Key Financial Metrics and Accounting Terms Explained

Financial Performance Measures

Economic Profit is not recorded on a company’s financial statements nor is it required to be disclosed to regulators, investors, or financial institutions. Meanwhile, Accounting Profit is a widely used performance measurement to indicate the overall financial success of an organization. Accounting profit measures the actual cash outlays and inflows, while economic profits incorporate a “what if” analysis.

Key Financial Ratios and Concepts

• The Debt Ratio: It is defined as the ratio of total – long-term and short-term – debt to total assets, expressed as a decimal or percentage.
• Solvency: The ability of a company to meet its long-term financial obligations.
• The Rotation (Asset Management): A company's efficient way to manage its assets (Inventories) to generate sales.
• Liquidity: A measure of the extent to which a person or organization has cash to meet immediate and short-term obligations.
• The Current Ratio: This can reveal whether the company has enough assets to generate the cash needed to pay off debt.

Inventory Definitions

Inventory: Inventory includes a small business's finished products, as well as the raw materials used to make the products.

Stock: Stock is the finished product that is sold by the business.

Cost and Profit Calculations

• Depreciation: Defined as the reduction of the recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero.
• Tax: A mandatory financial charge by a governmental organization.
• The Gross Margin: The difference between revenue and cost of goods sold.
• The Net Profit Margin: Takes into account all business expenses.
• The Financing Cost: Includes charges involved in the borrowing of money to build or purchase assets.

Fundamental Accounting Elements

Asset: Something bought by a company to increase its value and income.

Liability: An obligation of the entity to transfer cash or other resources to other parties.

Equity: It is the set of goods and rights belonging to a person, natural or legal.

Disciplines

Accounting: Treatment of Funds.

Finance: Decision making.

Financial Management: Is key to ensure the liquidity and access to financial resources in the coming years.