# Glossary

With the help of our comprehensive glossary, you can navigate through complex financial modelling concepts.
A

### Accounting Close

The accounting closure denotes the duration in which all financial transactions within a specified timeframe in a business are documented, condensed, and disclosed. It stands as a crucial step within the accounting cycle, typically executed at the conclusion of every accounting period—be it monthly, quarterly, or annually.
A

### Accounts Payable

A payable account represents a responsibility held by a business to settle dues to a third party for goods and/or services obtained on credit. These accounts are documented as liabilities on a company's balance sheet.
A

### Accounts Receivable

Accounts receivable is an asset signifying a company's forthcoming revenue stream. It represents the funds owed to the company by customers for goods or services already delivered. The net accounts receivable is calculated as the value of accounts receivable minus any allowances set aside for doubtful accounts.
A

### Accounts Receivable Turnover

The accounts receivable turnover is a metric that gauges the average frequency with which a company collects its accounts receivables within a specific period.
A

### Accrual Basis Accounting

Accrual basis accounting is an accounting method that recognizes and records financial transactions when they occur, regardless of the timing of cash flow. This method contrasts with cash basis accounting, where transactions are only recorded when cash is exchanged.
A

### Arbitrage

Arbitrage involves taking advantage of price differences among various markets. In the realm of foreign exchange (FX) trading, this often involves purchasing foreign currency or its derivatives, like options or forwards, in one market, then selling it for a profit in another market.
A

### At the Money

The term "At the Money" (ATM) is used in finance, particularly in options trading, to describe a situation where the current price of an underlying asset is equal to the strike price of an option.
B

### Balance Sheet

A balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time.
B

### Barrier

Barriers represent a characteristic in certain options, determining activation or deactivation based on the underlying asset's price reaching or surpassing a designated level, often referred to as the "barrier."
B

### Base Currency

The base currency is the primary currency in a currency pair used to determine the exchange rate in foreign exchange trading.
B

### Before-Tax Profit Margin

Before-tax profit margin is a financial metric that represents the ratio of a company's earnings before tax to its total revenue, measuring the firm's profitability before deducting taxes.
B

### Benchmarking

Benchmarking is the process of comparing and measuring an organization's performance, products, or practices against industry standards or best practices to identify areas for improvement and attain higher standards.
B

### Break-Even Analysis

Break-Even Analysis is a financial assessment method used to determine the point at which a company's revenue equals its total costs, resulting in zero profit or loss.
B

Business Intelligence is the process of utilizing data analysis and technology to gather, interpret, and present actionable insights that aid in making informed business decisions.
C

### Capital Budget

Capital budgeting is the financial procedure used to evaluate the financial consequences of a potential project. Its primary objective is to appraise the anticipated financial gains and risks associated with the proposed project, aiding in the decision-making process of whether to pursue the project or not.
C

### Capital Expenditures

Capital expenditures refer to essential expenditures vital for the long-term growth or expansion of a business. These expenditures are regarded as assets and are usually subject to depreciation over time.
C

### Capital Rationing

Capital rationing is a financial management strategy where a company limits its capital expenditures or investments due to budget constraints or a desire to maintain financial stability.
C

### Capitalization Ratio

The capitalization ratio is a financial metric utilized to gauge a company's degree of financial leverage. It is calculated as the proportion of debt to equity within the company's capital structure.
C

### Cash Budget

A cash budget is a forward-looking projection of a company's anticipated cash inflows and outflows during a specific time frame.
C

### Collar

A collar is an options strategy that involves simultaneously holding a long position in a security while writing a covered call and buying a protective put on the same security to limit potential losses.
D

### Days Payable Outstanding

Days Payable Outstanding (DPO) is a financial metric that measures the average number of days it takes a company to pay its outstanding accounts payable, reflecting its efficiency in managing supplier payments.
D

### Debt Equity Ratio

The Debt Equity Ratio is a financial metric used to determine a company's leverage by comparing its total debt to shareholders' equity.
D

### Debt Ratio

The debt ratio is a financial metric that indicates the proportion of a company's assets funded by debt, calculated by dividing total debt by total assets.
D

