Finance Glossary

Das Finanz-Glossar ist auch in Deutscher Sprache verfügbar.

Accounts Receivable

When a business sells goods or services to a customer, it makes a legal claim for payment in the form of an invoice, normally with an agreed payment term. This may be cash on delivery, prepayment, or some period of days or weeks. This allows the customer to check that the goods and services have been received according to any contract. It also allows the customer to process the necessary paperwork to expedite payment against the invoice. Typical credit terms are 30, 60 or 90 days from invoice.While the invoices are unpaid, they are termed Accounts Receivable – or “receivables” (UK : debtors). The total amount in cash unpaid is also referred to as Accounts Receivable (A/R). Once the customer pays the invoice, then the A/R total will reduce, as cash is paid by the customer into the company bank account. High A/R balances indicate lack of financial control on the part of a business. Management should try to reduce A/R levels to a low number to increase cash available in its own bank accounts. In many businesses this may not be possible because of standard trade practices.

In our negotiating style simulations, you can manage Account Receivable balances through our A/R operations screens. If a customer is severely overdue with payments, then you can “report” the customer to a credit agency to enforce payments. This impacts the customer’s credit rating and increases the interest charges he may have to pay.

Annual Report

An official quarterly or annual financial document published by a public company, showing Profit & Loss Statement, Balance Sheet and the Cash Flow Statement.

Balance Sheet

Quantitative summary of the financial condition of a company at a specific point in time, including assets, liabilities and net worth. The first part of a balance sheet shows all the productive assets a company owns, and the second part shows all the financing methods (such as liabilities and shareholders equity). also called statement of condition. The term balance sheet is derived from the simple purpose of detailing where the money came from, and where it is now. The balance sheet equation is fundamentally: (where the money came from) Capital + Liabilities = Assets (where the money is now). Hence the term double entry – for every change on one side of the balance sheet, so there must be a corresponding change on the other side – it must always balance.

Capacity Units

Highest possible output rate (maximum number of units per month, quarter, or year) that can be achieved with a business unit.

Capital Reserve

Capital Reserve is part of shareholders’ equity and includes the amount paid by shareholders for shares in excess of their nominal value.

Cash and Cash Equivalents

Cash and Cash Equivalents are composed of currency and coins on hand, bank balances, negotiable money orders and checks.

Cash Flow

A measure of a companys financial health. Equals cash receipts minus cash payments over a given period of time; or equivalently, net profit plus amounts charged off for depreciation, depletion, and amortization.

The net cash flow of a company over a period is equal to the change in cash balance over this period. The total net cash flow is the sum of cash flows that are classified in three areas:

1. Operating Cash Flow
2. Investing Cash Flow
3. Financing Cash Flow

Cash Flow Statement

One of the three essential reporting and measurement systems for any company. The Cash Flow statement provides a third perspective alongside the Profit and Loss account and Balance Sheet. The Cash Flow statement shows the movement and availability of cash through and to the business over a given period, certainly for a trading year, and often also monthly and cumulatively. The availability of cash in a company that is necessary to meet payments to suppliers, staff and other creditors is essential for any business to survive, and so the reliable forecasting and reporting of cash movement and availability is crucial.

Client Deposits

Customer deposits in retail banking are an important source of funding for banks, enabling them to make loans to retail and business customers. At a higher level, Certificates of Deposit are a popular investment product with conservative investors. The value of client deposits held by a bank is a widely-used measure to gauge the size of retail banking operations throughout the world.

Contribution Margin

Contribution Margin is the marginal profit per unit revenues.


Contribution Margin = Profit Contribution / Revenues * 100

Corporate Social Responsibility (CSR Policy)

Corporate Social Responsibility is a concept whereby companies integrate social and environmental concerns into their business operations and in their interaction with their stakeholders (employees, customers, shareholders, investors, local communities, government), on a voluntary basis.

CSR is closely linked with the principles of Sustainability, which argues that enterprises should make decisions based not only on financial factors such as profits or dividends, but also based on the immediate and long-term social and environmental consequences of their activities.

