Financial Modelling Glossary

Causal's glossary of the most important financial modelling terms.

A

Accounting Close

The accounting close is a time period where all the financial transactions that occurred in the business during a given time period are recorded, summarized and reported. The accounting close is a vital process in the accounting cycle, and it is usually performed at the end of each accounting period (month, quarter or year).

Accounts Payable

An account payable is an obligation a business has to pay a third party for goods and/or services it purchased on credit. Accounts payable are recorded as liabilities on a company's balance sheet.

Accounts Receivable

Accounts receivable is an asset that represents a company's future revenue stream. Accounts receivable are the money customers owe the company for goods or services that have already been provided.The net accounts receivable is the value of accounts receivable minus any allowances for doubtful accounts.

Accounts Receivable Turnover

Accounts receivable turnover is a measure of the average number of times a company's accounts receivables are collected during a given period

Accrual Basis Accounting

Accrual basis accounting is an accounting method in which transactions are recorded as soon as they are incurred, regardless of when the cash is actually received or paid out. Transactions are recorded regardless of whether the transaction has produced any cash flow.

B

Balance Sheet

A balance sheet is a financial statement that reports a company's assets, liabilities, and owner's equity at a specific point in time – usually at the end of an accounting period.

Before-Tax Profit Margin

The before-tax profit margin measures a company's profit from a perspective that ignores taxes, depreciation, amortization, and other non-cash charges. Before-tax profit margin is calculated by dividing the company's operating income by its revenue for the year.

Benchmarking

Benchmarking is the process of comparing a company to its competitors, or to its own past performance, in order to determine how it measures up and how effective it is. Benchmarking is used to evaluate the performance of a company and its strategies, to identify areas of improvement and to ensure that the organization is on the right track.

Break-Even Analysis

A break-even analysis is a method of financial management that helps businesses in determining the level of sales volume at which total revenue will be equal to total costs.SEO meta description: A break-even point is the point at which revenue equals expenses.SEO meta description: A break-even analysis is a method of financial management that helps businesses in determining the level of sales volume at which total revenue will be equal to total costs.

Business Intelligence

Business Intelligence or BI is a set of tools and techniques for gathering, analyzing and communicating information to enable informed decision making. BI is used by companies to make better decisions.

C

Capital Budget

Capital budgeting is a financial term that refers to the process of estimating the financial impact of a proposed project. The goal of capital budgeting is to assess the expected financial returns and risks of a proposed project, with the purpose of deciding whether to proceed with the project or not.

Capital Expenditures

Capital expenditures are expenditures that are necessary for the long-term growth or expansion of a business. Capital expenditures are considered assets and are typically depreciated.

Capital Rationing

Capital rationing refers to the restriction of capital expenditure on projects that can bring greater returns to the limited resources of a corporation that can be used for other profitable ventures. Capital rationing can be used to decide which projects a company should undertake, and is linked to the concept of NPV.

Capitalization Ratio

The capitalization ratio is a financial ratio used to determine a company's level of financial leverage. It is the ratio of debt to equity.SEO meta description: The term operating leverage refers to the ability of companies to increase their earnings or revenues with a relatively small increase in costs. It is achieved by reinvesting some of the firm's earnings, thus increasing its assets without increasing its liabilities

Cash Budget

A cash budget is a forecast of cash flow over a given period of time. It helps a business determine how much money it will have on hand at a given time. The cash budget is a very important tool for businesses because it allows them to know when and how much money they will have available to meet upcoming expenses.

D

Debt Equity Ratio

The debt equity ratio is a financial ratio that measures the proportion of a company's assets that are financed by creditors or debt.

Debt Ratio

The debt ratio is a ratio used by financial managers to determine how much of a company's debt it can take on. A high debt ratio can have a negative impact on a company's ability to survive.

Discounted Cash Flow

Discounted cash flow (DCF) is a method used in finance for determining the present value of a stream of future cash flows. DCF is used for estimating the value of acquiring a company, project, or asset; it is also used for making business decisions, such as determining the required rate of return on an investment opportunity.

Driver-Based Planning

Driver-based planning is a method of planning that involves the identification of a wide range of relevant internal and external factors that may have an impact on the future success of a business.

Days Payable Outstanding

Days payable outstanding (DPO) is a measure of how long a business waits to get paid for the goods and services it sells. DPO is the number of days between the invoice date and the day the customer pays the invoice.

E

Earnings Before Interest And Taxes

Earnings before interest and taxes (EBIT) is a metric used to assess a company's operating performance. The EBIT represents earnings before interest and taxes, and it is one of the most important financial metrics for investors.