### Derivative

A derivative is a financial contract or instrument whose value is based on the performance of an underlying asset, index, or entity.
D

### Discounted Cash Flow

Discounted cash flow (DCF) serves as a financial approach to ascertain the current value of an anticipated series of future cash flows. It's employed to assess the value of obtaining a company, project, or asset, and aids in various business decisions, including establishing the necessary rate of return on investment prospects.
D

### Driver-Based Planning

Driver-based planning is a method of financial planning and budgeting that focuses on specific operational drivers or key performance indicators to create more accurate and dynamic forecasts.
E

### Earnings Before Interest And Taxes

Earnings Before Interest and Taxes (EBIT) represents a company's profitability by indicating its operating income, excluding interest and tax expenses.
E

### Earnings Before Interest, Taxes, Depreciation, And Amortization

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) represents a measure of a company's operating performance, excluding interest, taxes, and non-cash expenses, commonly used to evaluate profitability.
E

### Economic Attributes Framework

The economic attributes framework is a tool used to assist analysts and decision-makers in comprehending the economic implications of a proposed project or policy change.
E

### Effective Corporate Tax Rate

The effective corporate tax rate represents the actual percentage of a company's profits paid in taxes after accounting for deductions, exemptions, and credits.
E

### Enterprise Resource Planning

Enterprise Resource Planning (ERP) is a comprehensive software system that integrates various business processes and functions, including inventory, accounting, human resources, and more, into a unified platform for streamlined operations and data management.
E

### Exposure

Exposure in foreign exchange refers to the potential risk or sensitivity of a company's financial situation to fluctuations in currency exchange rates.
F

### Financial Close

Financial close is the process of finalizing and completing all financial transactions, adjustments, and reporting at the end of an accounting period to accurately reflect a company's financial standing.
F

### Financial Plan

A financial plan is a comprehensive outline detailing an individual's or organization's objectives, strategies, and anticipated actions to manage and optimize their finances effectively.
F

### Financial Reporting

Financial reporting involves the disclosure of a company's financial performance and position through documents and statements, allowing stakeholders to assess its economic activities and status.
F

### Fiscal Year

A fiscal year is a 12-month period that organizations or governments use for accounting and budgeting purposes to track financial performance and report income and expenses.
F

### Fixed Asset

Fixed assets, also known as tangible assets, are long-term physical properties or investments with enduring value used in a company's operations, such as buildings, equipment, and land.
F

### Forward contract

A forward contract is a customized financial agreement between two parties to buy or sell an asset at a predetermined future date and price, providing a hedge against price fluctuations.
G

### General Ledger

The general ledger is a comprehensive record that presents all financial transactions of a company and organizes them into individual accounts for tracking purposes.
G

### Governance

Governance refers to the practices and processes used to ensure the effective management and oversight of an organization, typically involving decision-making, compliance, and maintaining accountability.
G

### Greeks

In options markets, "the Greeks" serve as numerical metrics traders utilize to gauge the risks associated with a specific trade type. These consist of five primary Greeks, each reflecting a distinct variable: Delta, Gamma, Vega, Theta, Rho
G

### Gross Profit

Gross profit is the difference between a company's total revenue and the cost of goods sold (COGS), representing the profit generated before deducting operating expenses.
G

### Gross Profit Margin

Gross profit margin is a financial metric that represents the percentage of revenue retained after deducting the cost of goods sold, demonstrating a company's efficiency in producing goods or delivering services.
G

### Gross Sales

Gross sales represent the total revenue generated by a company from the sale of its products or services before accounting for any deductions or expenses.
H

### Hedging

Hedging is a financial strategy used to reduce or offset the risk of adverse price movements in assets by taking an offsetting position in a related security or derivative.
H

### Human Capital Management

Human Capital Management (HCM) encompasses the strategic approach to managing and optimizing a company's workforce, focusing on recruiting, developing, and retaining employees to enhance overall business performance.
I

### Income Statement

The income statement is a financial report that details a company's revenues, expenses, and profits over a specific period, summarizing its financial performance.
I

### Initial Margin

The initial margin represents the percentage of the investment or collateral required by a broker or exchange for an investor to engage in a futures contract or securities purchase.
I