How companies benefit from the CSR concept

No matter the size of an organisation or the level of its involvement with CSR, every contribution is important and provides a number of benefits to both the community and business. Contributing to and supporting CSR does not have to be costly or time consuming and more and more businesses active in their local communities are seeing significant benefits from their involvement:

  • Reduced costs
  • Increased business leads
  • Increased reputation
  • Increased staff morale and skills development
  • Improved relationships with the local community, partners and clients
  • Innovation in processes, products and services
  • Managing the risks a company faces

Cost of Goods Sold

The directly attributable costs of products or services sold, (usually materials, labor, and direct production costs). Sales less COGS = gross profit.

Cost to Acquire Customer

The average cost incurred by a telecom operator in getting a new subscriber or customer to sign up for a service.

Credit Rating

A credit rating estimates the credit worthiness of a corporation. It is an evaluation of a borrower’s ability to repay debt. Credit ratings are calculated from financial history and current assets and liabilities. A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates.

Credit Ratings in IndustryMasters:

AAA best
AA good
A good
BBB ok
BB ok
B ok
CCC bad
CC bad
C bad
D worst
F bankrupt

Current Assets

A balance sheet item which equals the sum of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year. A company’s creditors will often be interested in how much that company has in current assets, since these assets can be easily liquidated in the event the company goes bankrupt. In addition, current assets are important to most companies as a source of funds for day-to-day operations.

Current Assets Write Down

Reducing the book value of a current asset because it is overvalued compared to the market value. A write-down typically occurs on a company’s financial statement, when the carrying value of the asset can no longer be justified as fair value and the likelihood of receiving the cost (book value) is questionable at best.

Current Liabilities

Liabilities of the company that are to be settled in cash within the fiscal year, such as Accounts Payable and Short Term Debt.

Days of Inventory

Days of Inventory tells the average amount of time a company will hold inventory before the inventory is sold. A high days of inventory on hand ratio shows the company is not moving inventory fast. This could be a sign of low demand for the product. A low days of inventory on hand could lead to the company running out of inventory. If the company runs out of inventory, its profits will most likely decrease..

Minimum days of inventory is a product attribute that is an indicator of the lowest possible lead time between a unit of that product getting manufactured and it reaching the consumer.


Depreciation is the charge with respect to long-term assets that have been capitalized on the balance sheet for a specific (accounting) period. It is a systematic allocation of cost rather than the recognition of market value decrement.

Discount Window

The discount window is an instrument of monetary policy (usually controlled by central banks) that allows institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions. The interest rate charged on such loans by a central bank is called the discount rate, base rate, or repo rate, and is separate and distinct from the prime rate.


The concession offered on the list price is termed as discount. It is not an out of pocket expense for the seller.

Disposal of Assets

Disposal of assets is a sale which generates profit or loss, which is a difference between sales price and net book value at the disposal time.

Dividends Paid

Dividends are payments made by a corporation to its shareholders. It is the part of the net income that is paid out to shareholders.


EBITDA (Earnings before interest, taxes, depreciation, and amortization) is a metric that is measured exactly as stated. All interest, tax, depreciation and amortization entries in the income statement are reversed out from the bottom-line net income. It purports to measure cash earnings without accrual accounting, cancelling tax-jurisdiction effects, and cancelling the effects of different capital structures.

Formula: EBITDA  = Net Income + Interest Expense + Taxes + Depreciation and Amortization

Economies of scale

Economies of scale, also called increasing returns to scale, refers to the situation in which the cost of producing an additional unit of output (i.e., the marginal cost) of a product decreases as the volume of output (i.e., the scale of production) increases.

It is important to understand the concept of economies of scale because they can be an important factor in determining the optimal and equilibrium size of firms and thus the structure of industries and their prices and output levels.

Often, large firms in industries with high fixed costs can take advantage of savings that smaller firms cannot. Economies of scale characterizes a production process in which an increase in the scale of the firm causes a decrease in the long run average cost of each unit. Economies of scale can be enjoyed by any size firm expanding its scale of operation.

Marginal cost can decrease as the volume of output increases for several reasons. One is that larger production volumes allow fixed costs to be spread over more units of output.

Fixed costs are costs that do not change regardless of the amount of use, or at least change relatively little as a function of use. That is, they are costs that must be incurred even if production were to drop to zero. Examples of fixed costs could include factories, warehouses, machinery, electrical transmission systems and railways.

In IndustryMasters the Economies of scale is implemented by Overhead Costs and the effects of Upsizing a Business unit. A 1x business unit (i.e. Small Cars) incurs the same amount of Overhead cost as a 2x business unit. When upsizing the business unit from 1x to 2x the Overhead cost per unit fall and therefore generate Economies of scale.

