Glossary of terms

Here are some terms that you may come across quite regularly in the business world. Next time your accountant or banker speaks to you in terms you don’t understand, use this jargon buster!

A

Accountant

An accountant is a professional who maintains, audits, and prepares financial records for an individual or business.

Acid test

The ratio of liquid assets to current liabilities. Indicates if a company has enough short-term assets to cover its immediate liabilities without selling any stock.

Administrative expenses

The cost of running a business.

Amortisation method

A process used to pro-rate the cost of a specific type of asset (usually intangible fixed assets) to the asset’s life. (See depreciation)

Annual report

A document required by Law showing accounting information for Limited Liability Companies.

Articles of Association

A document that specifies the comparative rights of Limited liability Company Shareholders.

Associate (also known as Licensee)

Relating to the company EFM – A finance professional who is part of EFM and is authorised to trade using the EFM name.

Audit

An audit is the independent assessment of, and expression of opinion on, financial statements of a company.

B

Balance Sheet

A statement of the financial position of a company showing its assets, liabilities and ownership interest.

Bankruptcy

A process by which a borrower who is unable to honour debts due, has its assets valued and in some cases sold off to settle those debts.

Base rate

The overnight interest rate that the Bank of England charges to banks for lending to them.

Bond

Also known as loan finance/ debt security or in very simple terms an IOU (commonly used as such in America).

Book value

The value of an asset as it appears on a balance sheet) of an asset

Bookkeeper

A bookkeeper performs the day-to-day accounting-related tasks of recording financial transactions. Bookkeeping is only a small part of the entire accounting function.

Business cycle

The period (normally 12 calendar months) during which the fluctuating activities of a business form a pattern (i.e. as peaks and troughs)

Business plans

A formal statement of business goals, the strategies and how you intend to achieve those goals. It can serve various purposes from securing external funding to measuring success within a company.

Buyout

A buyout is the purchase of a company’s shares in which the acquiring party gains controlling interest of the targeted firm. A leveraged buyout (LBO) is accomplished by borrowed money or by issuing more stock. Buyout strategies are often seen as a fast way for a company to grow because it allows the acquiring firm to align itself with other companies that have a competitive advantage.

 

C

Called up share capital

When a company ‘calls upon’ its shareholders to make full payment on shares bought, the value of the issued shares which are not fully paid for is referred to as the called up share capital.

Capital

Finance provided to enable a company to acquire assets and sustain its business. For investors, it refers to their stock of wealth, and for companies, normally a source of financing.

Capital adequacy ratio

A measure of a financial strength and securities and indicates a bank’s ability to absorb losses.

Cashflow

This is usually an indication of a company’s financial strength and basically the movement of money in and out of a business over a given period. Cash inflows usually arise from financing, operations or investing, while cash outflows result from expenses or investments.

Cashflow projections

These are statements of cash expected to flow into and out of a business over a specified period of time.

Cashflow statement

This provides information about changes in a company’s financial position.

Chief Executive

Position assigned to the director in charge of the daily running of a business.

Commercial paper

Short-term unsecured promissory notes issued by companies, usually used for working capital as opposed to fixed assets such as buildings.

Companies Act

Legislation in the United Kingdom relating to company law, that controls the activities of Limited Liability Companies. Refers to the Companies Act1985 as modified by the Companies Act 1989.

Consolidated financial statements

These show a company’s performance as a group. They are statements that factor the holding company’s subsidiaries into its aggregated accounting figure, presenting information as a single reporting entity.

Contingent liabilities

These are liabilities that may or may not be incurred because they depend on the outcome of an event. These obligations are not recognised in the balance sheet because they depend upon some future event occurring.

Corporation tax

Tax to be paid by companies, based on the taxable profits for the period.

Credit (in bookkeeping)

An increase in liabilities, revenue or ownership interest or a decrease in assets shown as an entry in the credit column of a ledger account.

Credit (in business)

Credit period typically ranging from 30 to 60 days – however every contract is distinct.

Credit control

The process by which a company ensures customers pay promptly, and takes steps to minimize the risks of loss from bad debts.

