Abridged accounts Accounts that can be filed by small companies at Companies House (UK). Abridged accounts contain fewer financial disclosures. See also statutory accounts.
Accounting standards Rules and guidelines that set out how transactions should be recorded and presented in financial statements.
Accounts payable Process purchase invoices and pay suppliers.
Accounts receivable Process sales invoices and collect payments from customers.
Accruals Goods or services which have been received, but not yet invoiced or paid. Also known as accrued expenses.
Accrued income Income from the provision of goods or services to a third party which has not yet been invoiced.
Amortisation Another word for depreciation. Amortisation is an accounting expense that reflects the usage, wearing-out or ‘consumption’ of (intangible) fixed assets.
Angel investors Wealthy individuals who invest their own capital in early-stage companies in return for an equity stake in the business. Also known as business angels.
Asset-based finance Source of debt finance for smaller businesses that are unable to access debt finance through more traditional routes, e.g. banks.
Audit An examination of a company’s financial statements carried out by external independent auditors.
Budget A financial and operational business plan.
Capex Payments to purchase or improve long-term assets. Also known as capital expenditure.
Capital allowances An apportionment of the cost of an asset over its life, which can be deducted from taxable profit.
Capital and reserves Owners’ equity in a business. Numerically, it is equivalent to net assets in a balance sheet.
Capital employed Total assets less current liabilities. Also known as TALCL.
Capital gain If a company sells an asset or investment for more than its original cost, it is subject to tax on the ‘capital gain’ which arises.
Capital reserves Surpluses arising from activities other than trading.
Confirmation statement An annual return that every company must submit to Companies House (UK) to confirm information held about the company.
Contribution Sales revenue less variable costs.
Corporate governance System by which companies are managed (i.e. directed and controlled).
Corporation tax Tax on a company’s profits.
Cost of capital Cost of financing an investment over the long term, which is the discount rate used in NPV and IRR calculations.
Covenant Financial performance limit or target that must be met as a condition of debt finance.
Credit control Managing and collecting amounts owed by credit customers (debtors).
Creditor A ‘credit’ supplier who accepts payment after providing goods or services, as opposed to a cash supplier who is paid at the time of receipt. Also known as payables.
Creditor days Average number of days of outstanding creditors for all suppliers.
Crowd (or peer) lending Online lending directly to small and medium-sized businesses (see also equity crowdfunding). Also known as peer-to-peer (P2P) lending.
CVP analysis Cost-Volume-Profit (or break-even) analysis.
DCF Discounted cash flow. Cash flow discounted to present value recognising the time value of money.
Debenture A loan agreement issued by a company which is typically secured and carries a fixed rate of interest.
Debt factoring Outsourcing the collection of debt to a third party, which has specific expertise in managing and collecting debts.
Debt finance Money raised from debtholders (banks, finance houses, individuals, etc.).
Debtor A ‘credit’ customer who pays after receiving goods or services, as opposed to a cash customer who pays at the time of receipt. Also known as receivables.
Debtor days Average number of days that a company takes to collect cash from its credit customers.
Deferred income Early or advance payment from a customer for goods or services not yet delivered.
Deferred tax Timing differences between accounting and tax regulations.
Depreciation Cost of using fixed assets. It is an accounting expense that reflects the usage, wearing-out or ‘consumption’ of (tangible) fixed assets.
Double taxation Where a company resident in two (or more) countries is potentially subject to tax in both countries.
Earnings Often used as a proxy term for profit, typically to refer to profit after tax.
EBITDA Earnings before interest, tax, depreciation and amortisation. Typically used as a measure to approximate the cash generated from operating activities.
Equity Capital and reserves that belong to shareholders.
Equity crowdfunding Source of funding in which the public invest money in return for an equity stake in companies. Investors are sought through online platforms.
Equity finance Money (‘capital’) raised through the sale of shares to investors.
EPS Earnings per share
ERP Enterprise resource planning. A system of integrated IT applications used to manage a business and automate many back-office functions.
External audit Examination of a company’s financial statements carried out by independent auditors. Auditors are qualified professionals, appointed annually by shareholders to provide an independent opinion on whether the financial statements present a ‘true and fair’ view.
Financial risk Volatility in profit due to high leverage.
Financial statements A term used to describe a report that presents the financial performance and position of a business at a point in time. A set of financial statements includes a balance sheet, profit and loss, statement of cash flows and accompanying notes.
Financing activities Changes to funding from either equity finance or debt finance, identified within the cash flow statement.
Fixed charge Form of security in which particular assets are charged or held as security against debt finance.
Floating charge Unsecured debt finance, i.e. not secured against particular assets.
Forecast An estimation or prediction of an organisation’s future financial performance.
Fraud Intentional deception with a view to gaining personal advantage.
Free cash flow A performance measure calculated by deducting capital expenditure from operating cash flow. Used to measure how much money a company has left over to pay back debt, pay investors, or grow the business after operational costs have been paid for.
