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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
Account Reconciliation
In accounting, reconciliation is the process of ensuring that two sets of records (usually the balances of two accounts) agree. Reconciliation is used to ensure that items in your accounting ledgers such as the bank balance typically agree to an external source such as the bank statement.
Accountant
An accountant is a professional who maintains and prepares financial and tax records for an individual or business. Some also provide audit services.
Accounts Receivable
Accounts receivable (AR) is the balance of money due to a business for goods or services delivered or used but not yet paid for by customers. Accounts receivables are listed on the balance sheet as a current asset.
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. A ratio below 1 is an indication of possible cashflow issues.
Administration Expense
The cost of running a business.
Aged Debt Register
The aged debt report lists a detailed account of which customers (debtors) owe your company money by invoice, how much they owe your company, and when they are supposed to complete payment.
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 and Partnerships.
Articles of Association
A document that specifies the comparative rights of Limited liability Company Shareholders.
Associate
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, the financial statements of a company.
B
BACS
Bankers’ Automated Clearing System; a method of making payments direct to a creditor’s bank without using a cheque.
Balance Sheet
A statement of the financial position of a company showing its assets, liabilities and ownership interest.
Bank Receipt
A bank (or cash) receipt is recognised when an entity receives money from any external source, such as a customer, an investor, or a bank. Typically, this money is recognised when money is received from a customer to offset the accounts receivable balance generated when the sale transaction occurred.
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.
Book Value
The value of an asset as it appears on a balance sheet of an asset.
Bookkeeping
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.
Bought Ledger
A bought ledger is a system in accounting by which a business records purchase invoices and monitors its creditors.
Break-Even Point
The break-even point formula is determined by dividing the total fixed costs associated with production by the revenue per individual unit minus the variable costs per unit. In this case, fixed costs refer to those which do not change depending upon the number of units sold. Put differently, the break-even point is the production level at which total revenues for a product equal total expense.
Budgeting
Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. If you don’t have enough money to do everything you would like to do, then you can use this planning process to prioritise your spending and focus your money on the things that are most important to you.
Business Advisor
Business Advisors work with a company very closely on their strategy and advise them on various aspects, especially on product development, marketing, and finances. These three dynamics are crucial to every business. Business advisors should be equipped with enough knowledge and trends of the market that will ultimately assist entrepreneurs in making an informed decision.
Business Continuity Planning
Business Continuity Planning is the process of creating systems of prevention and recovery to deal with potential threats to a company. In addition to prevention, the goal is to enable ongoing operations before and during execution of disaster recovery.
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 Growth
Business Growth is a stage where the business reaches the point for expansion and seeks additional options to generate more profit. Business Growth is a function of the business life-cycle, industry growth trends, and the owners desire for equity value creation.
Business Mentoring
Business Mentoring is a relationship between you, as an entrepreneur, and someone with business experience who is willing to act as a guide. The business mentor offers advice, guidance and support to help you run and improve your business.
Business Modelling
A business model is a company’s plan for how it will generate revenues, make a profit and generate or use cash. 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 and what cashflows will look like.
Business Performance Analysis
Business Performance Analysis refers to a variety of techniques used to quantify the performance of a company over a given period. A performance analysis could be done on just about any area of a business, provided the correct key performance indicators are factored in the analysis.
Business Plans
A formal statement of your vision, 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
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.
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. 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. Shares are long term investments and are not repayable.
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 financial institutions’ ability to absorb losses.
Capital Asset
Capital assets are significant pieces of property such as machinery, vehicles, investment properties, bonds, and even collectibles or art. For businesses, a capital asset is an asset with a useful life longer than a year that is not intended for sale in the regular course of the business’s operation. For example, if one company buys a computer to use in its office, the computer is a capital asset. If another company buys the same computer to sell, it is considered inventory.
Capital Expenditure
Capital Expenditure refers to funds that are used by a company for the purchase, improvement, or maintenance of long-term assets to improve the efficiency or capacity of the company. Long-term assets are usually physical, fixed and non-consumable assets like property, equipment, or infrastructure that have a useful life of more than one accounting period. Also known as CapEx or capital expenses, capital expenditures include the purchase of items such as new equipment, machinery, land, plant, buildings or warehouses, furniture and fixtures, business vehicles, software and intangible assets such as a patent or license.
