Financial Terms and Definitions

These are some financial terms, and their definitions will be used in this textbook.

Accounting Equation: Assets = Liabilities + Owners Equity

Accounts Payable: Money that you owe to your suppliers and other businesses.

Accounts Receivable: Money that is owed to the business.

Accrual Accounting is a method of recording revenue when earned and expenses when incurred, regardless of when you receive or pay the money.

Assets: Something that has value in monetary terms

Balance Sheet: A financial document containing a business’s assets and liabilities for a specific period.

Bank Note: A bank loan

Beverage Cost Percentage: The direct cost of the beverages (alcoholic and non-alcoholic) used to prepare drinks of beverage sales revenue, like food cost percentage, but specifically for beverage inventory.

Cash-basis accounting: This is an accounting method in which you record income only when you receive money and expenses when you pay it out. It’s simpler than accrual accounting, so small businesses and individuals often use it.

Cash Flow: The movement of cash through a business

Common Size Income Statement: A common size income statement presents each line item in an income statement as a percentage of a base figure, typically total revenue. Allowing for easier comparison of a company’s financial performance over time or against competitors, regardless of their absolute revenue figures

Contribution Margin / Gross Profit: Sales minus cost of sales.

Cost of Goods Sold (COGS): The direct cost of the ingredients used to produce the food and beverages you sell. Beginning inventory + Purchases – Ending inventory.

Earnings Month-To-Date (MTD): The total revenue or profit generated from the beginning until a specific period, typically the end of the month.

FIFO: A method of receiving and using inventory (first in, first out).

Fixed Asset: A fixed asset is property or equipment a company owns and uses to operate its business.

Fixed Costs: Operating costs that tend to stay the same regardless of the volume of sales

Food Cost Percentage refers to the direct cost of the ingredients used to produce the menu items you sell. It is a crucial metric for restaurants and other food service businesses to understand their profitability and pricing strategies. It also helps assess the efficiency of your food purchases and production.

Gross Profit / Contribution Margin: Sales minus cost of sales

Horizontal Income Statement: A horizontal income statement, also known as a trend analysis, presents the income statement information for a company across multiple periods, usually years. Line items are listed side-by-side, directly comparing the same expense or income category for different years.

Income Statement: A profit and loss statement (P&L) summarizes revenue and expenses for a period.

Installment Loan: A bank loan or other loan on which you make scheduled payments.

Inventory Turnover: A ratio that shows how often your inventory is sold and replaced within a period (usually a month or a year). A higher turnover ratio indicates efficient inventory management.

Labor Cost: This includes salaries and wages as well as labor-related costs.

Liabilities: Money or debts owed to others, businesses, or creditors.

LIFO: A method of receiving and using inventory (last in, last out).

Liquidity: The ease at which something can be turned into cash.

Menu Engineering: Involves analyzing and designing a restaurant menu to maximize profitability. It considers factors like ingredient cost, selling price, popularity, and contribution margin.

Negative Cash Flow: You have more cash going out (to pay bills, etc.) than coming into the business (sales).

Notes Payable: A loan agreement (contract) to pay back the money by a specific date

Operating Budget: A detailed budget outlining expected revenue and expenses associated with the day-to-day operations of a business during a specific period.

Owners Equity: The portion of a company’s assets that belong to the owners. It’s the amount left over after all the company’s debts (liabilities) have been paid off.

Owner Original Investment: The initial amount of start-up money or assets the owner(s) contributed to start the business.

Payroll Cost: Refers to the salaries and wages paid to employees.

P&L: Profit and Loss is another term for an income statement, which summarizes revenue and expenses for a period.

Prepaid Expenses: Payment of a bill or policy made in advance but has not received the benefits.

Prime Cost: COGS plus the direct labor cost of preparing the food and beverages (Food Cost, Beverage Cost, and Labor Cost).

Profit Margin: This is the gross profit as a percentage of total sales revenue and indicates the overall profitability of your food & beverage business.

Proforma Budget: A pro forma budget is a financial forecast that estimates a company’s future income and expenses under specific circumstances. It is a “what-if” scenario created to assess the potential fiscal impact of future events like:

Retained Earnings: Profit that accumulates over the business’s life but has not been used.

Total Assets: The total value of everything a company owns (current assets, fixed assets, intangible assets)

Total Liabilities: The total amount of money a company owes to others. It’s the sum of all debts and financial obligations a company has incurred.

Total Owner Equity:

Variable Costs: Operating costs that are related to the volume of sales.

Variance: This is the difference between a budgeted amount and the actual amount