Managerial Finance Vocabulary

Accrual Basis Accounting

Recognizes revenue and expenses when they are incurred.

Cash Basis Accounting

Recognizes revenue and expenses only when cash is exchanged.

Book Value

The value of a business according to its books or accounts, as reflected on its financial statements.

Market Value

The value of a company according to the stock market.

Aggregation

The formation of a number of things into a cluster.

Solvency

Refers to a company’s ability to meet its long-term financial commitments, indicating whether its assets exceed its liabilities.

Acquisition

An asset or object bought or obtained, typically by a library or museum. The act of acquiring something.

Internal Growth Rate

The maximum growth rate a company can achieve without external financing.

Sustainable Growth Rate

The growth rate a company can sustain while maintaining its existing capital structure, which includes a mix of debt and equity.

Source of Cash

Represents the inflow of cash into a business.

Use of Cash

Refers to the outflow of cash from a business.

Capital Budgeting

Process of evaluating and selecting long-term investment projects.

Liquidity Requirements

Amount of cash or easily convertible assets needed for daily operations.

Dividend Policy

Decision regarding the distribution of profits to shareholders.

Amortization

A financial term that refers to the process of gradually paying off a debt over time through regular payments.

Financial Leverage

Borrowing money (debt) to finance investments in order to increase returns.

Total Asset Turnover

The key efficiency ratio that indicates how effectively a company utilizes its assets to produce revenue.

Return on Equity

A measure of profitability relative to shareholders’ equity.

Percentage of Sales Method

Method to forecast financials based on projected sales percentage.

Plowback Ratio

Proportion of earning retained by a company for reinvestment in growth.

Compounding

The process of earning interest on both the initial principal and the accumulated interest from previous periods.

Discounting

The process of determining the present value of future cash flows.

Annuity

A series of equal payments made at regular intervals over time.

Perpetuity

A type of annuity that receives an infinite amount of periodic payments.

Cash Flow

The total amount of money being transferred into and out of a business.