Cash Book
A cash book is a financial journal that contains all cash receipts and payments, including bank deposits and withdrawals. Entries in the cash book are then posted into the general ledger.
Cash Management
Cash Management is the process of collecting and managing cash flows. In business, it is a key component of a company’s financial stability.
Cashflow
Cashflow is the money that is moving in and out of your business in a period. It may seem like sometimes the cash is only flowing one way – out of the business – however it does flow both ways. Cash is coming in from customers who are buying your products or services. If the customers don’t pay at the time of purchase, some of your cash flow is coming from collections of accounts receivable. Cash is going out of your business in the form of expense payments, like rent, payroll, monthly loan payments, and payments for taxes and other accounts payable.
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 strategy and the daily running of a business.
Coaching
Coaching will assist and guide the business owner in running a business by helping them clarify the vision of their business and how it fits in with their personal goals. Business coaching is a process used to take a business from where it is now to where the business owner wants it to be.
Commercial Agreement
A Commercial Agreement is a legally binding contract between parties where both are required to do activities or refrain from doing something. Commercial agreements can be verbal, in writing, or even implied in a formal or informal matter. They can cover all aspects of business, including wages, leases, loans, hiring, and employee safety. To breach a commercial agreement, one of the contracting parties fails to live up to their part of the agreement.
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 Act 2006.
Company Secretary
The Company Secretary is an officer appointed by the company directors of a business as responsible for ensuring that firm’s legal obligations under the corporate legislation are complied with. His or her formal duties include (1) calling meetings, (2) recording minutes of the meetings, (3) keeping statutory record books, (4) proper payment of dividend and interest payments, and (5) proper drafting and execution of agreements, contracts, and resolutions. A company secretary is not automatically an employee of the firm and, if employed with executive responsibilities, may not be its director shareholder.
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.
Corporate Governance
Corporate Governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
Corporation Tax
Tax to be paid by companies, based on the taxable profits.
Cost Reduction
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.
Cost Restructuring
Cost Restructuring is any and all costs and expenses of restructuring, consolidating or closing of any of the plants, facilities or offices of a business.
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)
Period of time given to a customer to pay a debt.
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 Management
The process a company undertakes to determine whether to give customers credit when selling them products and services.
Credit Note
A document given to a customer to cancel all or part of their debt to the company, usually because they have overpaid, returned faulty products or received ineffective service.
Credit Purchasing
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.
Credit Sale
Purchases made by a customer 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. Typically, these include inventory and trade receivables.
Current Liabilities
Debts or obligations due within one year- expected to be settled within 12 months of balance sheet date. Typically, these include trade payables, taxes and staff costs.
Current Value
This is the value of an asset at the present time, taking into account changing prices, as opposed to its historical cost.
Customer Remittance
A remittance refers to money that is sent or transferred to another party. Remittances can be sent via an electronic payment system, or cheque.
D
Debt Factoring
The sale of a business’ invoices to a third party. The third party is charged with collecting 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.
Debt to Asset ratio
The debt to assets ratio indicates the proportion of a company’s assets that are being financed with debt, rather than equity.
Debt to Equity Ratio
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 fulfil obligations to creditors in the event of a business decline.
Debtor
A debtor is a person or enterprise that owes money to another party. The party to whom the money is owed might be a supplier, bank, or other lender who is referred to as the creditor.
Debtor Days
Debtor days is the average number of days required for a company to receive payment from its customers for invoices issued to them.
Default
Failure to meet obligations as they fall due e.g. a borrower missing payments.
Deferred income
Deferred revenue is an advance billing or payment 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).
Deprecation
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.
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 to shareholders as reward for their investment in the company.
Drawing/ Director Loan Account (DLA)
A DLA is an accounting record maintained to track money withdrawn from a business by its owners.
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 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.
Due Diligence Report
A written report that presents the findings of an Investigation including the entity’s background and financial condition, business operations and contractual obligations and in some cases, recommended strategies.
E
Earnings per share
Earnings per share (EPS) is calculated as a company’s profit divided its ordinary shares. The resulting number serves as an indicator of a company’s profitability. It is common for a public company to report EPS that is adjusted for extraordinary items and potential share dilution. The higher a company’s EPS, the more profitable it is considered.
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 and investors to measure the ability of a company’s cashflow to repay its debts.
