An accountant is a professional who maintains, audits, and prepares financial records for an individual or business.
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!
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.
The cost of running a business.
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)
A document required by Law showing accounting information for Limited Liability Companies.
A document that specifies the comparative rights of Limited liability Company Shareholders.
Relating to the company EFM – A finance professional who is part of EFM and is authorised to trade using the EFM name.
An audit is the independent assessment of, and expression of opinion on, financial statements of a company.
A statement of the financial position of a company showing its assets, liabilities and ownership interest.
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.
The overnight interest rate that the Bank of England charges to banks for lending to them.
Also known as loan finance/ debt security or in very simple terms an IOU (commonly used as such in America).
The value of an asset as it appears on a balance sheet) of an asset
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.
The period (normally 12 calendar months) during which the fluctuating activities of a business form a pattern (i.e. as peaks and troughs)
A business model is a company’s plan for how it will generate revenues and make a profit. It explains what products or services the business plans to manufacture and market, and how it plans to do so, including what expenses it will incur.
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.
Business process improvement is a strategic planning methodology aimed at identifying the operations or employee skills that could be improved to encourage smoother procedures, more efficient workflow and overall business growth.
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.
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.
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.
A measure of a financial strength and securities and indicates a bank’s ability to absorb losses.
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.
These are statements of cash expected to flow into and out of a business over a specified period of time.
This provides information about changes in a company’s financial position.
Position assigned to the director in charge of the daily running of a business.
Short-term unsecured promissory notes issued by companies, usually used for working capital as opposed to fixed assets such as buildings.
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.
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.
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.
Tax to be paid by companies, based on the taxable profits for the period.
The process of looking for, finding and removing unwarranted expenses from a business to increase profits without having a negative impact on product quality. Many businesses engage in periodic cost reduction drives in order to make their company’s operation more efficient and to boost profits.
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 period typically ranging from 30 to 60 days – however every contract is distinct.
The process by which a company ensures customers pay promptly, and takes steps to minimize the risks of loss from bad debts.
An economic situation whereby lenders simultaneously cut back on lending due to fears of borrowers inability to repay debts.
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.
Is a transaction that describes when goods and services are purchased and the bill is to be settled on a future date.
Evaluation of the creditworthiness of a company, usually provided by a ratings agency from AAA which is the safest – D which is defaulted.
Purchases made by a client that do not require payment to be made at the time of purchase.
An entity/ party to whom money is owed
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.
Debts or obligations due within one year- expected to be settled within 12 months of balance sheet date.
This is the value of an asset at the present time, taking into account changing prices, as opposed to its historical cost.
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.
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.
The debt to assets ratio indicates the proportion of a company’s assets that are being financed with debt, rather than equity. The ratio is used to determine the financial risk of a business.
A ratio greater than 1 shows that a considerable proportion of assets are being funded with debt, while a low ratio indicates that the bulk of asset funding is coming from equity.
The debt-to-equity ratio shows the proportion of equity and debt a company is using to finance its assets and the extent to which shareholder’s equity can fulfill obligations to creditors in the event of a business decline.
A low debt-to-equity ratio indicates a lower amount of financing by debt via lenders versus funding through equity via shareholders.
A higher ratio indicates the company is getting more of their financing from borrowing which may pose a risk to the company if debt levels are too high.
An entity/ party that owes money
Failure to meet obligations as they fall due eg a borrower missing payments.
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.
The amount by which expenditure exceeds income in a given year
This is when the prices of goods and services in an economy are falling on average (usually below 0% i.e. negative inflation)
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)
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.
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.
A recession that experiences limited positive growth (or short-lived recovery) then dips back into recession.
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.
Money taken out of a business (sole trader or partnership) for personal use and is treated as a reduction of ownership interest.
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 also applies to voluntary investigations such as where a potential acquirer evaluates a target company or its assets for an acquisition or investment, or in some cases, litigation.
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.
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.
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.
A company owned by EFM that provides interim managers for projects and short term work
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.
