc), personnel expenses, taxes and dues.
Operating liabilities
Liabilities arising from the operating cycle and similar debt.
See : Liabilities Operating cycle
Operating working capital requirement OWCR
The OWCR represents money locked up in the business to finance its operating cycle. It is calculated by adding stock accounts (raw materials, goods for work in progress and finished goods) and operating receivables (customer receivables, advances to suppliers and other operating receivables), less operating liabilities (supplier payables, tax and social security liabilities, customer payments on account and other operating liabilities).
See : Working capital requirement Non-operating working capital requirement
Other external costs
These are made up of subcontracting, purchases of materials and supplies not for stock (water, energy, small tools, maintenance, administrative supplies, etc), repair and maintenance work, insurance premiums, research and analysis, external labour (temporary staff), fees and the remuneration of intermediaries, advertising expenses, transport, entertaining, travel and subsistence, postage, bank charges (these are different from interest on bank borrowings, which is recorded in the finance expenses) and sundry expenses.
Other purchases and external expenses
These are made up of subcontracting, purchases of materials and supplies not for stock (water, energy, small tools, maintenance, administrative supplies, etc), repair and maintenance work, insurance premiums, research and analysis fees, external labour (temporary staff), fees and intermediaries' remuneration, advertising expenses, transport, entertaining, travel and subsistence, postage, bank charges (these are different from interest on bank borrowings, which are recorded in the finance expenses) and sundry expenses.
Overall gross profit
Overall gross profit is the sum of gross profit on sales and gross profit on production.
Productivity
Productivity is defined as the relationship between quantities produced and the quantity of "factors of production" used. It measures the efficiency of the production function. Productivity reflects the relationship between activity and the resources used.
Profit on ordinary activities
Profit on ordinary activities is the sum of operating profit and finance expenses net of finance income. It may be calculated before or after tax.
Profit or loss
The business' profit or loss is equal to the difference between the sales invoiced to customers and the expenses incurred in the production of the goods (or rendering the services) sold in a given period. It can be approached as an overall figure of the whole-business level by comparing all sales and all expenses, or it can be broken down and analysed by product or by business sector. The profit or loss for the accounting period is equal both to the difference between the income and expenses and to the changes in equity between the beginning and the end of the accounting period. If it is positive, it is a profit, if it is negative, it is a loss. At the annual general meeting, the shareholders decide on the amount of the profit to be left in the business (which is then put into reserves and recorded as equity) and, if applicable, the proportion that will be appropriated to remunerate their contribution in the form of dividends.
Profitability
The relationship between the profit made and the capital employed to make it. The extent to which an investment in capital or in a business returns a profit.
Property
Anything (tangible or intangible) that can extinguish a need.
Property, plant and equipment
Real estate, plant, machinery and other durable goods used in the production of other goods or for offering services.
See : Property Fixed assets
Provision for impairment
These record incidental and uncertain loss of value in an asset
Provisions
Provisions are used to recognise an expense in advance. Charges to provisions reduce the profit in the year in which they are raised, so that the corresponding expenses do not affect the profits of the years in which they are actually recorded in the accounts, with which they have no economic connection. During these years, the provision is (wholly or in part) written back into income, which cancels out the expense recognised at the profit level.
Provisions for risks and charges
These are intended to cover actual identified risks, inherent in the business' activity, but for which the existence and amount are uncertain. The most commonly encountered provisions for risks and charges are: disputes (employment tribunal cases for example) fines, penalties or exchange losses. These record increases in liabilities that fall due in the more or less short-term, arising from an expense which has not materialised at the balance sheet date, but which is probable and arises from transactions carried out during the accounting period.
Purchases
These represent all goods (goods for resale, raw materials and consumables) and services acquired by the business during a period and the resale of which, after processing or not, or use as consumables, is in accordance with the business’ operating objects.
Reducing balance amortisation
This type of amortisation is characterised by higher charges in the early years. It applies to goods bought new (plant and machinery, IT and office equipment, etc.). The charge is equal to the net asset value multiplied by the amortisation rate. This is obtained by multiplying the straight-line amortisation rate by a multiplication factor laid down by law.
See : Cumulative amortisation Amortisation charges Net amount
Repayment capacity ratio
The net debt ratio/gross operating earnings reflects, as a number of years of gross operating earnings, the business' ability to repay its debts from gross operating earnings. Except in exceptional circumstances, a ratio of higher than 5 years means that borrowings are too high in comparison to the wealth generated by the business. The annual debt repayment/operating cash flow measures the burden of annual debt repayments on the business' internal resources. A ratio of greater than 50% would usually indicate excessive borrowings in relation to the business' operating cash flow, in the sense that it would have to direct an excessive proportion of its operating cash flow to repaying borrowings.
Research and development costs
Expenses relating to the research and development activity of the business (on its own account). They are often accounted for as expenses of the year in which they are incurred, in observance of the prudence principle applied due to the uncertain nature of these activities. They can also be considered as an investment able to generate revenues over several years, and they can be included as balance sheet assets under certain conditions (identifiable project, project feasibility, existence of a market, etc). The recommended amortisation period is then 5 years.
Reserves
In principle, reserves are profits appropriated to the business for the long term, until a decision to the contrary is made by the competent bodies.
Return on equity
This is measured by the following relationship: net income/equity. It is equal to the sum of the economic return and the leveraging effect. The analysis of return on equity should therefore clearly separate out these two components. Use of borrowings may result in a return on equity that is significantly higher than economic return, but it also brings with it a much higher financial risk for shareholders, whose required return increases as a result. In the long-term, only high economic return can create value for shareholders.