Efficiency of Employment
The actual time employees spend on core responsibilities compared to the time they are employed. This is found to be quite low considering meetings, training, sick days, office banter, tea breaks, plus other non-core activities and leads businesses to consider outsourcing some business activities.
EIS
The Enterprise Investment Scheme (EIS) offers tax reliefs to individual investors who buy new shares in your company. EIS investment is governed by rules which change periodically (for the investor and the receiving company). Money raised through EIS can be used to help grow the business and achieve business plan aims and objectives.
EMI
EMI share options are specifically designed for trading companies with growth potential and are intended to help such companies recruit and retain employees. They provide individuals with significant tax benefits and are much more flexible than other tax favoured share arrangements.
Employee ownership trust (EOT)
An employee ownership trust holds a permanent or long-term shareholding in a company on trust for the benefit of all the company's employees. An EOT provides indirect (trust) employee ownership of a company.
Equity
The value of a business after all liabilities are paid. In a company, it refers to the value of all its shares
ERP System
An ERP System (Enterprise Resource Planning) is a term applied to integrated software systems used to manage the internal and external resources of an organisation. These include the physical assets, financial resources, materials and human resources (or staff). ERP system facilitates the flow of information between all business functions inside the organisation and links to outside stakeholders such as customer and supplier systems. The key objective of implementing an ERP System is to bring together the disparate functions of the organisation into a single system environment and therefore make the operations run more efficiently.
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 e.g. an IPO or being purchased by an interested party. An exit strategy 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’.
Exit Planning
Exit planning is the preparation process for a business owner during the run up towards their eventual exit from their company in an effort to maximise the value of the business.
Expenses
An expense is the cost of operations that a company incurs to generate revenue. As the popular saying goes, “it costs money to make money.” Common expenses include payments to suppliers, employee wages, property costs, and insurances. Businesses can write off tax-deductible expenses on their corporation tax returns to lower their taxable income and thus their tax liability. However, HMRC has strict rules on which expenses business can claim as a deduction.
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 reports)
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
Finance
A broad term that describes the management of large amounts of money and other assets.
Finance Director
The senior manager 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
Someone who performs certain accounting functions including bookkeeping, credit control, payroll and some elements of management and financial reporting.
Finance Transformation
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.
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 Control
Implementing accounting controls to ensure a business operates efficiently, in accordance with laws and regulations, and provides accurate financial statements.
Financial Controller
An accounting expert who supervises the quality of accounting and financial reporting of a business whilst also overseeing and monitoring internal controls.
Financial Forecasting
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.
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, Healthcheck can also help to identify opportunities to achieve better financial outcomes and develop solutions to improve performance. EFM’s financial healthcheck is targeted at companies.
Financial Leadership
The success or failure of an organisation is determined more by the Financial Leadership within an organization than its strict adherence to accounting rules and regulations. Technical competency is a requirement, however Financial Leadership, is the ethical use of financial information that adds value, and helps the organisation to be successful.
Financial management
The effective and competent management of the finances of a business to achieve its financial objectives, mainly to be profitable.
Financial Modelling
The process by which a firm constructs a financial representation of some, or all, aspects of the firm or given security.
Financial Performance
A subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. The term is also used as a general measure of a firm’s overall financial health over a given period. Analysts and investors use financial performance to compare similar firms across the same industry or to compare industries or sectors in aggregate.
Financial Viability
To continue to produce a profit, pay debts as they fall due and continue to prosper.
Fixed Asset
Also known as Non-Current Asset An asset used on a continuing basis in a business and usually with a lifespan of more than 1 years and typically includes property, machinery, equipment, vehicles and computers.
Fixed Costs
Expenses not affected by the volume of output (goods & services) over a period of time.
Forecasts
A future estimate of performance using historical data and assumptions.
Foreign Exchange
Foreign Exchange, or forex, is the conversion of one country’s currency into another. In accounting it often arises when a company buys or sells to a customer overseas and the money spent or paid needs to be converted into or from that local currency.
Funding
The act of providing financial resources, usually in the form of money, or other values such as effort or time, to finance a need, program, and project, usually by an organisation or company.
G
Gearing
The ratio of owner’s equity to company’s debt.
Going Concern basis
The assumption that a company will continue to operate indefinitely.
Grant
A form of funding that assists a company with a project or upskilling workforce that is usually not refundable if the conditions of the grant are met.
Gross
The value before making any deductions.
