Essentials of Finance – What Finance Words Mean

There is a whole vocabulary in the accounting world that may seem a little strange to you especially what finance words are used and their meaning. I’ve covered quite a lot in my book 5-Minute Finance (the. essential guide to finance for Business owners) but just as a reminder (and to add a few other variations you may hear when talking finance), here is a summary of some of the keywords and phrases.

Accounts PayableAlso called Creditors
Accounts ReceivableAlso called Debtors
AccrualA cost that has been incurred but not yet reflected in the accounts.  Accruals are liabilities.
Accrued IncomeIncome that has been earned but not yet reflected in the accounts.  Accrued income is an asset.
Acid TestA liquidity ration ignoring the value of stock.
AmortisationMatching the “cost” of an

 

intangible asset to its economic

life.

AssetSomething that is owned by the company.
Balance SheetThe position of a company at a point in time, containing assets and liabilities.
BudgetA financial plan for future business operations.
CapitalInvestment in a business which includes debt/borrowings and equity (shareholders’ investment).
Cash Flow ForecastA view of possible future cash movements for the business.
Cash Flow StatementA historic view of the cash position of a company and where the cash has come from and been used.
CostAn expense to the business
CreditorSomeone/a business who is owed money by the business.
Current AssetsAssets of the company that are expected to convert into cash within 12 months.
Current 

 

Liabilities

Amounts expected to be paid by the company within 12 months of the date of the Balance Sheet.
DebtInvestment in the company that typically attracts interest and had an expected (usually specified) repayment date.
DebtorSomeone/a business that owes the company money.
DepreciationMethod of accounting for the matching of the “cost” of fixed assets to their economic life.
Direct CostA cost that can be attributed to a product or service that has been sold.
DividendDistributed profits to the shareholders of the business.
EarningsProfits (usually net profits).
EBIT and 

 

EBITDA

Earnings (profits) before Interest and Tax – and Depreciation and Amortisation.
EquityInvestment by shareholders that is not expected to be repaid in a specific timeframe.
Fair valueThe expected replacement cost of an asset.
Fixed assetsNon-current assets used to run the business.
Fixed costsAny cost that does not vary directly with the scale and levels of activity.  Usually overheads. (Often these will increase in steps rather than in line with volume of sales)
GoodwillThe difference between the fair value of a company’s net assets and the price paid by an acquirer.
Income 

 

Statement

Another name for Profit and Loss Statement or P&L.
Indirect costsAny cost not directly attributable to the sales of products or services also called overheads.
Intangible AssetsNon-physical assets such as patents, licenses and goodwill.
InterestA charge made over amounts of money loaned to a business – usually a % of the amount of a loan that is outstanding.
InventoryAlso called stock.
LiabilityThe amount owed by the company to another person/company.
LiquidationClosure of a company and the sales of all its assets to convert everything to cash, creditors are paid, and the outstanding balance is distributed to the shareholders if there is any!
LoanAlso known as debt – amounts borrowed by the company.
LossWhere total costs have exceeded total income.
Market valueThe amount of money an asset can be expected to be sold for.
Net AssetsTotal assets less total liabilities –  also known as shareholder capital.
Net Current 

 

Assets

Current assets less current liabilities – also known as working capital.
PrepaymentAn amount paid in advance of receiving goods or services.
ProfitThe result of sales less costs, where sales exceed costs.
Profit and 

 

Loss Account

Also known as Income Statement or P&L.  It shows the trading activity of the business.
ReceivershipIf a company can no longer satisfy its creditor or other liabilities, it is put into receivership and run for the benefit of the creditors (in contrast to being run for the benefit of its shareholders).  Receivership often precedes liquidation.
RefinancingWhen a company takes out another loan to pay off an existing loan.
Retained 

 

Earnings

Profits that are reinvested in the business instead of distributed as dividends to shareholders (also called Retained Profits).
SaleAlso referred to as Income, Revenue or Turnover.
Share CapitalThe value of the shares in a company.
ShareholderOwner of shares in a company.
Shareholders’ 

 

Funds

Share capital plus retained profits.
Statutory 

 

Accounts

The accounts required by law under the Companies Act.
VarianceThe difference between actual numbers and the budget or financial plan.
Work in 

 

Progress

Stock that is in the process of being converted from raw materials into finished goods for sale (often call WIP).
Working 

 

Capital

The net current assets used by the business to ensure that creditors and other liabilities are paid on time.
Working 

 

Capital 

Requirement

The number of days between when a company pays for goods or services from suppliers and when it receives cash from its debtors (customers).

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