Glossary of Franchise Terms

Inventory Turnover Ratio
This is the ratio of annual sales to average inventory. Sometimes called the Inventory Utilization Ratio, it indicates how many times the inventory of the company is sold and replaced during an accounting period. It is useful to compare the Inventory Turnover Ratio of a company to industry averages. A low turnover may be an unhealthy indicator.

Inventory Utilization Ratio
Refer to Inventory Turnover Ratio.

Keep well Agreement
A Keep well Agreement is a contract between a parent company and a subsidiary to maintain solvency and financial backing for the term of the agreement. It is a means of increasing the credit worthiness of Subsidiaries.

This is the ability to quickly sell an asset without an affect on the price of the asset. Treasury securities would be highly liquid. Raw land would not be a liquid asset. Highly liquid assets tend to have a lower rate of return, but are safer because they can easily be converted to cash.

Mark to Market Accounting
Mark to Market Accounting or Fair Value Accounting refers to accounting for the fair market value of assets rather than the historical cost. This can change the values on the balance sheet of a firm as market conditions change. Historical cost accounting does not reflect the current market value of assets. Balance sheets primarily made up of marketable securities can change dramatically when economic conditions are unstable.

Negative Working Capital
A situation where current liabilities exceed the current assets of a company. If the situation is not corrected, the company will find itself in a position where it cannot pay its obligations when due. This could result in insolvency and / or bankruptcy.

Net Current Assets or Working Capital
This is the difference between current assets and current liabilities.

Net Operating Income (NOI)
The amount of cash generated by a business after deducting operating expenses. NOI is calculated without considering loan payments.

Net Operating Profit (Or Loss)
See Operating Profit (Or Loss).

Net Profit
Also referred to as Net Cash Flow, the amount of cash generated by a business after deducting operating expenses and loan payments.

Net Quick Assets
These liquid assets are cash, marketable securities, and accounts receivable, less current liabilities. See Quick Ratio.

Net Worth
The amount determined by deducting total liabilities from total assets.

Non Current Asset
This is an asset that is not expected to be converted into cash, sold, or exchanged within one year. Examples are (1) Intangible Assets such as goodwill, trademarks, and patents, and (2) Fixed Assets such as machinery, equipment, and real estate.

Operating Profit (Or Loss)
This is the difference between the revenues of the firm and the related costs and expenses. Income from sources other than regular operations are excluded. Income taxes are excluded and cost unrelated to the operations of the business are also excluded. Operating Profit is also referred to as Net Operating Profit and Net Operating Income.

Operating Ratios
Operating Ratios measure a firm's operating efficiency and effectiveness by relating certain income and expense numbers from the income and expense statement to each other and to certain balance sheet numbers. Operating Ratios include: sales to cost of goods sold, operating expenses to income, and net profits to gross income. The ratios are particularly meaningful when comparisons are made to prior periods and with industry averages.

OTC Bulletin Board (OTCBB)
The OTCBB is the electronic listing of Bid and Asked quotations of Over the Counter (OTC) Stocks that do not meet the minimum net worth and other requirements of the NASDAQ stock listing system. It provides continuously updated data on domestic stocks that are not listed and traded on an organized exchange.

Over the Counter Stocks (OTC)
These are stocks and other securities of corporations that do not meet the listing requirements of an organized exchange, or securities of corporations that have chosen Over the Counter trading. The rules of OTC securities trading are written and enforced by the National Association of Securities Dealers (NASD), a self-regulatory group. Prices of OTC securities are published in many daily newspapers
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