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Jargon Buster
Business - Financial
Financial Jargon.Accounting (v Finance) Accounting is the act of recording the financial transactions of a business, whereas Finance is a much broader subject covering all of the financial aspects of the business, e.g. raising funds etc. Accruals These are provisions made in your accounts for costs that have been incurred for which the business has not yet been invoiced, e.g. a telephone bill may only come in quarterly, but there will calls made for which an invoice has not been sent; also expenditure on credit cards can take (say) six weeks before a bill is received. Balance sheet A balance sheet is a schedule of all of the assets and liabilities on a particular date (e.g. at the year end). This will show the ‘book value’ of the fixed assets, stocks held, money that is owed to the business and money that the business owes to others – plus cash at bank, or overdraft. The word ‘balance’ relates to the net assets (total assets less total liabilities) being equal to the aggregate of the (share) capital and reserves of the business. If the balance sheet does not equal, then there is an error to be found. Benchmarking Benchmarking the performance of parts of, or the whole of, an organisation is a way of improving by comparison with peer-groups, or ‘best in class’ organisations. Books (of account) These can take be either computerised or hand written is an actual book. A number of Books or Ledgers (see below) can be used. For those not confident in using computer packages, I recommend the use of simple columnar analysis books, or products such as the Simplex Account Books. Brand A brand is not just a name or logo of a company or product. A successful brand will convey unique ‘added-values’ that distinguishes it from the competition. Aston Martin, BMW and Peugeot are all selling cars, but they all have very different brands and brand values. Break-even What level sales are needed to exceed the costs of the goods sold and the overheads of the business? A very simple an easy to understand indicator that is so often omitted from accounts packs and budgets. Budgets An annual analysis showing the expected trading results (P&L) and balance sheets (including cash) by month, for the financial year. Business plan A business plan is a route plan and map for the future of the business. It sets out its aims and goals and how it plans to achieve them. Capital Broadly speaking, there are two main types of capital: share capital (see below) and capital expenditure or expenditure on fixed assets (see below). Cashflow statement A monthly (or annual) statement showing how much cash the business the business started with at the beginning on the period; what cash has been generated (or lost) by trading; whether the business has used more or less cash to fund its ‘working capital’ (see below) and whether it has bought or sold any fixed assets (see below). These figures are then aggregated to show the funds/overdraft at the end of the period. Current assets/current liabilities These are the assets and liabilities that will perpetually change as your business trades e.g. stock, debtors, creditors and bank balance. The excess of current assets over the current liabilities is known as the net assets (and vice versa). See working capital below. Cut-off This is term used to ensure that when producing a set of accounts, (P&L and Balance Sheet), that entries are shown in the correct period. This is typically used at a year-end when counting stocks, e.g. has provision been made (an accrual) for stocks delivered and counted, when the invoice has not been paid and/or received? Depreciation This is the amount each month or year by which fixed assets are written off over their expected useful life. It is shown in the P&L account as an expense of the business. Factoring This is a useful method for improving your cash situation, but it may be expensive. It involves selling your trade debtors to a company, who will typically advance 80% of your sales invoices when raised and 20% (less their costs) when the invoices are paid by your customer. Financials or Financial Statements Otherwise known as the Accounts, or Report and Accounts of the business and are the statutory annual accounts for the year. The term Financial Statements is increasingly being used and is another unwelcome use of American business vocabulary. Fixed assets This describes the assets that are required by the business in order to operate on a continuing basis. There are three types of fixed assets: 1) Tangible assets: e.g. plant, machinery, equipment, vehicles and buildings 2) Intangible assets: e.g. goodwill and intellectual property such as patents or trade marks 3) Investments: these would be held for long-term gain, e.g. equities/shares Forecast After (say) six months into the financial year and with the benefit of the results of the first six months trading, a forecast (revised budget) can be made to show the expected outturn for the year. Invoice Discounting This is very similar to factoring (see above), but with one major difference. Your company, and not the third party company, will collect the debt. In this way, your