Credit crunch

An economic situation whereby lenders simultaneously cut back on lending due to fears of borrowers inability to repay debts.

Credit note

A document given to a client to cancel the client’s debt to the company, usually because the client has overpaid, returned faulty products or received ineffective service.

Credit purchase

Is a transaction that describes when goods and services are purchased and the bill is to be settled on a future date.

Credit rating

Evaluation of the creditworthiness of a company, usually provided by a ratings agency from AAA which is the safest – D which is defaulted.

Credit sale

Purchases made by a client that do not require payment to be made at the time of purchase.

Creditor

An entity/ party to whom money is owed

Current assets

Liquid assets i.e. assets in the form of cash or easily convertible to cash within the trading cycle ideally 12 months of balance sheet date.

Current liabilities

Debts or obligations due within one year- expected to be settled within 12 months of balance sheet date.

Current value

This is the value of an asset at the present time, taking into account changing prices, as opposed to its historical cost.

D

Debt Factoring

The sale of a business’ invoices to a third party. The third party is charged with processing the invoices, and the business lending the invoices is able to receive loans based on the expected payments on the invoices.

Debt restructuring

A situation that allows a financially troubled company or entity to alter the terms of debt agreements usually to convert a short term facility to long term one or replace with lower interest rate. Refinancing is a process of altering terms if not facing financial difficulty or cashflow problems.

Debtor

An entity/ party that owes money

Default

Failure to meet obligations as they fall due eg a borrower missing payments.

Deferred income

Also ‘deferred revenue’, is in accrual accounting, advance payment or money received for goods and services not yet delivered. This is recorded as a liability in the balance sheet until after delivery or performance when it is converted to revenue in the income statement.

Deficit

The amount by which expenditure exceeds income in a given year

Deflation

This is when the prices of goods and services in an economy are falling on average (usually below 0% i.e. negative inflation)

Depreciation

Decrease in the value of an asset (usually tangible) and the allocation of the depreciable amount over its useful life, due to wear and tear. (See amortisation)

Director

An individual nominated by the shareholders of a Limited Liability Company to manage the affairs of the business, and may not be a shareholder or employee.

Dividends

Payment made by a company, usually quarterly to shareholders as reward for their investment in the company. This is usually linked to its profits and is proportionate to the number of shares held.

Double-dip recession

A recession that experiences limited positive growth (or short-lived recovery) then dips back into recession.

Drawing Account

A drawing account is an accounting record maintained to track money withdrawn from a business by its owners. A drawing account is used primarily for businesses that are taxed as sole proprietorships or partnerships. Owner withdrawals from businesses that are taxed as separate entities must generally be accounted for as either compensation or dividends.

Drawings

Money taken out of a business (sole trader or partnership) for personal use and is treated as a reduction of ownership interest.

Due Diligence

An investigation of a business or person or the audit of a potential investment. It refers to reasonable steps sometimes taken to satisfy a legal requirement especially before making a sale or a purchase, or prior to signing a contract. This can be or an act with a certain standard of care.  This also applies to voluntary investigations such as where a potential acquirer evaluates a target company or its assets for an acquisition, or in some cases, litigation or investment.

Due Diligence report

A written report that presents the findings of the Due Diligence Investigation including the entity’s background and financial condition, business operations and contractual obligations and in some cases, recommended strategies.

E

e-Newsletter

Electronic newsletters

Ebitda

An acronym for earnings (or profit) before interest payments, tax, depreciation and amortisation. It is an important indicator- preferred to the entity’s profits, used by lenders to measure the ability of a company’s cashflow to repay its debts.

Efficiency of employment

The actually time employees spend on core responsibilities compared to the time they are employed. This is found to be quite low taking into account meetings, training, sick days, office banter, tea breaks, plus other non core activities.

EFM Interims

A company owned by EFM that provides interim managers for projects and short term work

Equity

The value of a business after all liabilities are paid.  In a company, it refers to the value of all its shares. In property/ mortgage, it refers to the value the house less the outstanding debt.

