FP&A Glossary

H

Human Capital Management (HCM) Human capital management (HCM) views employees as valuable assets and focuses on acquiring, training, managing, and retaining them to provide future benefits to the organization. HCM software can automate HR functions such as payroll, training, and talent management.

I

Intangible Assets Intangible assets are non-physical assets like intellectual property, goodwill, trade secrets, and brand recognition that provide value to a company beyond one year.

Interest Coverage Ratio The interest coverage ratio measures a company’s ability to meet its interest payments on debt. It is calculated by dividing EBIT (earnings before interest and taxes) by interest expenses.

Internal Rate of Return (IRR) Internal rate of return (IRR) is used to estimate the profitability of an investment. It is the interest rate at which the net present value of all cash flows (both inflow and outflow) from a project equals zero.

Investing Investing involves using funds to purchase assets with the expectation of generating returns.

K

Key Performance Indicator (KPI) A key performance indicator (KPI) is a metric that measures critical factors for an organization’s success. KPIs are used to track performance over time and can be visualized in dashboards.

L

Lagging Indicator A lagging indicator reflects past economic activity. For example, salary growth is a lagging indicator because it occurs after economic growth and increased labor demand.

Leading Indicator A leading indicator signals future economic activity. For example, stock prices are considered leading indicators because they reflect investors’ expectations of future earnings.

Long-Term Liabilities Long-term liabilities are financial obligations that a company must pay after more than one year.

Long-Term Assets Long-term assets are assets that cannot be converted into cash within a year. Examples include property, real estate holdings, and factory equipment.

M

Modeling Modeling is the process of simulating financial outcomes based on specific variables to improve decision-making. It is essential for driver-based forecasting.

Modified Cash Basis Accounting Modified cash basis accounting combines elements of both cash and accrual accounting. Short-term items are recorded when cash changes hands, while long-term items are recorded on an accrual basis.

N

Net Income Net income is the total profit of a company after subtracting all expenses, including operating costs, taxes, and interest.

Net Income Before Tax (PBT) Net income before tax (PBT) is the profit a company makes before income tax expenses are deducted. It can be calculated by adding corporate income tax to net income.

Net Present Value (NPV) Net present value (NPV) measures the profitability of an investment by subtracting the present value of cash outflows from the present value of cash inflows. It uses a discount rate to calculate present values.

O

Operating Expenditures (OPEX) Operating expenditures (OPEX) are the ongoing costs of running a business, such as salaries and utilities. These expenses are fully recognized when incurred.

Operating Profit Margin Operating profit margin is the ratio of operating profit to net sales, indicating how efficiently a company generates profit from its sales.

Overhead Costs Overhead costs are the indirect expenses related to running a business that cannot be directly linked to production, such as rent and utilities.

P

Period A period is the specific duration covered by a financial report, often a month or quarter for internal reports, and a year for external reports.

Period Costs Period costs are expenses that cannot be attributed to a specific product and are recorded during the period they are incurred, usually as part of SG&A expenses.

Porter’s Five Forces Model Porter’s Five Forces Model analyzes industry competition through five forces: threat of substitution, threat of entry, supplier bargaining power, buyer bargaining power, and rivalry among competitors.

Present Value (PV) Present value (PV) is the current value of future cash flows discounted at a specific rate, reflecting the time value of money.

Pro Forma A pro forma is a financial report that combines historical data with projections to simulate future financial scenarios.

Profit and Loss Statement (P&L) A profit and loss statement (P&L) summarizes a company’s revenues, costs, and expenses over a specific period, showing the net profit or loss.

Profit Center A profit center is a business unit responsible for generating its own revenue and profits, measured separately from the rest of the company.

Profitability Analysis Profitability analysis assesses how effectively a project, product, or company generates profit. It can focus on internal factors or compare external profitability ratios.

Profitability Ratios Profitability ratios measure a company’s ability to generate profit relative to revenue, assets, or equity. Common ratios include return on assets (ROA), return on equity (ROE), and net profit margin.

Q

Qualitative Evaluation Qualitative evaluation assesses investments based on non-quantifiable factors, such as alignment with core competencies, rather than financial metrics alone.

R

Required Rate of Return (RRR) The required rate of return (RRR) is the minimum return an investor expects from an investment, typically adding a risk premium to a risk-free rate.

Research and Development (R&D) Research and development (R&D) expenses are costs associated with creating and improving products and services. They are subtracted from gross income to calculate operating income.

Retained Earnings Retained earnings are profits that a company keeps for reinvestment or debt repayment instead of distributing as dividends. They appear as part of shareholder equity on the balance sheet.

Return on Assets (ROA) Return on assets (ROA) measures how efficiently a company generates profit from its assets. It is calculated by dividing net income by total assets.

Return on Capital Employed (ROCE) Return on capital employed (ROCE) measures the profitability and efficiency of a company’s capital investments. It is calculated by dividing EBIT by total assets minus current liabilities.

Return on Equity (ROE) Return on equity (ROE) measures the profitability relative to shareholders’ equity. It is calculated by dividing net income by shareholders’ equity.

Revenue Revenue is the total amount of money a company receives from sales of goods or services during a specific period.

Risk Appetite Risk appetite is the level and type of risk an organization is willing to accept to achieve its objectives.

Risk Formula The risk formula quantifies risk by multiplying asset value, threat rating, and vulnerability rating.

Risk Management Risk management identifies, evaluates, and manages risks to minimize negative impacts on an organization.

Rolling Forecast A rolling forecast continuously extends the forecast period by adding new time periods, enhancing agility and accuracy in decision-making.

S

Scenario Planning Scenario planning analyzes potential outcomes based on different circumstances, aiding in what-if analyses and understanding model sensitivities.

Scope Scope defines the boundaries of a project, including output, schedule, and resources. Scope creep refers to the expansion of project boundaries.

Selling, General, and Administrative Expenses (SG&A) SG&A expenses include all costs not directly related to production and distribution, except for interest and taxes.

Sensitivity Analysis Sensitivity analysis tests how changes in input variables affect the outcomes of a financial model, helping to understand potential variations.

Statement of Shareholders’ Equity The statement of shareholders’ equity details changes in equity due to net income, dividends, and stock repurchases.

Static Planning Static planning is a traditional budgeting approach that often lacks flexibility and accuracy, making it challenging to meet dynamic business needs.

Statutory Tax Rate (STR) The statutory tax rate is the percentage of taxable income that a corporation must pay in taxes.

Strategic Plan A strategic plan outlines an organization’s goals and objectives and the strategies to achieve them over a set period.

T

Top-Down Budgeting Top-down budgeting involves creating a high-level budget and allocating funds to departments, which then create detailed budgets based on their allocations.

Trial Balance Trial balance checks the accuracy of debits and credits in a double-entry accounting system. It should total zero if there are no errors.

U

Unallocated Costs Unallocated costs are not directly associated with the production or sale of goods and are excluded from COGS.

V

Value Driver Tree A value driver tree (DuPont analysis) breaks down top-level value metrics into components to identify drivers of value.

Value Drivers Value drivers are key actions and processes that deliver value and competitive advantage to an organization.

Variable Costs Variable costs change directly with production volume.

Variance Reporting Variance reporting compares actual income and expenses to budgeted amounts, assessing adherence to financial plans.

W

What-If Analysis What-if analysis evaluates financial outcomes based on different scenarios and assumptions.

Working Capital Working capital measures a company’s ability to cover short-term debts, calculated by subtracting current liabilities from current assets.

Z

Zero-Based Budgeting Zero-based budgeting starts from scratch, requiring justification for all expenses, rather than carrying over prior budgets.