Earnings Before Interest, Taxes, Depreciation, And Amortization

Earnings before interest, taxes, depreciation, and amortization, or EBITDA, is a measure of a company's operating profitability, calculated by subtracting a company's total operating expenses from its total revenue. Investing Thesis: EBITDA is a good way to evaluate a company's financial performance, but it's not a good way to value a business

Economic Attributes Framework

The economic attributes framework is a way to identify and classify the economic attributes of any given product or service

Effective Corporate Tax Rate

The effective corporate tax rate is a company's effective tax rate, which is the percentage of the company's income that is paid in taxes. The effective corporate tax rate is calculated by subtracting the percentage of tax credits and tax deductions from the company's total tax bill.

Enterprise Resource Planning

Enterprise Resource Planning (ERP) is a category of software that combines software applications within a business to serve its purposes. ERP systems integrate processes and information from a company's supply chain, sales and marketing, finance, human resources, and customer relationship management.

F

Financial Close

Financial close is the process of reviewing, completing, and approving a business's financial statements to ensure they are accurate and reflect the company's financial condition.

Financial Plan

A financial plan is a detailed statement of the projected financial position, income and cash flows of an individual, business or project. It usually includes a balance sheet and a cash flow statement

Financial Reporting

Financial reporting is the process of collecting and reporting financial information about a company. This involves collecting information about the company's revenues, expenses, assets, liabilities, and equity, then organizing this data into a report that answers the questions: How much money did the business make? And what is its financial position?

Fiscal Year

A fiscal year (or financial year) is the 12-month period used by an organization to keep track of its business activities and submit financial reports to the government.

Fixed Asset

A fixed asset is a plant, property, or equipment that a company owns and uses for the production of its products or provision of its services. Fixed assets are usually only deducted fully in the year that they are no longer used for the company's operations.

G

General Ledger

A general ledger is a record of the financial transactions of a business. It is one of the four basic accounting records. The other three are the cash register, sales journal and the trial balance. A general ledger is the financial summary of the company.

Governance

In finance, corporate governance refers to the laws, regulations, and practices that determine how a corporation manages its business, including the duties and responsibilities of the board of directors, management, and stockholders

Gross Profit

Gross profit is the profit a business makes after subtracting all the costs that are related to manufacturing and selling its products or services. You can calculate gross profit by deducting the cost of goods sold (COGS) from your total sales.

Gross Profit Margin

Gross profit margin or gross margin is a ratio that shows how much gross profit a company makes in relation to its total sales. The gross profit margin formula is calculated by dividing the gross profit by the total sales.

Gross Sales

Gross sales refers to the total amount of money that a company receives for the sale of its goods and services, before deducting any costs or fees.

H

Human Capital Management

Human capital management (HCM) is a term used to describe a company's people-oriented activities and strategies that are designed to maximize the potential of its employees.

Hedging

Hedging is a financial technique that involves taking a position in one tradable asset in order to offset the risk of adverse price movements in another. The word hedge means to protect or shield against risk

I

Intangible Assets

An intangible asset is a nonphysical asset that has a value. Intangible assets are a big part of many companies' balance sheets. They include items like goodwill, patents, trademarks and customer lists.

Interest Coverage Ratio

The interest coverage ratio is a ratio that compares a company's operating profit with its interest expenses. The higher the ratio, the better, since it means the company's earnings are enough to cover interest expenses.

Internal Rate Of Return

The internal rate of return (IRR) is the discount rate that makes the net present value of all cash flows from a project equal to zero. In other words, it is the interest rate that sets the present value of the initial investment equal to the present value of the cash flows from the investment.

Inventory Turnover

Inventory turnover is a financial ratio that shows how many times a company sells its inventory in a given period of time. You can calculate inventory turnover by dividing the cost of goods sold by the average inventory.

Income Statement

Income statement is a financial statement that details the revenues and expenses of a business over a period of time. The income statement is one of the three key financial statements of an organization

J

Jensen's Alpha

Jensen's alpha is a measure of the performance of a portfolio manager that can be used to determine whether a specific fund or portfolio manager has added value to a fund

L

Lagging Indicator

A lagging indicator is a variable that is measured after the event has already occurred. Lagging indicators are used to identify cyclical trends and spot reversal points, but they do not predict future values.

Leading Indicator

A leading indicator is a statistical measure that helps you identify economic growth trends, spot business cycles and forecast future economic conditions.