Eurozone

The 17 countries that have adopted the Euro as their currency.

Exit

This is the process by which a business owner or venture capitalist plans to ‘cash out’ of an investment they have made in the past , selling off their stake in the company eg an IPO or being purchased by an interested party. An exit stategy is sometimes included in business plans to align end-game objectives with operational activities and to show that the business has thought about scenarios where things may not go according to plan, and there is a ‘Plan B’.

External reporting

Reporting financial information to those users with a legitimate claim to obtain it including shareholders, tax and regulatory authorities as well as the public, as opposed to internal reporting for the benefit of the company’s management team.

External users (of financial statements)

Also referred to as secondary users are users who have a valid interest but do not have access to daily company records including customers, shareholders,  investors, creditors and the authorities.

F

Federal reserve

The US central bank.

Finance

A broad term that describes the management of large amounts of money and other assets.

Finance Director

The top boss of financial matters in a company. This is the official finance overseer who presents financial reports and forecasts for future growth as well as helps to minimise risks to the business and manage cashflow.

Finance Manager: (Also known as Assistant Accountant)

Someone who performs certain accounting functions including bookkeeping, credit control, payroll and some elements of management and financial reporting

Financial accounting

External reporting in financial terms used by those outside an organisation (as opposed to management reporting). This is usually published in the form of annual accounts, and sometimes, more frequently.

Financial Controller

An accounting expert who supervises the quality of accounting and financial reporting of a business whilst also overseeing and monitoring internal controls and countersigning expenses.

Financial Healthcheck

Assessment of a company’s financial situation to help identify areas that need further attention, discussion and improvement. But it is not all about the negatives, Healthchecks also help to identify opportunities to achieve better financial outcomes and develop solutions to improve performance. EFM’s financial healthcheck is targeted at companies. Take the heathcheck now.

Financial Management

The effective and competent management of the finances of a business to achieve its financial objectives, mainly to be profitable.

Financial viability

To continue to produce a profit, pay debts as they fall due and continue to survive.

Fiscal policy

Refers to government finance i.e. the borrowing, spending and taxation activities. If a government is concerned that it is borrowing excessively, it can raise taxes and/or cut spending (austerity measures). However, if it is concerned that there might be a recession, it can cut taxes, raise borrowing and/or spending (fiscal stimulus)

Fixed asset

(Also known as Non Current Asset) used on a continuing basis in a business and usually referred to as PPE (Property, Plant and Equipment).

Fixed costs

Expenses not affected by the volume of output (goods & services) of output over a period of time.

Forecast

A future estimate of performance using historical data and assumptions.

FTSE 100

(Also blue chip companies) The ‘footsie’ is the share index of the 100 largest companies listed on the London Stock Exchange, and this index is revised quarterly.

Futures

A futures contract allows a buyer or seller to purchase or sell an asset with delivery and payment occurring in the future. The buyer is ‘long’ because he expects the value will increase and the seller ‘short’ because he expects the value to decrease.

G

G7

A forum of the seven major industrialised economies in the world, consisting of the US, UK, France, Germany, Italy, Canada and Japan.

GDP

Acronym for Gross Domestic Product. A measure of county’s health valuing its economic activity in a year i.e. all the services and goods produced.

Gearing

The ratio of owner’s equity to company’s debt.

Going concern basis

The assumption that a company will continue to operate indefinitely

Gross

The value before making any deductions.

Gross margin

Profit margin, calculated as Total Sales/ revenue minus cost of sales before deducting administration and selling expenses.

H

Haircut

Part of debt restructuring, a decrease in the amount of debts of a business in financial difficulty, imposed on by lenders.

Hedge fund

A portfolio of investments which uses a range of advanced, sophisticated strategies to maximise returns including leveraging and derivatives trading.

Hedging

Is an advanced investing strategy that reduces the risk of price fluctuations to the value of an asset.

Her Majesty’s Revenue and Customs (HMRC)

The UK government’s tax-collection  organisation (previously called ‘Inland Revenue’).  It has other non-tax responsibilities.

