Non-Credit/General Financial Terms

Net Profit/Net Loss

Net profit or loss is one measure of a company’s financial performance. However, creditors and investors are also extremely interested in how much cash a business generates and how it is used. The statement of cash flows is a summary of the money flowing into and out of a firm. It is the financial statement used to assess the sources and uses of cash during a certain period, typically one year. All publicly traded firms must include a statement of cash flows in their financial reports to shareholders. The statement of cash flows tracks the firm’s cash receipts and cash payments. It gives financial managers and analysts a way to identify cash flow problems and assess the firm’s financial viability.

The statement of cash flows classifies cash receipts and disbursements as operating, investing, and financing cash

The Income Statement

An income statement is a financial report that shows a company's revenues, expenses, and profit (or loss) over a specific period, such as a month, quarter, or year.

It is one of the three primary financial statements, along with the balance sheet and cash flow statement.

Revenue− Expenses= Net Income (Profit) or Net Loss

Revneues

The income statement, sometimes called an earnings statement or profit and loss statement, reports the profitability of a business organization for a stated period of time. In accounting, we measure profitability for a period, such as a month or year, by comparing the revenues earned with the expenses incurred to produce these revenues.

The income statement contains the following:

Revenues are the inflows of cash resulting from the sale of products or providing services to customers. We measure revenues by the prices agreed on between the business and customer.

Expenses are the costs incurred to produce revenues. In other words, expenses are costs of doing business (typically identified as accounts with the word “expense”).

Net Income = Revenues − Expenses. Net income is often called the earnings of the company. When

Financial Accounting

Financial accounting focuses on preparing external financial reports that are used by outsiders; that is, people who have an interest in the business but are not part of the company’s management. Although they provide useful information for managers, these reports are used primarily by lenders, suppliers, investors, government agencies, and others to assess the financial strength of a business.

Note that both managerial and financial accounting involve preparing financial reports, but only in financial accounting do you prepare financial statements.

Managerial Accounting

As the term implies, managerial accounting provides financial information that managers inside the organization can use to evaluate and make decisions about current and future operations. For instance, the sales reports prepared by managerial accountants show how well marketing strategies are working, as well as the number of units sold in a specific period of time. This information can be used by a variety of managers within the company in operations as well as in production or manufacturing to plan future work based on current financial data. Production cost reports can help departments track and control costs, as well as zero in on the amount of labor needed to produce goods or services. In addition, managers may prepare very detailed financial reports for their own use and provide summary reports to top management, providing key executives with a “snapshot” of business operations in a specific timeframe.

Accounting

Accounting is the process of collecting, recording, classifying, summarizing, reporting, and analyzing financial activities. Accounting provides a framework for looking at past performance, current financial health, and possible future performance.

Key Financial Statements

When businesses present their financial condition to external stakeholders, taxing authorities, investors, and the general public, the most common format for this information is one of four key financial statements. These four statements are the Income Statement, Statement of Owners Equity (also called the Statement of Retained Earnings), Balance Sheet, and Statement of Cash Flows. These four statements, although representing different facets of the company’s finances, are all interconnected and create a birds-eye view of the company’s financial position.

assets

things of value owned by the organization

statement of retained earnings

explains the changes in retained earnings (or owner’s equity) between two balance sheet dates

statement of cash flows

a summary of the money flowing into and out of a firm, is the financial statement used to assess the sources and uses of cash during a certain period

Sarbanes-Oxley Act

a U.S. federal law enacted in 2002 to enhance corporate governance and financial reporting transparency, aiming to protect investors and restore public trust in the wake of major accounting scandals.

The Income Statement (Earnings Statement)

The income statement, sometimes called an earnings statement or profit and loss statement, reports the profitability of a business organization for a stated period of time. In accounting, we measure profitability for a period, such as a month or year, by comparing the revenues earned with the expenses incurred to produce these revenues.

The income statement contains the following:

Revenues are the inflows of cash resulting from the sale of products or providing services to customers. We measure revenues by the prices agreed on between the business and customer.

Expenses are the costs incurred to produce revenues. In other words, expenses are costs of doing business (typically identified as accounts with the word “expense”).

Net Income = Revenues − Expenses. Net income is often called the earnings of the company. When expenses exceed revenues, the business has a net loss.