customers are unaware that this arrangement is in place. However, the longer the debt remains overdue, the more interest you will have to pay against the monies advanced on it. Ledgers Otherwise known as the ‘Books’ of account (see above). There are three main ledgers: Sales ledger - records the details of the transactions with each of the customers/debtors who purchase goods or services from the business, on credit terms. Purchase (or Bought) ledger - records the details of the transactions with each of the suppliers/creditors who supply goods or services to the business on credit terms. Nominal (or General) ledger - can be viewed as the ‘master’ ledger. Within this ledger are the nominal accounts (see below) for all of the income, expenditure, assets and liabilities of the business. For every transaction there are two entries – a debit and a credit. Therefore, when recorded correctly, the nominal ledger should always be ‘in balance’, i.e. the total of the debit balances equals the total of the credit balances. Marketing (v sales/selling) Marketing is the process of matching the resources of the business with customer needs. It identifies customer needs and wants, and finds ways of satisfying them. Whereas sales/selling is the disposal, at a price, of what you have in stock or in the pipeline, or the providing of a service. Nominals (or nominal accounts) These are the headings contained within the nominal ledger (see above). There will, for example, be nominal accounts for sales, purchases for resale, payroll costs (by department), rent, telephone, all other overheads, and for all fixed and current assets, current and long term liabilities, reserves and share capital. Profit and loss account (P&L) A statement showing the results of trading over a period, e.g. a month or a year. It shows how much money has been made, or lost! The P&L account should ‘accrue’ (see below) for expenditure incurred, but not yet charged and 'prepay' any income received in advance relating to a future period. Reserves These are the accumulated surpluses, (less losses), of the business since it has started operating. The reserves are represented by the net assets (the total assets less the total liabilities) of the business. Any dividends paid are paid out of the reserves of the business. Revenue Items of income or expenditure that are ‘written-off’, or expensed to the P&L as incurred. This is not to be confused with the Inland Revenue, the tax gatherers. Share capital The most common type of share is known as an ‘ordinary’ share. The owners of these shares are collectively known as the ‘shareholders’ of the company. They own the company in direct proportion to the number of shares they each own. Each share has a ‘nominal’ (notional) value, typically of £1 in a private company, but they could be of any value in a publicly quoted company e.g. 5p or 10p. This ‘nominal value’ confusingly bears no relevance to the value or worth that the share can be bought or sold. Strategy Strategy is about the future. What do we want our organisation to be, where do we want it to go and what do we want it to do? When these questions can be answered the strategy will address how the business is going the get there. VAT (Valued Added Tax) There are millions of pages written about this tax on the supply of goods or services. I’ll give a brief explanation of some of the main terms used: Output tax: this is the VAT that you add to the invoice when you make a sale Input tax: this is the tax that shown on the invoices of goods or services that you buy Standard rate: currently 17.5% Reduced rate: currently 5% Zero rate: this is an actual rate of tax - 0% Exempt: this is not a rate of tax, but a term to describe goods and services that are sold that are outside the scope of VAT Partially-exempt: this applies to a business where some of its goods or services sold are exempt, whilst others have one of the three rates applied to it. As a consequence, the business will not be able to fully recover the input VAT that if has suffered. This is known as irrecoverable VAT and is a cost to the business. Working capital This comprises of stock, debtors, creditors and cash/overdraft. These are the items that are (should be!) constantly ‘turning over’ when you are trading. Stock: items purchased (and perhaps worked on) for resale Debtors: monies owed by others to your business Creditors: monies owed by your business to others Work in Progress (WIP) see below Work in progress This term is used to describe the partially completed products or services to be sold, e.g. a company buys in raw materials for widgets to be made for £10 each and then processes the widgets before they are sold. Supposing there two processes to be undertaken in turn and the costs to apply theses processes are £5 and £8. The stock of widgets for a stocktake valuation will be £10, or £15, or £23 depending upon whether the sock is raw materials, work in progress, or finished goods. Zzzzzz Finance needn’t send you to sleep. Let Welsby Associates, be your own Finance Director and help you to understand and keep an interest in all aspects of the business. After all, it is your business.
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