ACCOUNTS PAYABLE

A liability to a creditor, generally an open account. Usually limited to unpaid purchases of goods and services.

ACCOUNTS RECEIVABLE

A claim against a debtor, generally an open account. Usually limited to uncollected sales of goods and services and distinguished from deposits, accruals, and other items not arising out of everyday transactions.

ACCRUAL BASIS OF ACCOUNTING

Under the accrual basis of accounting, revenue (sales) is reported in the income statement for the period when it is earned (regardless of when it is collected), and expenses reported in the period when they occur (regardless of when the cash disbursement is made).

ACCRUED EXPENSES

Expenses which have been incurred but have not been paid.

ADMINISTRATIVE EXPENSES

Officers' salaries, wages, and benefits, professional fees, vehicles and all other general and administrative expenses.

ASSET

Any owned physical object (tangible) or right (intangible) having a money value; expressed in terms of its cost, depreciated cost, or less frequently some other value.

BALANCE SHEET

The portion of the financial statement which shows the financial condition of a business at a particular point in time; shows Assets, Liabilities and Owner's Equity, and always balances according to the formula: Assets = Liabilities + Equity (Net Worth).

BEGINNING INVENTORY

Can be at cost or retail; same as ending inventory of previous period.

CASH FLOW

The physical flow of funds into and out of a business.

CASH FLOW BUDGET

A projection of cash receipts and cash expenses for a period of time into the future, usually done on a monthly basis.

COST OF GOODS SOLD

The sum of the opening inventory, plus purchases at cost, minus the closing inventory at cost. Can include cash discounts deducted, or workroom costs, or freight in. Other terms used: Gross Cost of Merchandise Sold, Total Merchandise Costs, or Cost of Sales.

CURRENT ASSETS

Assets which are expected to convert to cash within one operating cycle, which is usually one year. Includes cash, accounts receivable, and inventory.

CURRENT LIABILITIES

Liabilities which are due to be paid within one operating cycle (usually one year). Includes Accounts Payable (Trade), Notes Payable, Accrued Expenses and current portion of Long-Term Debt.

CURRENT PORTION OF LONG-TERM DEBT

The portion of long-term obligations which are due within one year of the date of the Balance Sheet.

CURRENT RATIO (Current Assets divided by Current Liabilities)

Financial ratio which tests solvency or ability to meet current debt obligations. An increase in your current ratio is favorable.

DATING

Special merchandise payment terms which extend the standard due date.

DEBT-TO-WORTH RATIO  (Total Liabilities divided by Total Equity)

Financial ratio which compares the amount loaned by creditors to the amount invested by the owners of a business; a measure of safety. A decrease in your debt-to-worth ratio is generally favorable.

DEPRECIATION

The decline in useful value of a fixed asset due to wear, tear and obsolescence. A non-cash operating expense.

DESIRED ENDING INVENTORY

The approximate amount of retail inventory that the turnover rate suggests be on hand at month-end to cover the next complete cycle of sales. For example, if your planned turnover rate is 4.0, at any given month-end you would want enough inventory (at retail) on hand to cover the next three months (of sales). (12 months / 4.0 = 3 months "supply".)

EQUITY

Balance sheet category listing the owners' share of the company; also referred to as "Net Worth". Equity (or Net Worth) equals Total Assets minus Total Liabilities.

EXCESS ENDING INVENTORY

The probable or actual Ending Inventory minus the Desired (Targeted) Ending Inventory.

FINANCIAL STATEMENT

The Balance Sheet and the Profit and Loss Statement are generally spoken of as the financial statement. These reports reflect both the current financial status at the end of the accounting period and the change in financial status during the accounting period.

FIXED ASSETS

Assets which are not bought to be sold or easily converted to cash within one operating cycle (usually one year). Includes furniture, fixtures, equipment, leasehold improvements, vehicles, etc.

GROSS MARGIN (or GROSS PROFIT)

Amount of money remaining after "Cost of Goods Sold" is subtracted from sales; can be calculated as a percentage or in dollars. An increase in your gross margin is favorable.

GROSS MARGIN PERCENT  

(Gross Margin Dollars divided by Sales)

A financial ratio which indicates the percent of sales dollars remaining after costs related to purchased merchandise are recognized; an increase in your Gross Margin Percent is generally favorable.

GMROI - Gross Margin Return on Inventory Investment 

(Gross Margin Percent times Annual Sales divided by Average Inventory at Cost)

Measures productivity; how much is returned in Gross Margin Dollars for each average dollar invested in inventory; particularly useful in comparing one merchandise department against another. Can also be computed by dividing Gross Margin (annual) Dollars by Average Inventory at Cost.

