Financial Terms Glossary

by John Kind

Financial Terms Glossary: S – Z

S

SALES

The invoiced value of the goods and services provided to customers or the work done for customers during a financial period. It is also called revenue or turnover. It excludes VAT.

 

SCRIP ISSUE

A free or bonus issue of new shares to existing shareholders in proportion to their current holding. No new share capital is received and no extra cash is raised. A company converts some or all of its retained profit into shares. Since the number of ordinary shares will increase, the share price will fall pro rata.

 

SENSITIVITY ANALYSIS

A technique used in the economic and financial assessment of a project. It considers the effects on the net present value, the internal rate of return, the payback period and the profitability index of changes in the assumptions supporting the estimated future cash flows. Sensitivity analysis asks the ‘what if’ question.

 

SHARE BUY-BACKS

The purchase of shares by a company from its own shareholders. It has the effect of reducing equity and increasing earnings per share and can boost the share price.

 

SHARE CAPITAL

The permanent capital contributed directly by the owners or shareholders of a business at the start of trading and, subsequently, when additional capital is required to finance expansion.

Issued share capital is the amount of capital contributed by shareholders and received by the company. Authorised share capital is the total amount of share capital which the directors are empowered to issue.

 

SHARE PREMIUM

The difference between the issue price and the nominal value of a share. When a premium is paid for new shares, a share premium reserve is created or increased.

 

SHAREHOLDER RETURN

The wealth produced for a shareholder during a financial period. It is calculated by adding the appreciation (or fall) in the share price to the dividend per share received during the period and expressing the result as a percentage of the opening share price.

Example

Share price = 100p at the start of a 12 month period.

Share price = 110p at the end of the period.

Dividend per share received during the period = 5p.

The total gain = 110p less 100p plus 5p = 15p.

15p expressed as a percentage of the opening share price (100p) is 15 per cent. 15 per cent is the annual rate of shareholder return.

 

When shareholder return is calculated over a period of several years, it is assumed that dividends are reinvested to purchase additional shares.

 

SOLVENCY

The ability of a business to meet its commitments or liabilities as they fall due. See the debt-equity ratio and interest cover.

 

STANDARD COSTING

A system of costing; predetermined costs are compared with actual costs to highlight differences or variances which are then investigated.

 

STOCKS

Raw materials, work in progress, finished goods and supplies. They are normally valued at cost or net realisable value, whichever is lower. The American term is inventory.

 

STOCK TURNOVER RATE or INVENTORY TURNOVER RATE

The average number of times each year that stocks are ‘turned over’ in the course of trading activity. It is calculated by dividing the cost of sales by average or closing stocks. When computing the ratio from financial statements, the cost of sales may not be known; in such cases, the sales figure is normally substituted.

There is no general benchmark for the stock turnover rate because it varies from industry to industry. A retailer or supermarket, for example, will have a higher stock turnover rate than an engineering contractor.

 

SUBSIDIARY COMPANY

A company whose share capital is at least 50 per cent owned by another company.

 

SUNK COST

A cost that has been incurred already. Examples include market research and product development costs. Sunk costs should be excluded from future cash flow estimates since they are ‘spilt milk’; they are past expenditures regardless of future project decisions.

 

T

TRADE CREDITORS or PAYABLES

Amounts due to suppliers for goods and services received but not yet paid for. They are normally due for payment within 12 months of the balance sheet date and are part of current liabilities.

A capital creditor refers to unpaid amounts for capital expenditure rather than operating costs, for example, unpaid bills for new plant and machinery.

The American term for trade creditors is accounts payable.

 

TRADE DEBTORS

The amount due from customers in respect of goods and services supplied or work completed but not yet paid for. Trade debtors are usually reported under current assets but a note may disclose that some trade debtors are not expected to pay within the coming year.

The American term for trade debtors is accounts receivable or receivables.

 

TRADING OR OPERATING PROFIT

Profit before interest and taxation (PBIT). It is also referred to as EBIT (earnings before interest and taxation) and operating income.

Operating profit is revenue less the cost of sales and less operating costs.

 

TURNOVER

See sales.

 

V

VARIABLE COST

A cost which varies according to the level of activity or the volume of production, for example, raw material and packaging costs.

Semi-variable costs are partly fixed and partly variable. For example, utility charges such as electricity and gas include a fixed charge plus a variable charge according to usage.

 

VARIANCE

The difference between a budgeted or standard figure and the actual result. There are a number of different kinds of variances including material price and usage variances; labour rate and efficiency variances; variable overhead rate and efficiency variances; and fixed overhead spending, volume and efficiency variances. A management accounting textbook will explain how these variances are calculated.

 

W

WORKING CAPITAL or NET CURRENT ASSETS

Current assets such as accounts receivable or trade debtors, cash and stocks less current liabilities such as trade creditors, bank overdrafts and accrued charges.

Operating or trading working capital is current assets excluding cash balances less current liabilities excluding short-term borrowings. Operating working capital is the working capital that line managers can control during their day-to-day activities. Consistent with paying suppliers promptly, working capital should be kept as low as practicable.

Working capital is the net investment an organisation makes in short-term assets. It represents the value of the resources required to operate on a day-to-day basis. Working capital is likely to fluctuate depending, for example, on seasonal requirements.

 

Z

ZERO BASED BUDGET

A budget compiled without reference to the previous year’s budget. It challenges the status quo and assumes that an organisation, department or function is starting from scratch.