Effective Capacity

The effective capacity of a business unit can be less than the nominal capacity if the Long Term Assets (Property, Plant  & Equipment) are worn out due to a lack of capital expenditures (Capex)

Employee Engagement

Employee engagement can be defined as a positive attitude towards the company and its values. An engaged employee is aware of the business context, and works to improve performance within the job for the benefit of the company. In the simulation the engagement ratio is derived from the motivation and qualification ratios.

Engagement Ratio = (Motivation ratio + Qualification Ratio) / 2


The number of employees currently held by the company.

Excess Cash

Cash in excess of what is needed to operate the business.

Financing Cash Flow

Cash received from the issue of debt and equity, or paid out as dividends, share repurchases or debt repayments.

Generic Cost

Generic Cost

Generic Income

Generic Income


Goodwill is the value of an entity above the value of its assets. Goodwill arises when a company is purchased for more than the fair value of the identifiable assets of the company.

Gross Margin

Gross profit divided by sales, expressed as a percentage.

Gross Profit

Pre-tax net sales minus cost of sales, also called gross income.


The number of new employees hired in a given period.

Interest Expense

Amount paid out or owed (accrued) as a result of borrowing funds – normally from another financial institution. The amount payable is calculated based on the annualized interest rate agreed with the institution which has lent the funds to you, the term (length) of the loan and the amount borrowed.

Interest Rate

A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and Federal Reserve policies. For example, if a bank charges a customer M$90 in a year on a credit of M$1000, then the interest rate would be 90/1000 *100% = 9%.


The merchandise, raw materials, and finished and unfinished products of a company which have not yet been sold. These are considered liquid assets, because they can be converted into cash easily. There are various means of valuing these assets, but to be conservative, the lowest value is usually used in financial statements.

Inventory Turnover

Inventory turnover measures how fast a company is selling inventory and is generally compared against industry averages. A low turnover implies weak sales and, therefore, excess inventory. A high ratio implies either strong sales and/or large discounts.

Read more: Inventory Turnover Definition | Investopedia

Inventory Turnover = Revenues / Inventory

Inventory Units

Inventory Units

The number of units by volume that are in stock after accounting for new units produced and sold.

Inventory units = Previous inventory units + Units produced – Units Sold

Investing Cash Flow

Cash received from the sale of long-life assets, or spent on capital expenditure (Capex).

Leverage Effect

The leverage effect is a financial term that generally describes situations in which small changes in a variable result in large variations in the result. The leverage effect is the effect of the borrowing costs on the return on equity. By using debt capital, the return on equity of an investment can be increased. However, this only applies if an investor can borrow on more favorable terms than the return on capital returns.

Example: 100,000 euros of equity are invested in a project that promises 10% interest. The expected return at the end of the project is 10,000 euros.

An additional 100,000 euros of borrowed capital will be raised at a rate of 5%. The investment in the project will thus be doubled to 200,000 euros. In the end, by borrowing, one has achieved the following result:
20,000 euros return expectation – 5,000 euros borrowing costs = 15,000 euros return.

Due to the additional borrowing, total income was increased to 15,000 euros. The return on equity from the project has been increased from 10% to 15%. The leverage effect was used.


A liability or obligation in the form of bonds, loan notes, or mortgages, owed to another person or persons and required to be paid by a specified date (maturity).

Long Term Assets

The value of property, plant, equipment and other capital assets expected to be useable for more than one year, minus depreciation.

Market Share

Market share is the portion or percentage of sales of a particular product or service in a given region that is controlled by a company.


Well motivated teams will help ensure that your workforce is productive and efficient. Low levels of motivation bring the risk of low productivity and dissatisfied customers, and you will need a larger number of employees to accomplish your required level of work – the “workload” factor in the simulation is linked to motivation.

Motivation can be improved by increasing salary levels – when new staff are hired, they will naturally have lower levels of motivation until they are fully integrated into your teams and culture.

Net Adds

Number of new subscribers or customers who sign up for a telecom service in a given period.

Net Income

Net Income is sales minus taxes, interest, depreciation, and other expenses. It is one of the most important measures of a company’s performance because the pursuit of income is the primary reason companies exist. Sometimes Net Income includes one-time and extraordinary items. Also referred to as “Net Earnings.”