I

Income statement: (Also Profit and Loss account)

This financial statement shows operating results for a specific period including revenues, expenses, and profit.

Incorporation

When a company legally comes into existence.

Inflation

An increase in prices and also a fall in the purchasing value of money

Insolvency

The inability to pay debts or the lack of sufficient assets to cover debts

Insolvency practitioner

A person licensed to act on behalf on an insolvent individual, partnership or company.

Intangible

not physical

Interest

Fee charged as a percentage by a lender for a loan. The annual rate is expressed as a percentage of the principal.

Interim reports

Financial statements issued in a period less than one year e.g. half-yearly or quarterly, and typically, not audited.

Internal reporting

Reporting financial information for the management of a business (internal users).

Inventory

Stock held by a business

Investment bank

A financial institution that works typically in higher finance to raise capital for large companies, wealthy individuals and the government

Investor

A person or entity that commits capital/ provides money in exchange for a share of ownership and with the expectation of a financial return.

Invoice discounting

Invoice discounting is an alternative solution to traditional types of business finance, which provides you with instant access to cash tied up in your outstanding invoices. An invoice discounting facility adapts with your business as it changes and grows, making it much more flexible than an overdraft or loan.

IPO

An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue, the best offering price, the amount of shares to be issued and the time to bring it to market.

 

J

Joint and several liability

A situation in a partnership whereby liabilities are shared collectively, yet each partner is individually responsible for the whole of the partnership.

Junk bond

A high yield bond with a credit rating of BB or lower. Due to their higher risk of default, they offer a very high return to investors when used to raise capital .

K

Key Performance Indicators

KPIs are a set of quantifiable measures used to define goals and objectives in a business, measure performance and evaluate if these goals are achieved eg customer attrition, turnover, income from retained clients.

L

Lehman Brothers

Previously the 4th largest investment Bank in America which went bankrupt in 2008 and sparked off the most severe phase of the financial crisis.

Leverage

This alternative form of gearing occurs when borrowed capital is used for an investment with the expectation that the resulting profits will be more than the interest payable. The more a business borrows over this, the more highly leveraged it is.

Liability

A financial obligation or debt, recorded on the right side of the balance sheet.

Libor

Acronym for London Inter Bank Offered Rate. The benchmark rate, calculated daily at which banks in London lend unsecured money to each other for the short-term.

Licensee: (Referred to as Associate)

Relating to the company EFM – A finance professional who is part of EFM and is authorised to trade using the EFM name.

Limited liability

This limits a partner or investor’s loss to the amount they have invested.

Liquidation

Bringing a business to an end and selling off assets for cash to repay debts. Tax authorities are usually paid first while shareholders are paid last.

Liquidity

The ease with which an item can be quickly converted into cash.

M

Management

refers to a group within an entity responsible for running the company.

Management accounting

Reporting accounting information within a business specifically for management use (internal use).

Margin

The difference between income and sales, also know as profit.

Merger

A corporate situation that involves the combination of 2 separate companies into one entity. Existing shareholders retain a shared interest in the new entity.

Minority Interest

The part of a subsidiary company’s share not owned by the parent company. This ownership interest is also referred to as non-controlling interest.

Monetary policy

The policies of the central bank targeted at controlling the supply of money.

Money Markets

Global market business that trades in short term instruments such as Commercial Paper and Bankers Acceptance.

N

Nationalisation

The process by which a government takes over the ownership of a private industry or assets, making it publicly owned.

Net

The value after deductions.

Net Assets

Total Assets minus Total Liabilities

Net realisable value

The estimated amount a company expects to obtain from the sale of its stock. Calculated as proceeds of sale minus cost of sale

NIC

National Insurance Contributions – NIC’ Payments made by employees and employers into the United Kingdom’s National Insurance (NI). National insurance contributions initially funded programs for the ill and unemployed, and later on eventually paid for state pensions too.

Nominal value of a share

The face value of a share certificate

Non Executive Director (NXD/ NED)

Directors who are not employees of a company that provide creative contribution, guidance and support to management. Their responsibilities are around managing people, risks, strategy and performance.