Double-Entry Bookkeeping

The accounting equation must always be in balance (that is, the total of the elements on one side of the equals sign must equal the total on the other side). Suppose you start a coffee shop and put $10,000 in cash into the business. At that point, the business has assets of $10,000 and no liabilities. This would be the accounting equation:

Assets = Liabilities + Owners’equity

$10,000 = $0 + $10,000

Lockbox Banking

A lockbox is a bank-operated mailing address or post office box that businesses use to receive payments from customers. Instead of sending payments to the business directly, customers send checks or money orders to this secure location. The bank then collects, processes, and deposits these payments into the business’s account, reducing delays and administrative work while improving cash flow and payment accuracy

CAGR – Compound Annual Growth Rate

Is the rate of return (RoR) that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span.

 CIM – Confidential Information Memorandum

Is a document drafted by an M&A advisory firm or investment banker used in a sell-side engagement to market a business to prospective buyers. These documents will contain important financials, future growth projections, customer diversification, strength and weakness analysis, and more.

COGS – Cost of Goods Sold

This is the total amount your business paid as a cost directly related to the sale of products. 

DD – Due Diligence

Is an essential activity in M&A transactions. In the M&A process, due diligence allows the buyer to confirm pertinent information about the seller, such as contracts, finances, and customers. By gathering this information, the buyer is better equipped to make an informed decision and close the deal with a sense of certainty. Due Diligence usually commences after the LOI is signed.

DPO – Days Payables Outstanding

Is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices to its trade creditors, which may include suppliers, vendors, or financiers. It’s a measure of cash flow, and you’d like to have cash coming in faster than it goes out, in effect creating a positive cash flow engine.  Many companies get in trouble, even when they’ve secured large, lucrative customer contracts because they’re locked into paying their suppliers weeks and sometimes months before they get paid. Is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices to its trade creditors, which may include suppliers, vendors, or financiers. It’s a measure of cash flow, and you’d like to have cash coming in faster than it goes out, in effect creating a positive cash flow engine.  Many companies get in trouble, even when they’ve secured large, lucrative customer contracts because they’re locked into paying their suppliers weeks and sometimes months before they get paid. 

EBIT – Earnings before Interest and Taxes

Is an indicator of a company’s profitability. EBIT can be calculated as revenue minus expenses excluding tax and interest. EBIT is also referred to as operating earnings, operating profit, and profit before interest and taxes.

EBITDA – Earnings Before Interest Taxes Depreciation & Amortization – Is a measure of a company’s overall financial performance and is used as an alternative to net income in some circumstances. This is the number that a multiple is attached to for business valuation.

EV – Enterprise Value – Is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. Enterprise value is a popular metric used to value a company for a potential acquisition.

GAAP – Generally Accepted Accounting Principles –  Are standards that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices. Also, when you have an audit firm audit your financial statements, they will design their audit using GAAP as the basis for their audit procedures.

GL – General Ledger – In bookkeeping, a general ledger, also known as a nominal ledger, is a bookkeeping ledger in which accounting data is posted from journals and from sub-ledgers, such as accounts payable, accounts receivable, cash management, fixed assets,

IOI – Indication of Interest – The IOI is an informal notice of an investor’s interest in purchasing or acquiring an asset, in this case, your business. It is non-binding and is less definitive than the LOI.

KPI – Key Performance Indicator – A quantifiable measure of performance over time for a specific objective. KPIs provide targets for teams to shoot for, milestones to gauge progress, and insights that help people across the organization make better decisions. 

LBO – Leveraged Buyout – Is one company’s acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company

LOI – Letter of Intent – Is a written, non-binding document which outlines an agreement in principle for the buyer to purchase the seller’s business, stating the proposed price and terms.

M&A – Mergers & Acquisitions – This is a general financial term that describes the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions. At Final Ascent, our M&A advisors work with our middle-market business owners, taking them through the selling process and helping them achieve their American Dreams.

NDA – Non-Disclosure Agreement – Is an agreement in contract law that certain information will remain confidential. It prevents buyers from disclosing private information about your company.

P&L – Profit & Loss – Is a record of revenue and expenses incurred by a business in a given period of time. A profit and loss statement is also called a P&L, an income statement, a statement of profit and loss, an income and expense statement, or a statement of financial results. The goal for any business owner is to have more revenue than expenses, referred to as Net Income, versus the opposite situation where you’re operating at a Net Loss.