Gross Profit Margin
Profit margin, calculated as Total Sales/ revenue minus cost of sales before deducting administration and selling expenses.
H
Hedging
Is an advanced investing strategy that reduces the risk of price fluctuations to the value of an asset.
His Majesty’s Revenues and Customs (HMRC)
The UK government’s tax-collection organisation (previously called ‘Inland Revenue’). It has other non-tax responsibilities.
I
Incentive Planning
For an organisation to succeed, the business owner must attract and retain productive employees. Therefore, a business establishes competitive incentive plans to accomplish these objectives. Incentive plans motivate employees to exceed expectations and grow the business. Such plans promote exceptional behaviour during a specific period. In addition, they attract potential employees to an organisation and encourage company loyalty. However, an incentive plan must contain obtainable goals. Otherwise, employee morale will fade, and the plan becomes ineffective.
Income Statement
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 enough assets to cover debts.
Insolvency Practitioner
A person licensed to act on behalf on an insolvent individual, partnership or company.
Insourcing
Insourcing arises when a company sees the need for professional financial management and control, but does not want to add to headcount, and certainly does not need a full-time finance person. Instead of “contracting out” to an accounting firm, you can insource the appropriate financial skillset who will be part of your team. A specialist outside company can provide this and will back up the in-sourced resource with a team at its own base and necessary methodologies, systems and experience to give a growing company all the benefits and value of strong and flexible financial management – working mostly from company premises, with colleagues, but without the cost and employment obligations of hiring yet another staff member.
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.
Inventory Valuation
Inventory valuation is the cost associated with an entity’s inventory at the end of a reporting period. It forms a key part of the cost of goods sold calculation and can also be used as collateral for loans. This valuation appears as a current asset on the entity’s balance sheet. The inventory valuation is based on the costs incurred by the entity to acquire the inventory, convert it into a condition that makes it ready for sale, and have it transported into the proper place for sale.
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.
Invoice Factoring
Invoice Factoring is a financial transaction and a type of debtor finance. In invoice factoring, a business sells its accounts receivable (invoice) to a third party (called a factor) at a discount. A company will sometimes factor its receivable assets to meet its present and immediate cash needs. It might also factor their invoices to mitigate credit risk.
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 number 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.
Joint Venture
A Joint Venture is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a Joint Venture, each of the participants is responsible for its share of profits, losses, and costs associated with it. However, the venture is its own entity, separate from the participants’ other business interests.
K
Key Performance Indicators (KPI)
A measurable value that demonstrates how effectively a company is achieving key business objectives. Businesses use KPIs at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the company, while low-level KPIs may focus on processes in departments such as sales or marketing.
L
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 in the balance sheet.
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 and other creditors are usually paid first while shareholders are paid last.
Liquidity
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. Liquidity can be enhanced by having access to debt facilities such as overdrafts and factoring.
M
Making Tax Digital (MTD)
Making Tax Digital (MTD) is a UK government initiative that sets out a vision for the 'end of the tax return' and a 'transformed tax system', announced in 2015 and originally intended to be in place by 2020. HM Revenue and Customs (HMRC) states that the main goal of MTD is to make tax administration more effective, more efficient and simpler for taxpayers.
Management
Refers to a group within an entity responsible for running the company.
Management Accounting
Reporting accounting information within a business specifically for internal management use.
Management Information
Management information (MI) is very important in reporting the past, analysing trends, helping you forecast the future and solving any problems you identify.
Margin
The difference between income and sales, also known as profit.
Marginal Analysis
Examination of the additional benefits of an activity compared to the additional costs incurred by that same activity. Companies use Marginal Analysis as a decision-making tool to help them maximise their potential profits. Marginal refers to the focus on the cost or benefit of the next unit or individual, for example, the cost to produce one more widget or the profit earned by adding one more worker.
Market Share
Market share is the percent of total sales in an industry generated by a particular company. It is calculated by taking the company’s sales over the period and dividing it by the total sales of the industry over the same period. This metric is used to give a general idea of the size of a company in relation to its market and its competitors.
MBO
An MBO (management buyout) is a transaction where a company’s management team purchases the assets and operations of the business they manage. It is appealing to professional managers because of the greater potential rewards and control from being owners of the business rather than employees. It can also be a beneficial way for an existing owner to sell the business on retirement.