Non-controlling interest

See Minority Interest.

Non-current Assets

Fixed Asset that is a long term liability for which value will not be realised within the trading year, such as Plant, Property and Equipment.

Non-current liabilities

Long term financial obligations/ liabilities not due to be paid within 12 months eg long term bank loans and long term leases.

Notes to the accounts

Additional information provided at the end of financial statements to provide further details on specific items in the financial statements.

O

Off-balance-sheet finance

Large capital expenditures that are kept off the balance sheet to keep debt to equity ratio low e.g. joint ventures and other financing activities.

Offer for sale

A public invitation to buy a company’s shares in the stockmarket.

Online 50

A fast and efficient online accounting system that provides access to Sage Accounts and Sage Payroll

Operating activities

Activities that directly affect cash inflows and cash outflows, as opposed to investing and financing activities, resulting in net income.

Options

A contract that gives the buyer/ investor the right- but not the obligation,  to buy- or sell an in the future at an agreed time and price.

Ponzi scheme

Named after Charles Ponzi, a notorious Italian fraudster. This is an investment scheme (similar to a pyramid scheme) that pays returns to investors from their own money or from other investors instead of from any actual profits made.

P

P11D

The P11D is a statutory form required by HMRC from UK based employers detailing the cash equivalents of benefits and expenses that they have provided during the tax year to their directors, and employees earning at the rate of more than £8,500 per year.

PAYE

A pay-as-you-earn tax (PAYE) is a withholding tax on income payments to employees. Amounts withheld are treated as advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns.

Preference shares

A type of shares which guarantees priority in dividend payment but does not give voting rights to shareholders. They also rank above ordinary shareholders in the event of bankruptcy.

Profit

Profit is the amount of revenue a business has after deducting all expenses.

Profit and loss account

An account prepared at the end of the accounting period presenting revenues, expenses, and profit, in order to show whether the business has made a profit or loss over the financial year.

Profit warning

A declaration by a listed company to investors to warn that the profit of the company will not be as high as it had expected.

Project Management

The application of unique knowledge, skills and techniques to execute a business activity that has a defined beginning, end, scope and resources with pre-determined goals in such a way that added value is attained.

Prospective Investor

A person thinking about the possibility of investing in a company.

PSA

A PAYE Settlement Agreement (PSA) allows you to make one annual payment to cover all the tax and National Insurance due on small or irregular taxable expenses or benefits for your employees.

If you get a PSA for these items you won’t need to:

  • Put them through your payroll to work out tax and National Insurance.
  •  Include them in your end-of-year P11D forms.
  • Pay Class 1A National Insurance on them at the end of the tax year (you pay Class 1B National Insurance as part of your PSA instead).
Public Limited Company

This is a publicly listed company, abbreviated to PLC, which has offered its shares to the public and has limited liability.

Purchase Ledger

The Purchase Ledger is your record of purchases and expenses, whether or not you have paid them and how much you still owe. On a Balance Sheet, the total unpaid bills will be usually called Trade Creditors or Accounts Payable. The Purchase Ledger has an Account for every Supplier.

Purchases

Goods and services that have been bought.

Q

Qualified audit opinion

A statement on an audit report that suggests that information provided was limited in scope, or/and not following GAAP accounting principles, thereby not showing a true and fair view in all areas.

Quantitative easing

A government monetary policy, whereby the Central Bank increases the supply of money by printing more, typically by purchasing government bonds or other assets, using the ‘newly printed’ money.

R

Recapitalisation

This is a change in the capital structure of a company that involves the injection of fresh equity and options include leveraged recapitalisation, leveraged buyout or nationalisation

Recession

A period of significant decline in economic activity (and GDP) whereby trade and industrial activity levels fall for more than 2 quarters (6 months).

Residual value

What a fixed asset would be worth after the end of its useful life e.g. a machine after 5 years or a car after 3 years.

Retained earnings

A portion of the net profit retained by a company to be reinvested, rather than being paid out to shareholders as dividends.

Retained profit

Profit left over after deducting dividends.