Long-Term Liabilities

Long-term liabilities are debt or financial obligations that last beyond 12 months. These debts are usually associated with long-term assets, such as property and equipment

Long-Term Assets

A company's long-term assets are assets that will still be owned by the company a year or more in the future. Examples include land, buildings, and machinery

Leasehold Improvements (LHI)

Leasehold improvements (LHI) are capital expenditures made to a property that is leased. They are amortized over a period of time as per the terms of the lease agreement.

M

Modeling

Financial modeling is the process of using various financial formulas, data and assumptions to create a model that represents the financial aspects of a firm's operations, projects, investments and other financial decisions.

Modified Cash Basis Accounting

Modified cash basis accounting is a type of accounting methodology, which allows a business to treat revenue and expenses differently from the way they are reported for tax purposes.

Market Capitalization

Market capitalization (market cap) is the total dollar market value of a company's outstanding shares. Market cap is calculated by multiplying a company's total shares outstanding by the current market price of one share.

Margin

The margin is the difference between the selling price of a product or service and its cost. The margin can be calculated either as a percentage of the selling price or as a set amount per unit.

Marginal Analysis

Marginal analysis helps businesses determine the effect of small changes in one factor on the resulting change in another factor. There are three types of marginal analysis: marginal cost analysis, marginal revenue analysis, and marginal income analysis.

N

Net Income

Net Income is the difference between total revenue and total expenses. It is calculated by subtracting total expenses from total revenue. Subtracting expenses from revenue results in net income or profit.

Net Income Before Tax

Net income before tax is the difference between your total revenue and your total expenses before accounting for taxes. It is typically presented as a single line item on your income statement.

Net Present Value

The net present value (NPV) of an investment is the amount that a business would be worth at a future date if it used its cash flows to grow at a constant rate.

Net Margin

Net margin is the difference between a company's revenues and its expenses. It is one of the primary financial performance indicators used by investors, creditors and analysts in the valuation of a firm.

Net Operating Cash Flow

The net operating cash flow (NOCF) is a cash flow statement item in the income statement. It represents the cash that a firm has left after paying all the expenses.

O

Operating Expenditures

Operating expenditures, also called operating costs, are expenses that are required to keep a company in business. These costs are incurred in the normal activities of a company.

Operating Profit Margin

Operating profit margin is a ratio that shows how much profit a company makes after accounting for all operating expenses, such as cost of goods sold and sales, general, and administrative expenses. Operating profit margin is calculated by dividing a company's operating profit by its total sales.

Overhead Costs

Overhead costs are expenses that a business has to pay in order to keep its doors open, regardless of its activities. Overhead costs also include indirect costs associated with the production of goods and services, or to the maintenance of the company's property, plant, and equipment

Operating Budget

An operating budget is a type of budget that tracks the income and expenses of a business over a specific period of time

Operating Cash Flow

Cash flow means the amount of money that comes into or goes out of a business. Operating cash flow is calculated as the amount of cash flow from a company's operating activities. It is cash flow from the normal day to day business operations and not from investing or financing activities.

P

Period

Period refers to the period of time at which a particular financial transaction or event occurs. In accounting, the period of time is usually a month, quarter, or year.

Period Costs

Period costs are expenses that are not directly tied to the production of goods or services. They are expenses that are needed to keep the business running, but which do not generate value for the company

Porter'S Five Forces Model

Porter's Five Forces model is an analysis tool that uses five forces to determine the intensity of competition in an industry and its profitability. The five forces identified are threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes and competitive rivalry

Present Value

Present Value - the value of a future sum of money that is discounted to the present using a given interest rate.

Pro Forma

Pro forma is a Latin phrase that means "for the sake of form or appearance." In finance, pro forma is used to describe a forecast or projection of financial information that does not necessarily reflect actual historical performance.

Q

Qualitative Evaluation

Qualitative evaluation is a form of evaluation in which the assessor uses skills and experience, rather than numerical data, to estimate an aspect of the project or product.

Quick Ratio

The quick ratio is an indicator of the liquidity of a company. It is calculated by dividing a company's book value of cash, cash equivalents, and short-term investments by its current liabilities.

R

Required Rate Of Return

The required rate of return (RRR) is the minimum rate of return an investor or a company expects on an investment or project. A higher RRR means the investor or company have a higher risk tolerance, and they are more likely to accept a higher level of risk.

Research And Development

Research and development, or R&D, refers to the process of designing and developing new products and services. R&D is one of the key factors of a company's innovation.

Retained Earnings

The retained earnings is the net income that is retained by a company and not distributed to shareholders. Retained earnings are presented on the balance sheet of a company, as an asset.