### Intangible Assets

Intangible assets are non-physical assets representing valuable rights and resources such as patents, trademarks, copyrights, goodwill, and intellectual property.
I

### Interest Coverage Ratio

The Interest Coverage Ratio is a financial metric that assesses a company's ability to pay its interest expenses on outstanding debt by comparing its earnings before interest and taxes (EBIT) to its interest expenses.
I

### Internal Rate Of Return

The Internal Rate of Return (IRR) is a metric used to evaluate the profitability of an investment by calculating the discount rate that makes the net present value of future cash flows equal to zero.
I

### Inventory Turnover

Inventory turnover, in a single sentence, represents the number of times a company sells and replaces its average inventory in a given period, showing how effectively inventory is managed.
J

The Japanese Yen Carry Trade refers to a financial strategy involving borrowing low-interest Japanese yen to invest in higher-yielding assets in other currencies to capitalize on interest rate differentials.
J

### Jensen's Alpha

Jensen's Alpha stands out as a crucial metric used to assess the risk-adjusted returns of an investment portfolio. Named after Michael Jensen, this performance measure evaluates an investment's excess return compared to its expected return based on the Capital Asset Pricing Model (CAPM).
K

### Knock-in Option

A knock-in option is a type of derivative that becomes active or "knocks in" only if the underlying asset reaches a specific price level during its lifetime.
L

### Lagging Indicator

A lagging indicator is a financial or economic metric that trails behind changes in the overall economy, reflecting historical data and confirming trends after they have occurred.
L

A leading indicator is a statistical measurement or metric that forecasts and predicts potential future changes in economic trends or financial markets.
L

### Leasehold Improvements (LHI)

Leasehold Improvements (LHI) are enhancements or modifications made to a leased property by the tenant, typically to customize the space to their specific needs, with the costs often amortized over the lease term.
L

### Leverage

Leverage, in finance, involves using borrowed funds or debt to amplify the potential returns or risks of an investment, allowing an investor to control a larger position than with their own capital.
L

### Long-Term Assets

Long-term assets are tangible or intangible resources that a company holds for an extended period, typically more than a year, to support its operations and generate future revenue.
L

### Long-Term Liabilities

Long-term liabilities refer to financial obligations or debts that are due beyond a 12-month period, typically extending several years, on a company's balance sheet.
M

### Margin

Margin refers to the amount of money or securities required to be deposited by an investor in order to trade in financial markets, typically to cover potential losses from market fluctuations.
M

### Marginal Analysis

Marginal analysis is an economic and financial decision-making tool that assesses the additional or incremental costs and benefits associated with a specific action or unit of production, helping determine the optimal level of that action.
M

### Mark-to-market

Mark-to-market is the process of valuing an asset or security based on its current market price, often reflecting its real-time value rather than its book value.
M

### Market Capitalization

Market capitalization is the total value of a publicly traded company's outstanding shares, calculated by multiplying the current stock price by the total number of outstanding shares.
M

### Modeling

Modeling in finance refers to the creation and utilization of mathematical representations or simulations to analyze, forecast, or evaluate financial data or investment opportunities.
M

### Modified Cash Basis Accounting

Modified cash basis accounting is a hybrid accounting method that incorporates elements of both cash and accrual basis accounting, allowing certain elements of accrual-based accounting while maintaining a simplified approach by recording most transactions on a cash basis.
N

### Net Income

Net income, also known as profit or earnings, represents the total revenue of a company after deducting all expenses, taxes, and other costs.
N

### Net Income Before Tax

Net Income Before Tax is a financial metric that represents a company's profit before accounting for income tax expenses and other tax-related items.
N

### Net Margin

Net margin refers to a company's profitability ratio, calculated by dividing net income by total revenue and representing the percentage of profit per dollar of sales.
N

### Net Operating Cash Flow

Net Operating Cash Flow is the cash generated from a company's core business operations after accounting for operating expenses and taxes.
N

### Net Present Value

Net Present Value (NPV) is a financial metric used to evaluate the profitability of an investment by comparing the present value of its expected cash flows to the initial investment cost.
N