What is Fiduciary Banking? with Ronna Lubash

he term “fiduciary banking” may not be a household phrase, however, it plays a pivotal role in ensuring that the financial affairs of individuals, trusts, and estates are handled with precision, security, and legality. In a recent interview, we had the privilege of discussing this fascinating topic with Ronna Lubash, an industry expert with over 35 years of banking experience. In this article, we’ll delve into the insights and wisdom shared by Ronna during the interview, shedding light on the significance of fiduciary banking in the world of estate management.

Working Capital Calculation – Is calculated by taking a company’s current assets and deducting current liabilities. For instance, if a company has current assets of $100,000 and current liabilities of $80,000, then its NWC would be $20,000. Common examples of current assets include cash, accounts receivable, and inventory. Examples of current liabilities include accounts payable, short-term debt payments, or the current portion of deferred revenue. 

Working Capital – This is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. In its simplest form, working capital is calculated as current assets minus current liabilities.

Top Line – Refers to the revenue of a company.

Term Sheet – This is a nonbinding agreement that shows the basic terms and conditions of an investment. The term sheet serves as a template and basis for more detailed, legally binding documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is drawn up.

Subscription Revenue – This can be defined most simply as a model which generates income from customers through recurring fees that are paid at regular intervals. These can be weekly, monthly, or annual payments. 

Stock Sale – A company’s shareholder sells their existing stock to a new owner. In this transaction, the buyer obtains all company equity including all assets and liabilities. This means the buyer is at risk from future litigation from liabilities that are not paid and cleared.

Strategic – Shorthand for a strategic buyer. A strategic buyer is a company that acquires another company in the same industry to capture synergies. Because a strategic buyer expects to get more value out of an acquisition than its intrinsic value, it will usually be willing to pay a premium price to close the deal.

Seller Note – This is a form of financing used in small company sale transactions whereby a seller agrees to receive a portion of the acquisition proceeds in a series of debt payments. 

Multiple – A multiple is a number attached to a company’s EBITDA that gives the buyer and seller a valuation range for how much the company is worth.

Roll-up – A company buys multiple businesses in the same industry, consolidates them, and then sells them later for a higher multiple or takes them public.

Recurring Revenue – Is the portion of a company’s revenue that is expected to continue in the future. Unlike one-off sales, these revenues are predictable, stable, and can be counted on to occur at regular intervals going forward with a relatively high degree of certainty. Examples of recurring revenue streams are cellphone contracts, magazine or newspaper subscriptions, clothing boxes delivered to your door, Netflix contracts, Amazon Prime memberships, and more.  Businesses that have sales with more than 50% recurring revenue are highly sought after by buyers, and businesses with greater than 90% of their sales are recurring revenue enjoy higher multiples than their counterparts.

Ready to Sell – A business that is strong in all the areas a buyer is looking for and is ready to go to market. This also applies to the business owner, as they must be just as ready as the business is. 

Liquidity – Refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Cash is the most liquid of assets, while tangible items are less liquid, like buildings or land. 

Key employee – Is an employee with major ownership and/or a decision-making role in the business. They may also lead key functions of the business, like sales, finance and accounting, research and development, and more. Key employees are usually highly compensated either monetarily or with benefits, or both. Key employees may also receive special benefits as an incentive both to join the company and to stay with the company. 

Inventory Turnover – Is a measure of the number of times inventory is sold or used in a time period such as a year. It is calculated to see if a business has an excessive inventory in comparison to its sales level. 

Gross Margin – Represents each dollar of revenue that the company retains after subtracting the direct labor and materials used to produce the revenue (referred to as Cost of Goods Sold or COGS). 

RevPAR

Replacement reserves are funds set aside to cover the future repair or replacement of major property components that wear out faster than the building itself.

A pro forma in commercial real estate is a financial document that projects a property's cash flow, detailing expected income and expenses over a defined period, crucial for investment analysis and decision-making.

Cap rate analysis evaluates a property’s potential return by comparing its net operating income to its market value, providing a snapshot of investment risk and yield.

Sensitivity Analysis in Real Estate

An AOC lien, or "Abundance of Caution" lien, is a type of lien taken by a lender to secure a loan when the collateral provided by the borrower is deemed insufficient.

An ADR (American Depositary Receipt) is a U.S.-traded certificate representing shares of a foreign company, allowing American investors to buy and sell foreign stocks in U.S. markets without dealing with foreign exchanges or currencies.

ROA (Return on Assets) is a profitability ratio that measures how efficiently a company uses its total assets to generate profi

None-Core

A non-core asset is any asset that is not esential to a company’s primary revenue-generating activities and is peripheral to its mian business operatins