Return On Assets

The return on assets ratio is a financial ratio that measures the profit generated from total assets. It is useful for comparing the productivity of a firm's assets and is expressed as a percentage

Return On Capital Employed

ROACE, also known as return on capital employed, is an important profitability ratio that measures how much profit a company makes on the capital it has invested into its business. The ratio is calculated by dividing the net income by the average amount of capital invested.

S

Scenario Planning

Scenario planning is a method of strategic planning that involves creating possible futures and their implications and developing contingency plans for each possible future. This method is used in many different types of organizations, including government agencies, non-profits and businesses

Scope

The term "scope" is used in the financial modelling process to describe the amount of business activity that a particular model is designed to analyse. The scope of a model is determined by the amount of detail it contains and the types of financial data it uses.

Selling, General, And Administrative Expenses

Selling, General, and Administrative expenses (SG&A) represent the operating expenses of a business that are not directly associated with production. Selling and administrative costs are marketing expenses, finance costs, and other general expenses that are necessary to keep the business running.

Sensitivity Analysis

A sensitivity analysis is a financial analysis used to evaluate the impacts of different assumptions and possible outcomes on a company's earnings. It allows a company to determine which factors are more important and to better understand future outlooks.

Statement Of Shareholders' Equity

The statement of shareholders' equity (or shareholders' equity report) is a financial statement that shows the changes in equity of a business over a given period. This statement presents the balance sheet items in detail and splits them into their sources (i.e., changes in shareholders' equity).

T

Top-Down Budgeting

Top-down budgeting is a budgeting approach in which the manager starts with a high-level budget number, then works to break it down into lower-level categories

Trial Balance

A trial balance is a list of all the accounts in your general ledger that shows their balances and the accounts that they are related to. A trial balance lists all the balances in the general ledger and can be used to verify that the general ledger is in balance.

Tax

Tax is a compulsory contribution, most often paid to a governing body for the purpose of financing public expenditures. Taxes consist of direct taxes or indirect taxes.

Tax Shield

The tax shield is a financial concept to express the tax benefits of an investment. The tax shield is the present value of future tax savings that an investment generates

Taxable Income

Taxable income (or net income ) is the amount of income left over after accounting for all expenses that are related to running a business. Taxable income is the income number that businesses report to the Internal Revenue Service (IRS) on a business income tax return.

U

Unallocated Costs

Unallocated costs are costs that help an enterprise record the cost of operations but do not meet the criteria of a specific cost pool. Unallocated costs are expenses that are not related to any specific activity and are easy to track

Unlevered Free Cash Flow

Unlevered free cash flow is a financial metric used to calculate the cash generated by a business before taking interest and taxes into account. In other words, it's a measure of how much cash is generated by a company's core operations (i.e. its business activities that do not include investments in other companies, debt repayments and so on).

V

Value Driver Tree

The Value Driver Tree is a graphical representation of the drivers that influence the sales revenue of a company. The tree is composed of the drivers of revenue, the level of activity, and the profitability of the business.

Value Drivers

Value drivers are the costs within a particular business that have the biggest impact on its value. Value drivers are one of the most important factors in deciding how much to pay for a business.

Variable Costs

Variable costs are costs that change depending on the level of production. Variable costs are expenses that are directly proportional to the production level of a business.

Variance Reporting

Variance analysis is a powerful tool for managing businesses. In essence, it's the process of identifying and quantifying cost and revenue variances.

Value at Risk

The value-at-risk (VaR) is the maximum possible loss a portfolio could suffer within a certain confidence interval. Calculating VaR involves simulating a large number of possible market scenarios and using a statistical model to estimate the probability of incurring a loss at a certain level.

W

What-If Analysis

What-If Analysis is an important part of financial modelling. What-If Analysis lets you play around with financial variables, so that you can make informed decisions that are in the best interest of your company.

Working Capital

Working capital is an important measure of a company's financial health. It measures the difference between current assets and current liabilities. Working capital is a measure of how much cash is available to the company to fund its growth

WACC

Weighted average cost of capital (WACC) is a financial ratio that determines the blended cost of capital of a company, based on the proportion of debt and equity used to finance the company's assets.

Weighted Average Cost of Capital

The weighted average cost of capital (WACC) is the cost of a company's capital structure, made up of equity and debt, which is used to calculate the cost of equity. WACC is an important measure of profitability and is often used in capital budgeting decisions

Z

Zero-Based Budgeting

Zero-based budgeting is a method for planning and controlling a company's expenses. It begins by breaking a company's projects into tasks and then determining the required amount of resources for each task

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