Operating Cash Flow

Cash received or expended as a result of the company’s internal business activities. It includes cash earnings plus changes to working capital. Over the medium term this must be net positive if the company is to remain solvent.

Operating Profit

Operating profit is the profit earned from normal business operations, excluding deductions of interest and taxes.

Operating Profit = Revenues – Direct Operating Expenses – Indirect Operating Expenses

Order Fill Rate

Order Fill Rate

In the context of trading businesses that require ordering from a supplier, the order fill rate is defined as the ratio of units delivered to the units ordered, in a given period.

Other Items

Other items on the profit and loss account includes sundry items incidental to and separate from the business activities.

Perfect Competition

A market operates under perfect competition if it satisfies the following conditions:

1. Numerous firms
2. Freedom of entry and exit
3. Homogeneous output
4. Perfect information

In a market economy, competition occurs between large numbers of buyers and sellers who vie for the opportunity to buy or sell goods and services. The competition among buyers means that prices will never fall very low, and the competition among sellers means that prices will never rise very high. This is only true if there are so many buyers and sellers that none of them has a significant impact on the market equilibrium.

Pure monopoly – A firm that satisfies the following conditions:
1. It is the only supplier in the market.
2. There is no close substitute to the output good.
3. There is no threat of competition.

Natural monopoly – A firm with such extreme economies of scale that once it begins creating a certain level of output, it can produce more at a lower cost than any smaller competitor. Generally characterized by a declining average cost curve.

Duopoly – A market dominated by two firms. Both firms are large enough to influence the market price.

Oligopoly – A market dominated by a small number of firms. At least several of these firms are large enough to influence the market price.

A monopoly differs from competitive firms in that it is not a price taker. Because it is the only supplier in the market, it faces a downward sloping demand curve, the market demand curve. As a result, the monopoly is free to choose its price and quantity according to market demand. Monopolies are still profit maximizing firms and are thus going to satisfy the profit maximizing condition that marginal cost equal marginal revenue. The key to understanding monopolies and monopoly power is the marginal revenue calculation. In a perfectly competitive market, there exists a market price. Marginal revenue is simply equal to price in this market; every additional unit that is sold brings the market price. In a monopoly, however, every quantity is associated with a different price.

In IndustryMasters the 3 main conditions (Freedom of entry and exit, Homogeneous output, Perfect information) of perfect competition are given. The number of competing firms depends on the participants investment decisions. All competition patterns, as Monopoly, Duopoly and Oligopoly may occur in IndustryMasters Realtime. In any case the Equilibrium Price is determined by the aggregate Supply and Demand functions for each Industry.

Plan Purchase

The proposed buying quantity in a business plan.

Proceeds from New Shares

Funds generated from the issuance of new shares.

Product Life Cycle

Each industry sector has a specific Product Life Cycle that ranges from 12 to 27 months in length. During the PLC the Revenues and Profits start at a low level and then start rising until they reach the maximum. Thereafter, Revenues and Profits start declining and finally remain on a low profitablity level.

To simplify the management of the PLC, the Maturity is displayed as the product age relative to the life cycle. A maturity of +100% means that the maximum point of the life cycle was reached and revenues/profits begin to decline unless the Business Unit is upsized or relaunched. Products with a short life cycle can quickly exceed 100% market demand as they will need to be upsized frequently.


The amount of products produced or services delivered in a given period.

Profit & Loss Statement

An official quarterly or annual financial document published by a public company, showing earnings, expenses, and net profit. also called income statement or earnings report. The P&L typically shows sales revenues, cost of sales/cost of goods sold, generally a gross profit margin (sometimes called contribution), fixed overheads and or operating expenses, and then a profit before tax figure (PBT). Basically the P&L shows how well the company has performed in its business activities.


Buying of goods and services from suppliers from production or trading purposes.

Purchase Price

The cost of product items for a business, listed by vendors in a sales catalogue.


As you invest in training and development, so the average level of skills in your organization will increase. New employees especially will have a relatively low skills level, and will need extra investment to bring them up to the average for your teams. So as you expand, you will need to increase spending on training to ensure this happens.

With low levels of qualification or skills, your team will be less productive, and you will need more staff to accomplish the same performance levels. High levels of qualification will ensure higher productivity.

Retained Earnings

Retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called retained losses. Retained earnings and losses are cumulative from year to year with losses offsetting earnings.

