IB Business Management Unit 3: Financial Management - Accounting, Ratio Evaluation, Core Financial Documents Key Definitions

The Acid Test Ratio, also known as the Quick Ratio, measures a company's ability to meet short-term liabilities using its most liquid assets (excluding inventory).

Amortization refers to the process of writing off the cost of an intangible asset (e.g., patents, trademarks, goodwill) over its useful life. This expense is spread out evenly over the asset's estimated lifespan.

The Average Rate of Return (ARR) measures the profitability of an investment as a percentage of the initial or average investment cost. It helps businesses compare the potential returns of different investment projects.

A bank loan is a sum of money provided by a bank to a business, which is repaid with interest over an agreed period.

A legal process where an individual or business declares they are unable to repay outstanding debts. This can result in asset liquidation to pay creditors or a structured repayment plan under court supervision.

The value of an asset as recorded in a company's financial statements, usually the original cost minus depreciation, amortization, or impairment costs.

A financial plan that estimates income and expenses over a specific period, guiding decision-making and resource allocation.

Business angels are wealthy individuals who invest personal funds in exchange for equity or a share of future profits.

Capital Employed represents the total capital investment used to generate profits. It reflects the long-term funds deployed in the business.

Capital expenditures (CapEx) involve investments in long-term assets that provide benefits over multiple years. These assets typically support business growth, operational efficiency, and strategic goals.

The movement of money into and out of a business over a specific period. It includes both cash inflows (receipts) and cash outflows (payments).

A cash flow forecast is a financial projection that estimates the amount of money expected to flow in and out of a business over a specific period. It helps businesses predict their future cash position, ensuring they have enough liquidity to cover expenses and make informed financial decisions.

The unique attributes or capabilities that allow a business to outperform its competitors. It enables a company to offer superior value to customers, whether through lower costs, differentiated products, superior quality, brand reputation, or innovation.

A department, function, or segment within an organization that incurs costs but does not directly generate revenue. Examples include HR and IT departments.

The direct costs associated with producing or purchasing goods that a company sells during a period, including raw materials and labour.

A cost refers to the expenditure a business incurs while producing goods or services. Typical costs include payments for raw materials, wages, rent, and fuel.

A financial strategy used by businesses to manage customer credit, minimize bad debts, and ensure timely payments. It includes setting credit limits, monitoring receivables, and enforcing payment terms.

Refers to an entity's ability to repay its debts, based on its financial health and reliability. It's often assessed by credit ratings, which consider factors like income, debt levels, past borrowing history, and the stability of cash flows.

Creditor Days (also known as Payables Days) measures the average number of days a company takes to pay its suppliers after receiving goods or services.

Individuals or entities to whom a business owes money, typically suppliers or lenders.

Crowdfunding involves raising small amounts of money from a large number of individuals, typically via online platforms.

The Current Ratio is a liquidity ratio that measures a company's ability to pay short-term obligations using its current assets.

A debenture is a long-term loan issued by businesses to raise capital, often with fixed interest payments over a specific term.

Debtor Days (also known as Receivables Days) measures the average number of days it takes for a company to collect payments from its customers after a sale.