Return

The yield generated from an investment usually expressed as a percentage of the investment amount.

Return on capital employed (ROCE)

tells a business the return (profit) it has made on available resources, and is calculated by dividing operating profit (before deducting interest and taxation) by share capital (plus reserves plus long-term loans).

Return on shareholders’ equity

This is a measure of a company’s profitability and is calculated by dividing shareholders profit by share capital plus reserves.

Return on total assets

indicates how effectively assets are being used to generate profit. It is calculated by dividing operating profit (before deducting interest and taxation) by total assets.

Revaluation reserve

 ‘Paper’ or unrealised profits (or losses) arising from the revaluation of an asset, showing the difference between the current and likely future value of an asset.

Revenue

Income (money) which a company receives from its business activities, usually a sale.

Rights issue

Offer to existing shareholders the right to buy additional shares.

S

Sales invoice

A tool (document) that shows a client sums due in exchange for goods/services delivered.

Secured loan

This is a loan backed by assets (e.g. a car, property) belonging to the borrower to reduce the lender.

Shadow banking

The FSB defined the shadow banking system as “the system of credit intermediation that involves entities and activities outside the regular banking system”. In essence, they provide services similar to banks but are not regulated like banks.

Share

This is a unit of a company’s capital. A company divides its capital into these units (shares) which it offers for sale to raise capital.

Shareholders

Individuals or firms who own shares in a limited liability company, also referred to as owners of the company.

Shareholders’ funds

The sum of issued share capital, retained profit and reserves showing the total shareholders investment in a business.

Short-term finance

Loan or debt to a company due to be paid within one year.

Stagflation

An economic situation whereby there is high inflation combined with stagnation- slow growth and high unemployment.

Stakeholders

Anyone who might have an interest in a company including the public, clients, suppliers etc

Statutory Accounts

Statutory accounts are a legal requirement for Limited companies large or small. They have to be provided to the shareholders (members) – a requirement stipulated by the Companies Act, these accounts also have to be filed with Companies House for each accounting period.

Stimulus

Monetary/ fiscal policy aimed at driving growth and/or inflation. It may include an increase in spending, tax cuts, interest rate cuts, and quantitative easing

Stock exchange (stock market.)

A market /exchange in which stocks and securities are bought and sold and which sets the rules for buyers and sellers.

Subsidiary company

A company that is owned and controlled by another entity referred to as the holding or parent company.

T

Toxic debts

Debts with a low probability of being repaid.

Trade Creditors: (Accounts payable)

These are suppliers awaiting payment for goods or services supplied on credit

Trade Debtors: (Accounts receivable)

Those to whom a company has sold goods on credit and is awaiting future payment.

Trade Sale

A trade sale is the sale of a business, or part of the business, to another business.

Trade sales are a common form of exit for a company’s management and investors. The acquiring company often makes a strategic decision to purchase the company to acquire the underlying intellectual property owned by, or the market share captured by, the company it is purchasing.

Trial Balance (TB)

The total of all debit and credit balances at the end of an accounting period, showing general ledger accounts (which records all business transactions including assets, liabilities, capital, revenue and expenses) contained in the ledger of a business. The aim of the TB is to balance i.e. assets + expenses = liabilities + capital + income.

Turnaround

A series of planned activities/steps taken to reverse or regenerate a company’s poor performance e.g. turning around a loss making company to a profitable one.

Turnover

The sales of a business or other form of revenue generated from business operations.

W

Working capital

Measures ability to cover short term financial obligations, and indicates how liquid a company. This is calculated as current assets minus current liabilities.

Write-down

A reduction in the book value of an asset. Book value is the value of an asset as it appears on a balance sheet.

Is there a term you are interested in that’s not covered here? Contact us and we will reply and tweet the answer on Twitter anonymously, unless you ask otherwise.

Disclaimer: Please note that this document is not to be used to make any legal or financial decision on its own. It only serves as a guide to reflect certain scenarios and definitions we are familiar with. The meaning of some terms may differ in other situations. Please seek additional advice before you act on these definitions. 

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