The 17 countries that have adopted the Euro as their currency.
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’.
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.
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.
The US central bank.
A broad term that describes the management of large amounts of money and other assets.
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.
Someone who performs certain accounting functions including bookkeeping, credit control, payroll and some elements of management and financial reporting
A strategic action plan in which a goal is created to improve overall finance performance within an organisation. It includes a variety of tasks, from implementing new accounting software to shortening a budget cycle to reducing overhead costs.
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.
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.
A prediction concerning future business conditions that are likely to affect a company or organisation.
Financial forecasting identifies trends in external and internal historical data, and projects those trends in order to provide decision-makers with information about what the financial status of the company is likely to be at some point in the future.
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.
The effective and competent management of the finances of a business to achieve its financial objectives, mainly to be profitable.
Financial modeling is the process by which a firm constructs a financial representation of some, or all, aspects of the firm or given security.
The model is usually characterised by performing calculations and makes recommendations based on that information.
To continue to produce a profit, pay debts as they fall due and continue to survive.
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)
(Also known as Non Current Asset) used on a continuing basis in a business and usually referred to as PPE (Property, Plant and Equipment).
Expenses not affected by the volume of output (goods & services) of output over a period of time.
A future estimate of performance using historical data and assumptions.
(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.
Financial resource provided in order to finance e.g. program, project or a new product launch usually by an organization or company
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.
A forum of the seven major industrialised economies in the world, consisting of the US, UK, France, Germany, Italy, Canada and Japan.
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.
The ratio of owner’s equity to company’s debt.
The assumption that a company will continue to operate indefinitely
The value before making any deductions.
Profit margin, calculated as Total Sales/ revenue minus cost of sales before deducting administration and selling expenses.
Part of debt restructuring, a decrease in the amount of debts of a business in financial difficulty, imposed on by lenders.
A portfolio of investments which uses a range of advanced, sophisticated strategies to maximise returns including leveraging and derivatives trading.
Is an advanced investing strategy that reduces the risk of price fluctuations to the value of an asset.
The UK government’s tax-collection organisation (previously called ‘Inland Revenue’). It has other non-tax responsibilities.
This financial statement shows operating results for a specific period including revenues, expenses, and profit.
When a company legally comes into existence.
An increase in prices and also a fall in the purchasing value of money
The inability to pay debts or the lack of sufficient assets to cover debts
A person licensed to act on behalf on an insolvent individual, partnership or company.
Fee charged as a percentage by a lender for a loan. The annual rate is expressed as a percentage of the principal.
Financial statements issued in a period less than one year e.g. half-yearly or quarterly, and typically, not audited.
Reporting financial information for the management of a business (internal users).
Stock held by a business
A financial institution that works typically in higher finance to raise capital for large companies, wealthy individuals and the government
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 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.
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.
A situation in a partnership whereby liabilities are shared collectively, yet each partner is individually responsible for the whole of the partnership.
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 .
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.
Previously the 4th largest investment Bank in America which went bankrupt in 2008 and sparked off the most severe phase of the financial crisis.
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.
A financial obligation or debt, recorded on the right side of the balance sheet.
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.
Relating to the company EFM – A finance professional who is part of EFM and is authorised to trade using the EFM name.
This limits a partner or investor’s loss to the amount they have invested.
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.
The current assets of your business are its cash or assets such as stock, work in progress, or debts that can be turned into cash.
refers to a group within an entity responsible for running the company.
Reporting accounting information within a business specifically for management use (internal use).
The difference between income and sales, also know as profit.
A corporate situation that involves the combination of 2 separate companies into one entity. Existing shareholders retain a shared interest in the new entity.
Mergers and acquisitions (M&A) is a general term that refers to the consolidation of companies or assets. M&A can include a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. In all cases, two companies are involved.
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.
The policies of the central bank targeted at controlling the supply of money.
Global market business that trades in short term instruments such as Commercial Paper and Bankers Acceptance.