Merger
A corporate situation that involves the combination of two separate companies into one entity. Existing shareholders retain a shared interest in the new entity.
Mergers and Acquisitions (M&A)
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, purchase of assets and management buy-out / buy-in acquisitions. In all cases, at least two companies are involved.
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.
Month-End Reports
At the close of each month, you need to complete a month-end report to keep your accounting statements updated. The month-end report adjusts your ledger for monthly transactions. This includes recording loan payments, reducing the value of business assets by their depreciation, writing off any bad debts and recording entries for prepaid expenses. The month-end report is also used to review the past month’s transactions and make sure everything has been properly recorded. If your accounts do not balance, the month-end report is a time to correct any accounting errors.
N
Net
The value after deductions.
Net Assets
Total Assets minus Total Liabilities.
Net profit margin
Net profit margin is the percentage of revenue left after all expenses and taxes have been deducted from sales. The measurement reveals the amount of profit that a business can extract from its total sales. A high net profit margin indicates that a business is pricing its products correctly and is exercising good cost control.
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).
Nominal Ledger
A nominal ledger is the main place where accounting transactions are recorded. It contains profit and loss, balance sheet and the nominal account – a complete set of accounting records.
Nominal Value of a share
The face value of a share certificate.
Non- current Liabilities
Long term financial obligations/ liabilities not due to be paid within 12 months e.g. long-term bank loans and long-term leases.
Non- Executive Director
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.
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 stock market.
Operating Activities
Activities that directly affect cash inflows and 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.
Outsourcing
The strategic use of outside resources to perform activities traditionally handled by internal staff and resources.
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.
P45
In the UK and the Republic of Ireland, a P45 is a certificate given to an employee at the end of a period of employment, providing details of their tax code, gross pay, and the tax paid for that year, to be passed to a subsequent employer or benefit agency.
P60
A P60 is a form that shows how much taxable salary the employee was paid in the tax year and how much tax was deducted from their wages. An employer must give a P60 to each of their employees at the end of the tax year. Employees who have left during the tax year will not receive a P60 from their employer, as the same information will be on their P45.
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.
Payroll
Payroll is the total amount of wages paid by a company to its employees. Payroll processing is an important function for any business—no matter how small. It’s likely your company’s largest expense, and the most time-consuming HR work performed each month. Payroll can be processed weekly, biweekly, or monthly. While the process varies from company to company, payroll is indisputably complicated. It requires an organised system, knowledge of current regulations and taxes, and careful planning and so processing is often outsourced.
Peer to Peer Learning
Peer to Peer Lending (P2P) enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman. Websites that facilitate peer to peer lending have greatly increased its adoption as an alternative method of financing. P2P lending is also known as social lending or crowd lending.
Pension
A retirement plan in which an employer and employee make contributions into an account each month. The contributions are often tax-efficient and are invested on behalf of an employee, who may begin to make withdrawals after retirement.
Personal Guarantee
The term personal guarantee refers to an individual's legal promise to repay credit issued to a business for which they serve as an executive or partner. Providing a personal guarantee means that if the business becomes unable to repay the debt, the individual assumes personal responsibility for the balance.
Preference shares
A type of shares which guarantees priority in dividend payment but does not give voting rights to shareholders. They usually also rank above ordinary shareholders in the event of bankruptcy.
Pricing Strategy
Pricing strategy is the tactic that companies use to increase sales and maximize profits by selling their goods and services for appropriate prices. Depending on the industry in which a firm operates, there are different pricing strategies to implement, such as penetration pricing, premium pricing, discount pricing, and competitive pricing.
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 how the business has financially performed over the financial period.
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 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, or pay Class 1A National Insurance on them at the end of the tax year.
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 recommended accounting principles, thereby not showing a true and fair view in all areas.
R
R&D Tax Credits
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.
Real Time Information (RTI)
Real Time Information involved making regular and current submissions to HMRC. Each time you pay your employees, you’ll need to submit PAYE information to HMRC, rather than just once a year at payroll year end.
Recapitalisation
This is a change in the capital structure of a company that involves the injection of fresh equity and options
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 Profits
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 Shareholder’s 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 Issues
Offer to existing shareholders the right to buy additional shares.
Risk Assessment
Risk assessment is a general term used across many industries to determine the likelihood of loss on an asset, loan, or investment. Assessing risk is essential for determining how worthwhile an investment is and the best process(es) to mitigate risk. It presents the upside reward compared to the risk profile. It also determines the rate of return necessary to make a particular investment succeed.