Return on Assets (ROA)

Return on Assets(ROA) = Net Income / Assets * 100

Return on Investment (ROI)

A measure of a corporations profitability, equal to a fiscal years income divided by Long-Term Assets. ROI measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better.

ROI = Net Income/(Total debt + Shareholders’ Equity)

Revenues per Employee

Ratio that compares a company’s revenues to the number of employees active. Higher revenues per employee imply a higher level of productivity.


The volume of products or services sold in a given period.

Sales Price

The Sales Price is the price at which you sell your product (or service).

Share Capital

Share capital refers to the portion of a company’s equity that has been obtained (or will be obtained) by trading stock to a shareholder for cash or an equivalent item of capital value.

Share capital usually comprises the nominal values of all shares issued, less those repurchased by the company. It includes both common stock (ordinary shares) and preferred stock (preference shares).

Shareholders Equity

Ownership interest in a corporation in the form of common stock or preferred stock. It is the risk-bearing part of the companys capital and contrasts with debt capital which is usually secured and has priority over shareholders if the company becomes insolvent and its assets are distributed.

Shares Outstanding

Shares outstanding are common shares that have been issued and where purchased by investors. They have voting rights and represent ownership in the corporation by the shareholder. They should be distinguished from treasury shares, which is common stock held by the corporation.


Sustainability argues that enterprises should make decisions based not only on financial factors such as profits or dividends, but also based on the immediate and long-term social and environmental consequences of their activities.


Synergy is the obviation of the need to incur incremental costs to set up incremental revenue streams. As a result of synergies,  Synergies ensure that the increase in fixed costs of entering new businesses grow at a slower rate than the rate at which revenues grow on account of these businesses.

Synergies primarily result from two resources – infrastructure (also known as material cost/infrastructure synergy) and customer base (also known as demand synergy).

1. Material Cost Synergy (also known as Infrastructure synergy) is cost savings that result from using existing infrastructure to support new business linesFor example, an existing production facility can be put to use for producing a new line that the company launched, thereby obviating the need to incur incremental investment.

2. Demand Synergy is incremental revenue that can be got by the ability to cross sell multiple offerings to your customer base (thereby obviating the need to incur incremental sales costs to generate the incremental revenue).

Demand synergy works both ways, that is, both new and existing businesses benefit from it.

Downstream Demand Synergy (Demand Benefit for New from Existing) is the ability to cross sell new offerings to your existing customer base.

Upstream Demand Synergy (Demand Benefit for Existing from New) is the ability to cross sell existing offerings to your new customer base.

Target Utilization

Every wireless telecom network has a rated bandwidth which determines the maximum traffic (in Gigabytes) it can carry in a given period.

The target utilization in a given period is the amount of traffic flowing through the network as a proportion of the maximum traffic that it is designed to carry.

Target Utilization = Traffic flowing through a network * 100/Maximum traffic carrying capacity


Taxes are compulsory, unrequited payments, in cash or in kind, made by institutional units to government units; they are described as unrequited because the government provides nothing in return to the individual unit making the payment, although governments may use the funds raised in taxes to provide goods or services to other units, either individually or collectively, or to the community as a whole.

Total Assets

The sum of current and long-term assets owned by a person, company, or other entity.

Total Liabilities and Equity

The sum of Liabilities and Equity owned by a person, company, or other entity.

Total Purchase Value

The product of purchase price per item, multiplied by the number of items purchased.


Delivery and execution are important value creation aspects of a service or a projects business. In both of these types of businesses, there is one constraining resource that acts as a bottleneck to the growth of that business. Deploying this constraining resource is usually a fixed cost that cannot be ramped up or down, on demand.

For example, manhours for an IT or a consulting business, network capacity for telecom business, rooms for a hotel business and seats for an airline business are all constraining resources.

Therefore, such businesses track how much of the constraining resource is generating revenue for them at any point in time, their utilization.

Utilization = (Size of constraining resource involved in revenue generation/Total size of constraining resource)x100

For services and projects businesses, utilization has a strong bearing on pricing, marketing budgets and capacity decisions.


The ratio workload is the demand placed on an employee’s resources relative to his or her available resources. A given task will produce different workload levels depending on the employee’s motivation and qualifications.

A workload above 100% lowers the employee’s motivation level unless it is covered by increased salary levels.