The process by which a government takes over the ownership of a private industry or assets, making it publicly owned.
The value after deductions.
Total Assets minus Total Liabilities
Net profit margin is the percentage of revenue left after all expenses have been deducted from sales. The measurement reveals the amount of profit that a business can extract from its total sales. The net profit margin is intended to be a measure of the overall success of a business. A high net profit margin indicates that a business is pricing its products correctly and is exercising good cost control.
The estimated amount a company expects to obtain from the sale of its stock. Calculated as proceeds of sale minus cost of sale
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.
The face value of a share certificate
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.
See Minority Interest.
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.
Long term financial obligations/ liabilities not due to be paid within 12 months eg long term bank loans and long term leases.
Additional information provided at the end of financial statements to provide further details on specific items in the financial statements.
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.
A public invitation to buy a company’s shares in the stockmarket.
A fast and efficient online accounting system that provides access to Sage Accounts and Sage Payroll
Activities that directly affect cash inflows and cash outflows, as opposed to investing and financing activities, resulting in net income.
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.
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.
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.
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.
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 is the amount of revenue a business has after deducting all expenses.
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.
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.
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.
A person thinking about the possibility of investing in a company.
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).
This is a publicly listed company, abbreviated to PLC, which has offered its shares to the public and has limited liability.
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.
Goods and services that have been bought.
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.
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.
Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation. They are a valuable source of cash for businesses to invest in accelerating their R&D, hiring new staff and ultimately growing.
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
A period of significant decline in economic activity (and GDP) whereby trade and industrial activity levels fall for more than 2 quarters (6 months).
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.
A portion of the net profit retained by a company to be reinvested, rather than being paid out to shareholders as dividends.
Profit left over after deducting dividends.
The yield generated from an investment usually expressed as a percentage of the investment amount.
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).
This is a measure of a company’s profitability and is calculated by dividing shareholders profit by share capital plus reserves.
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.
‘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.
Income (money) which a company receives from its business activities, usually a sale.
Offer to existing shareholders the right to buy additional shares.
A tool (document) that shows a client sums due in exchange for goods/services delivered.
A scale-up company is one that is showing strong, consistent growth – whether in terms of revenue or customer base. All enterprises with average annualised growth greater than 20% per annum, over a three year period, with at least 10 employees at the start of the observation.
This is a loan backed by assets (e.g. a car, property) belonging to the borrower to reduce the lender.
Selling a business is often the culmination of years of work. It is not something that many managers or owners do more than once. You have to get it right first time. The right advice and thorough preparation are vital when you come to sell. Understanding the sales process will help you choose the right buyer, and negotiate the right deal.
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.
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.
Individuals or firms who own shares in a limited liability company, also referred to as owners of the company.
The sum of issued share capital, retained profit and reserves showing the total shareholders investment in a business.
Loan or debt to a company due to be paid within one year.
An economic situation whereby there is high inflation combined with stagnation- slow growth and high unemployment.
Anyone who might have an interest in a company including the public, clients, suppliers etc
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.
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
A market /exchange in which stocks and securities are bought and sold and which sets the rules for buyers and sellers.
A company that is owned and controlled by another entity referred to as the holding or parent company.
Succession planning focuses on identifying and growing talent to fill business-critical positions in the future. In the face of skills shortages and a lack of confidence in leadership potential, succession planning has gained popularity, and is now carried out in both large and smaller organisations.
Debts with a low probability of being repaid.
These are suppliers awaiting payment for goods or services supplied on credit
Those to whom a company has sold goods on credit and is awaiting future payment.
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.
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.
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.
The sales of a business or other form of revenue generated from business operations.
Venture capital is a type of funding for a new or growing business. It usually comes from VC firms that specialise in building high risk financial portfolios. The venture capital firm gives funding to the startup company in exchange for equity in the startup.
Measures ability to cover short term financial obligations, and indicates how liquid a company. This is calculated as current assets minus current liabilities.
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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