An Accounting Glossary for the Non-Financial Manager
Most managers can get by with a basic understanding of financial acumen. That’s why we have business finance experts, and it’s a good thing we do.
Here’s a basic glossary of finance and accounting terms for the non-financial manager:
- Accruals. An amount incurred as an expense in a given accounting period, but not paid by the end of that period.
- Allocation. The process of spreading costs from one expense category to several others, typically based on usage.
- Amortized expenses. The costs for assets such as buildings and computers, which are expensed over time to reflect their usable life.
- Assets. Anything owned by the company having a monetary value; i.e., fixed assets like buildings, plants and machinery, and vehicles.
- Balance Sheet. A snapshot in time of who owns what in the company, and what assets and debts represent the value of the company. The balance sheet equation is: capital + liabilities = assets.
- Break-even point. The point when a business' revenue equals a business' expenses.
- Budget forecast. The amount of money planned to spend over the course of a period, usually a year.
- Budget variance. The difference between a budget forecast and actual expenditures.
- Cost/benefit analysis. A form of analysis that evaluates whether, over a given time frame, the benefits of the new investment, or the new business opportunity, outweigh the associated costs.
- Direct vs. indirect costs. Costs that are directly associated to the manufacture of a product. Indirect costs cannot be directly tied to a particular product.
- Earnings per share (EPS). A commonly watched indicator of a company’s financial performance – it equals net income divided by the number of shares outstanding.
- Fixed assets. Assets that are difficult to convert to cash. For example, buildings, and equipment. Sometimes called plant assets.
- Gross margin. A ratio that measures the percentage of gross profit relative to sales revenue.
- Gross profit. The sum left over after all direct product expenses or costs of goods sold have been subtracted from revenues.
- Hurdle rate. The rate of return on investment dollars required for a project to be worthwhile. It is typically a higher rate of return than what would have been obtained by investing the capital in low or moderate risk financial instruments.
- Intangible assets. Non-physical assets with no fixed value, such as goodwill and intellectual property rights.
- Inventory. Goods or materials a business is holding for sale. See inventory management.
- Liabilities. General term for what the business owes. Liabilities are long-term loans of the type used to finance the business and short-term debts or money owing as a result of trading activities to date.
- Net present value (NPV). The economic value of an investment, calculated by subtracting the cost of the investment from the present value of the investment’s future earnings. Due to the time value of money, the investment’s future earnings must be discounted in order to be expressed accurately in today’s dollars.
- Operating expenses. Expenses that occur in operating a business, for example: administrative employee salaries, rents, sales and marketing costs, as well as other costs of business not directly attributed to manufacturing a product.
- Overhead. An expense that cannot be attributed to any one single part of the company's activities
- Payback period. The length of time needed to recoup the cost of a capital investment; the time that transpires before an investment pays for itself.
- Productivity measures. Indicators such as retail sales-per-employee or units-produced-per-employee, which provide a measure of workforce efficiency and effectiveness.
- Return on investment (ROI). A financial ratio measuring the cash return from an investment relative to its cost.
- Sunk costs. Prior investment that cannot be affected by current decisions. These should not be factored into the calculation of the profitability of a project.
- Time value of money. The principle that a dollar received today is worth more than a dollar received at a given point in the future. Even without the effects of inflation, the dollar received today would be worth more because it could be invested immediately, earning additional revenue.
- Variable costs. Costs that are incurred in relation to sales volume; examples include the cost of materials and sales commissions.