GROSS PROFIT (see GROSS MARGIN)

INCOME STATEMENT

The portion of the financial statement which shows the performance of a business over a period of time; shows Sales, Cost of Goods Sold, Gross Margin, Operating Expenses, and Profit or Loss. Also called Profit and Loss Statement (P&L).

INITIAL MARKUP

The sum added to the cost of new merchandise to arrive at the first retail price. (Note: the "Initial Markup Percent" may be used for "Gross Margin Percent" when markdowns and shrinkage are not included.)

INVENTORY TURNOVER

(Sales divided by Average Inventory @Retail), or

(Cost of Goods Sold divided by Average Inventory @Cost)

Financial ratio which measures velocity or how often (theoretically) entire inventory is sold and replaced within a given period of time. Inventory Turnover in Days equals Number of Days in Period divided by Inventory Turnover.

LIABILITIES

Balance sheet category listing of debts, everything which is owed by the business.

LONG-TERM DEBT

See Long-Term Liabilities.

LONG-TERM LIABILITIES

(Also Long-Term Debt) Liabilities which are due to be paid more than one year from the date of the Balance Sheet.

MARKDOWN

A reduction in the original or previous retail price of a piece of merchandise. For comparative purposes, markdowns are stated as percentage of net sales.

MARKUP

Difference between landed cost of a product and its selling (retail) price. Also referred to as Markon.

NET OPERATING INCOME

Net sales less net cost of goods sold less operating expenses. (Not the same as Net Profit)

NET PROFIT

Bookkeeping figure derived by subtracting all Operating Expenses and all other expenses such as taxes, depreciation and draws from Gross Profit. Found on Income Statement.

NET WORTH (or EQUITY)

The difference between the total value of the assets minus the liabilities.

NON-MERCHANDISE REVENUE (EXPENSES)

Revenue and/or expenses associated with related activities such as sub-tenant rental, repair shops, etc.

NOTES PAYABLE

Balance sheet category showing short-term or long-term debts which are contracted for in writing. Does not include Accounts Payable - Trade.

OCCUPANCY EXPENSES

Includes expenses for premises (i.e., maintenance, repair, rent and utilities). Found on Income Statement.

OPEN-TO-BUY

An inventory purchasing plan based on anticipated sales and desired inventory turnover rate for various categories of merchandise, departments or entire operations.

OPERATING EXPENSES

Non-merchandise expenses incurred by a business; may be generally categorized as Selling Expenses, Occupancy Expenses, Administrative Expenses, and Depreciation.

PROFIT

A term for the excess of revenue, proceeds, or selling price over all related costs.

PROFIT BEFORE TAXES PERCENT 

(Profit Before Taxes divided by Sales)

Financial ratio which indicates the percent of original sales dollars remaining after all expenses are recognized.

PROFIT and LOSS STATEMENT

A portion of the financial statement that indicates the operating results for a period of time. The format is to deduct from sales (revenues) the cost of sales; the resulting gross margin covers expenses and profit for the business. See Income Statement.

PRO FORMA

A forecast or projection.

QUICK RATIO (Cash plus Accounts Receivable divided by Current Liabilities)

Financial ratio which measures ability to have cash available to quickly meet current obligations. An increase in your Quick Ratio is generally favorable.

RATIO ANALYSIS

The study of relationships between different parts of a company's financial data. Used to pinpoint a company's financial strengths and weaknesses.

ROA, or RETURN ON TOTAL ASSETS 

(Net Profit Before Taxes divided by Total Assets)

Measures profit as a percentage of total assets. An increase is generally favorable.

SELLING EXPENSES

Type of Operating Expense which includes Sales Salaries, Commissions, related Payroll Taxes and Employee Benefits, Advertising and all other expenses specifically related to the selling of merchandise. Selling Expenses may be sub-divided into Store Payroll Expenses and all other selling expenses.

SHRINKAGE

Difference between the amount of inventory the accounting records report and the actual physical inventory when counted. Can result from bookkeeping or paperwork errors, and/or pilferage (internal or external).

WORKING CAPITAL

(Current Assets minus Current Liabilities)

The amount of money which may be available in order to meet current debt obligations when they become due.

WORKING CAPITAL CHANGE

The difference between the starting Working Capital and the Working Capital at the end of the period (usually one year). An increase is favorable.

WORKING CAPITAL WHEEL

Diagram used to illustrate the relationship between sales and the flow of cash, inventory and accounts receivable through a business.