S
Sales Forecast
Projection of achievable sales revenue, based on historical sales data, analysis of market surveys and trends, and salespersons’ estimates. Also called sales budget, it forms the basis of a business plan because the level of sales revenue affects practically every aspect of a business.
Sales invoice
A document that shows a client sums due in exchange for goods/services delivered and includes any VAT to be collected for HMRC.
Sales Ledger
A sales ledger is a record of a company’s sales, showing the amounts paid and owed by customers.
Scale Up
A scale-up company is one that is showing strong, consistent growth – whether in terms of revenue or customer base. Typical definition is any enterprise 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.
Secured Loan
This is a loan backed by assets (e.g. a car, property) belonging to the borrower to reduce the lender.
SEIS
The Seed Enterprise Investment Scheme (SEIS offers tax reliefs to individual investors who buy new shares in your company. The scheme helps your company to raise money when it’s starting to trade. You can receive a maximum of £250,000 through Seed Enterprise Investment Scheme (maximum correct at July 2023).
Selling a business
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 must 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.
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 fund
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.
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 and Limited Liability partnerships. 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 within a defined period in order to avoid a fine. Credit agencies will use these to help determine company credit scores and limits
Stock Control
Stock Control is the practice of balancing the need to maintain inventory levels against its cost. The ideal outcome of stock control is a minimal investment in inventory, while still being able to fulfil customer orders in a timely manner.
Stock exchange
A market /exchange in which stocks and securities are bought and sold and which sets the rules for buyers and sellers.
Strategic Planning
Strategic Planning is an organisational management activity that is used to set priorities, focus energy and resources, strengthen operations, ensure that employees and other stakeholders are working toward common goals, establish agreement around intended outcomes/results, and assess and adjust the organisation’s direction in response to a changing environment. It is a disciplined effort that produces fundamental decisions and actions that shape and guide what an organisation is, who it serves, what it does, and why it does it, with a focus on the future.
Strategy Implementation
Strategy Implementation refers to the execution of the plans and strategies, so as to accomplish the long-term goals of the organisation. It converts the opted strategy into the moves and actions of the organisation to achieve the objectives. Strategy Implementation is the technique through which the firm develops, utilises and integrates its structure, culture, resources, people and control system to follow the strategies to have the edge over other competitors in the market.
Subsidiary Company
A company that is owned (fully or partly) and controlled by another entity referred to as the holding or parent company.
Succession Planning
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.
T
Term
Definition
Trade Creditors
These are suppliers awaiting payment for goods or services supplied on credit.
Trade Debtors
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 less any sales taxes.
V
Value Added Tax (VAT)
A general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the UK and the European Union.
Variable Costs
A corporate expense that changes in proportion to production output. Variable costs increase or decrease depending on a company’s production volume; they rise as production increases and fall as production decreases. Examples include the costs of raw materials and packaging.
VAT Reclaim
Reclaiming the VAT paid on goods and services purchased for use in your business. Reclaimable only for the business proportion of the VAT; records and valid VAT invoices are necessary to support the claim.
VAT Return
A form filed with HMRC, usually four times a year, showing the amount of VAT due to be paid and the amount reclaimable on purchases. If reclaimable amount exceeds due amount, HMRC refunds the difference.
Venture Capital
Funding for a new or growing business, often from VC firms in exchange for equity in the start-up. VC firms specialize in building high-risk financial portfolios and support start-ups with funding and guidance.
Venture Capitalist
An investor providing capital to firms with high growth potential in exchange for an equity stake. They invest in start-up ventures or small companies aiming to expand without access to equities markets.
W
Wages
Monetary compensation paid by an employer to an employee in exchange for work done, calculated based on tasks completed, hourly/daily rates, monthly flat rates, or work quantity. Part of the expenses involved in running a business.
Working Capital
Measures the ability to cover short-term financial obligations and indicates the liquidity of a company. Calculated as current assets minus current liabilities.
Write down
A reduction in the book value of an asset, representing the value as it appears on a balance sheet.
Y
Year end
The completion of an accounting period, known as an accounting reference date (ARD) for limited companies. ARD is the end of the financial year, and the new financial year starts the following day. Directors can change this date within certain Companies Act rules.
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.