### Non-deliverable Forward

A Net Non-Deliverable Forward (NDF) is a derivative contract used in currency markets where parties settle the net difference between a predetermined exchange rate and the prevailing market rate without physically delivering the underlying currency.
O

### Operating Budget

An operating budget is a financial plan that outlines an organization's projected income and expenses for day-to-day operations within a specific time frame, usually a fiscal year.
O

### Operating Cash Flow

Operating Cash Flow refers to the cash generated or used by a company's core business operations within a specific period, excluding financing and investing activities.
O

### Operating Expenditures

Operating expenditures, often abbreviated as OPEX, represent the ongoing expenses incurred by a business in its day-to-day operations to maintain and run the company.
O

### Operating Profit Margin

Operating Profit Margin is a financial metric representing the proportion of revenue remaining after deducting operating expenses, reflecting the company's operating efficiency and profitability.
O

### Out of the money

Out of the money refers to a situation in options trading where the current market price of an underlying asset is not favorable for exercising the option, resulting in no immediate profit for the holder.
O

Overhead costs refer to ongoing business expenses that are not directly attributed to a specific product or service but contribute to the operation as a whole.
P

### Participating Forward

A participating forward is a financial contract that allows the holder to receive additional profits or incur further losses beyond the agreed-upon price of the underlying asset at maturity.
P

### Period

In the context of accounting and finance, a "period" typically refers to a specific duration or timeframe used for financial reporting, analysis, or decision-making purposes.
P

### Period Costs

Period costs are expenses incurred in a specific accounting period, such as selling, general, and administrative expenses, not directly tied to the production of goods or services.
P

### Porter's Five Forces Model

Porter's Five Forces Model is a framework used in business analysis to assess the competitive forces within an industry, helping businesses evaluate their competitive position and strategic options.
P

### Present Value

Present value refers to the current worth of a future sum of money, discounted to reflect its current value based on a specific rate of return or interest over time.
P

### Pro Forma

Pro forma refers to financial statements presenting potential future financial performance or outcomes, often created under special circumstances or hypothetical scenarios.
Q

### Qualitative Evaluation

Qualitative evaluation involves the assessment of non-quantifiable factors or attributes, such as subjective judgments, opinions, and observations, to gauge quality or characteristics.
Q

### Quarterly Roll

Quarterly roll is the process of closing out expiring derivative contracts and simultaneously opening new positions for the next quarter.
Q

### Quick Ratio

The Quick Ratio, also known as the Acid-Test Ratio, measures a company's ability to use its most liquid assets to pay its current liabilities.
R

### Ratio forward

Ratio forward hedging is like a safety net for businesses dealing with money in different currencies. It's a way to protect against the risk that comes from changes in exchange rates.
R

### Required Rate Of Return

The Required Rate of Return is the minimum profit or yield an investor expects from an investment to compensate for the investment's risk and opportunity cost.
R

### Research And Development

Research and Development (R&D) involves investigative activities conducted by companies or organizations to innovate, create, and improve products, processes, or services.
R

### Retained Earnings

Retained earnings represent the cumulative profits kept by a company after paying dividends and are typically reinvested back into the business.
R

### Return On Assets

Return on Assets (ROA) is a financial ratio that measures a company's profitability by assessing the efficiency of its use of assets to generate earnings.
R

### Return On Capital Employed

Return on Capital Employed (ROCE) represents a gauge of a company's profitability that considers the capital invested within the business.
S

### Scenario Planning

Scenario planning involves a strategic method for anticipating and preparing for the future by constructing and analyzing various plausible, potential situations or scenarios.
S

### Scope

In a business context, "scope" refers to the defined boundaries, objectives, and the range of work to be accomplished within a project or a particular task.
S

### Selling, General, And Administrative Expenses

Selling, general, and administrative (SG&A) expenses include marketing, advertising, sales support, and administrative costs such as legal services and employee benefits.
S

### Sensitivity Analysis

Sensitivity analysis is a financial technique used to assess how variations in an input variable impact the outcome in a model, determining the sensitivity of the model's results to changes in the input.
S

### Statement Of Shareholders' Equity

The Statement of Shareholders' Equity is a financial statement presenting changes in a company's shareholders' equity accounts over a specific period.
S