Preparatory course for sanitation financing

Amortization capitalises the value of an intangible asset over time. Intangible assets are Trademarks, R&D etc.  Amortization occurs when the value of the asset reduces over a specific time period, usually it’s estimated useful life.

Break-Even Analysis is useful in the determination of the level of production or in a targeted desired sales mix. The analysis is for management’s use only as the metric and calculations are often not required to be disclosed to external sources such as investors, regulators or financial institutions. Break-even analysis looks at the level of fixed costs relative to the profit earned by each additional unit produced and sold.

Break-Even Point (BEP) is a point in time, usually expressed in months and/or years when profit level has equalled the fixed costs of the company. 

Corporate Income Tax (CIT) is a tax set by Government, typically as a percentage (%). There are a host of special tax credits (offsets) that could reduce or even eliminate the amount of income tax a corporation has to pay.

Current Assets are the items that your business owns that can be converted to cash within a year, for example cash, people that owe you money, raw materials etc.

Current Liabilities are the debts your business will pay within a year, for example general operating expenses, items that you bought on credit etc.

Depreciation: Fixed assets are depreciated over the total life of the asset, with a period depreciation expense charged to the company's income statement, normally monthly or annually. Accumulated depreciation is recorded on the company's balance sheet as the summation of all depreciation expenses, and it reduces the value of the asset over the life of that asset.

Debt-Service Coverage Ratio (DCSR) compares net operating income with total debt service of the entity. Net operating income is a company's revenue minus its operating expenses, not including taxes and interest payments. 

Earnings Before Interest and Taxes (EBIT) measures the profit a company generates from its operations, making it synonymous with "operating profit." By ignoring tax and interest expenses, it focuses solely on a company's ability to generate earnings from operations, ignoring variables such as the tax burden and capital structure.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is an indicator of a company's financial performance.

Fixed Assets are items owned by the business that have a long-term use such as property, land and equipment and cannot be converted to cash within a year. For example vehicles, buildings, special equipment, air-conditioners etc.

Gross Margin Ratio represents the percent of total sales revenue that the business retains after incurring the direct costs associated with producing the goods and services sold by a business. The higher the percentage, the more the business retains on its cash sales to service its other costs and obligations. It is calculated by dividing Gross Profit by Sales.

Internal Rate of Return (IRR) measures the profitability of the project or business. It is defined as the rate of discount for which the net present value of a project becomes zero.

Loan Life Coverage Ratio (LLCR) is a measure of the number of times the cash flow of a project can repay an outstanding debt over the life of a loan.

Long-term Liabilities are debts that you don’t have to pay within a year, usually a long-term bank loan is a typical example.

Net Margin Ratio shows how much money earned by the business is translated into profits. It is usually expressed in percentage and is calculated by dividing Net Profit by Sales and multiplying by 100.

Net Present Value (NPV) is the sum of the discounted annual cash inflows net of outflows during the lifetime of the project. The rate of discount needs to be selected. It rate of discount reflects the financial conditions for obtaining cash and the likely return upon alternative financial investment open to the project promoters.

Owner’s Money/Equity/Capital is the investment that owners have put in the business plus any earnings that have been retained in the business. It is what the owners would get if all the assets were sold and all the obligations were paid.

Project finance is often used for long-term financing of infrastructure and industrial projects. It is based upon the projected cash flows of the project rather than the balance sheets of its sponsors.

Project Life Coverage Ratio (PLCR) shows the ability of the project to cover its debt service over the life of the project.

Return on Investment (ROI) can be used to assess in broad terms an investment’s profitability. Return on investment calculates in % the profit made on an investment and divides this by the investment itself.

Weighted Average Cost of Capital (WACC): Generally, a company finances its assets either through debt or with equity. WACC is the average of the costs of these types of financing, each of which is weighted by its proportionate use in a given situation. By taking a weighted average in this way, we can determine how much interest a company owes for each € it finances. 

In terms of project financing, the cost of accessing the funds — includes interest on any loans and, in the case of private equity, the return on the capital invested. As the debts may be higher than the equity share and the returns to the bank or investor are likely to be different, the costs of capital is often averaged against the respective shares (weights) and terms (e.g. interest rate and dividends), this is called the weighted average cost of capital (WACC).