Revenues
Revenues are made up of all production sold (for manufacturing companies and service providers) and sales of bought-in goods (for trading businesses). Changes in them are the foundation of all financial analysis. They must be broken down into three components: volume (quantities sold), price (inflation, foreign exchange) and markets/types of goods.
Risk
The concept of risk in finance is very close to that of uncertainty. We can notably differentiate between economic risks (political, natural, inflationary, etc.) which threaten flows from securities and stem from the economic world, and financial risks (liquidity, exchange rates, interest rates, etc.) which do not have a direct bearing on these flows, and belong to the field of finance. Regardless of its nature, any risk is reflected by a fluctuation in the value of a financial security. It is also what differentiates pure accounting, which is not concerned with rates of return, from finance, which incorporates the concept of risk to determine value. Risk in a financial security is measured by the volatility in its value (or its rate of return): the higher the volatility, the higher the risk, and vice versa.
Self-financing capacity
A business that can finance its growth without using external sources of finance is said to self-finance. Although such a business is viewed favourably by its partners, and this cancels out risks that might arise on excessive borrowings, self-financing can be harmful if taken to excess. Its apparent nil cost could in fact encourage investment in unprofitable projects, to the disadvantage of shareholders. Only the guarantee of a rate of profitability that will at least match the cost of capital can safeguard the value of reinvested profit.
See : Operating cash flow
Share capital
All funds contributed and made permanently available to the business by the owners or shareholders.
Short-term investments [Valeur mobilière de placement]
Securities held by the business such as listed equities or open-ended fund units [SICAV].
Solvency
Solvency reflects the ability of a business to meet its commitments in the event of its winding up, that is to say the cessation of operations and the sale of its assets. A business may therefore be considered to be insolvent if its equity becomes negative: it then owes more than it possesses.
Statutory profit-sharing
Employee statutory profit sharing consists of appropriating part of the profit to the business' employees. This is a legal obligation for businesses with over 50 employees, different from the various incentive schemes, which are on contractual terms.
Stock
Stock represents operating expenses that have been contracted for but not yet consumed or sold. Stock may be divided into raw materials, goods for resale, work in progress and finished goods. Opening stock is the total of goods in stock at the beginning of the period. Closing stock is the total of goods in stock at the period end. At the end of each accounting period, the closing stock is recorded on the balance sheet. Only changes in stock levels occurring during the period appear in the income statement.
Straight-line amortisation
This type of amortisation is characterised by a constant annual charge throughout the expected useful life of the asset. This is equal to the original value of the asset (its gross value) multiplied by the amortisation rate. This is obtained by dividing 100 by the number of years expected useful life.
See : Cumulative amortisation Amortisation charges Gross value
Supplier Payables
Supplier payables arise from the time lag between recognising the purchases in the accounting system and the corresponding movement of funds. The debt is generally recorded at the invoice date or date of delivery by the supplier.
Tangible assets
Tangible fixed assets, together with intangible assets, make up the basis of a business, of its industrial and commercial asset base. The main types of tangible assets are land, buildings, fixtures and fittings and plant and machinery.
The raw materials (or goods for resale) stock turnover ratio
The raw material (or goods for resale) stock turnover ratio is equal to average raw materials (or goods for resale) stock/purchases ex VAT. (or goods for resale) * 360. This ratio gives the number of days needed for stock to run out if the business stopped restocking.
Transfer of charges
The transfer of charges account is for changing the allocation of certain expenses of an accounting period that do not necessarily relate to the cost of sales for that accounting period. These expenses may be transferred to another account in the income statement or to a balance sheet account (fixed assets, third-party receivables, or prepayments accounts for expenses to be spread over several years).
Treasury
All cash and cash equivalents that the business holds to meet its immediate expenditure. It also represents that part of the business' sources of funds that have not been used either to finance fixed assets nor to finance operating requirements.
Value added
Value added represents the additional value given by the business, through its activities, to goods and services received from third parties. It equals the total of the margin on sales and the gross margin on production, less the consumption of goods and services received from third parties, also called "other purchases and external expenses". Value added can be used for typifying a sector and is a measure of how well a business performs in its sector.
Working capital WC
Working capital represents the balance between fixed sources of finance (under 1 year) and fixed assets (fixed uses of funds over 1 year). If positive, it means that fixed sources of funds are greater than fixed uses of funds. If negative, it shows that fixed assets are financed by cash resources or by the surplus of operating sources over uses (negative working capital requirement) In accepted financial wisdom, as sources of funds are repayable on demand whilst fixed assets take time to turn into cash, working capital should be positive in times of growth.
Working capital requirement WCR
The working capital requirement (WCR) of a business is the sum of its operating WCR and its non-operating WCR. If the components of WCR are liquid and renewed quickly, their level will remain relatively stable at constant levels of activity, this where the concept of fixed working capital requirement comes from.
The WCR calculated at the balance sheet date does not represent the structural WCR (normal WCR) of the business because its activity may be seasonal.
See : Operating working capital requirement Non-operating working capital requirement
Working capital turnover ratio
The working capital turnover ratio is used to analyse the trend of the proportion of funds locked up in the operating cycle.
See : Days sales outstanding The raw materials (or goods for resale) stock turnover ratio Days purchases outstanding Finished goods stock turnover ratio Working capital requirement