GAAP Generally Accepted Accounting Practice.
Gearing Measure of a company’s long-term financing structure. It compares a company’s borrowings (debt) with its funding from shareholders (equity).
Going concern A state of operating and financial capability in which a business is expected to continue operations into the future, for a period of at least 12 months from the date the accounts are signed.
Goodwill Difference in value between what a company is worth and the value of its net assets.
Gross profit Revenue less ‘cost of sales’ (direct costs).
Gross profit margin Gross profit expressed as a percentage of revenue.
Group A parent company with at least one subsidiary.
Group accounts Financial information of a group of companies presented as a single (consolidated) set of financial statements.
HMRC Her Majesty’s Revenue and Customs.
IFRS International Financial Reporting Standards
Impairment A permanent loss in the income-generating potential of an asset.
Incremental budget A budget on the previous year’s budget plus or minus a set percentage.
Income Sales recognised within an accounting period. Also referred to as sales revenue or turnover. In some accounting jurisdictions the term ‘net income’ is used instead of ‘profit’.
Initial public offering (IPO) First sale of shares to outside investors by a private company.
Insolvency Legal term used where a company is unable to repay the debts that it owes.
Intangible assets Fixed assets that have no physical form such as development costs, patents, licenses, trademarks and software.
Interest cover An indication of the affordability of debt to a company. Measures how many ‘times’ a company could afford to pay its interest charges.
Investing activities Acquisition and disposal of long-term assets and other investments, identified within the cash flow statement.
IRR Internal Rate of Return. The ‘rate of return’ of an investment.
Journals Accounting adjustments to reflect timing differences.
Leverage A method of financing that uses debt to amplify the rate of return (to equity holders) from an investment.
Margin Profit as a percentage of the sales price.
Margin of safety Amount by which sales have to fall before a product or service makes a loss.
Market to book ratio Business value divided by net asset value.
Mark-up Profit as a percentage of direct costs.
Materiality A concept that refers to the importance of financial or non-financial information. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions of the users of financial statements.
Mixed costs Costs which include an element of both fixed and variable costs.
NBV Net book value. Difference between cost and accumulated depreciation.
Net assets Fixed assets + current assets – current liabilities – long-term liabilities.
Net working capital Current assets – current liabilities.
Nominal ledger Central repository for all accounting transactions.
Non-controlling interest Proportion of a company not owned by a parent company, i.e. held by third parties. A non-controlling interest exists when a subsidiary is less than 100 per cent owned by its parent company. Also referred to as Minority Interest.
NPV Net Present Value. The value or contribution of an investment measured using today’s value of money.
Operating activities Principal revenue generating activities of the business, identified within the cash flow statement.
Operating profit Revenue – ‘cost of sales’ and ‘operating expenses’.
Operating profit margin Margin between revenue and all operating costs, both direct and indirect overheads.
Operating risk Volatility in profit due to a high level of fixed costs compared to variable costs. Also known as operational gearing.
Opex Expenses incurred in running a business. Also known as operating expenditure or revenue expenditure.
Payback period A measure of the time required to pay back an investment.
PAYE Pay As You Earn.
Pre-emption rights Rights protecting existing shareholders against dilution of their percentage shareholding in a company.
Prepayments Goods or services which have been invoiced and paid for, yet have not been received. Also known as deferred expenses.
Price customisation Setting different prices for different customers based on their relative perceptions of value. Also known as ‘dynamic pricing’, ‘ demand yield pricing’ or price discrimination.
Private equity Funds raised from institutional investors and private individuals typically used to ‘buy out’ shareholders of existing companies rather than providing a source of new finance for companies.
Provision A liability that is uncertain in timing or amount. An obligation to pay is known to exist (or is probable) although the timing or exact amount is still unclear.
Prudence An accounting principle of conservatism, which states that revenue should not be overestimated and expenses should not be underestimated.
Public offering Regulated issue of shares to investors.
Retained profit Residual or remaining profit (i.e. after all expenses) and after dividends have been paid to shareholders.
Return on investment ‘Return’, typically profit generated, expressed as a percentage of the ‘investment’ required to run the business which generated the ‘return’.
Revenue Sales recognised within an accounting period. Also referred to as sales revenue, turnover or income.
Revenue reserves Accumulated profit retained in the business for future investment.
Rights issue Shares issued to existing shareholders typically at a discount and in proportion to shareholders’ holding of existing shares.
Rolling budgets Budgets which are revised on a regular basis, usually monthly or quarterly.
Secondary dealing A transaction that occurs between investors where the proceeds of the sale go to the selling investor, not to the company that issued the shares.
Solvent A business that is able to pay its long-term debts.
Statutory accounts Accounts prepared and filed by all companies (except dormant companies) at Companies House (UK). See also abridged accounts.
Stock Inventory comprising raw materials, work in progress and finished goods.
Substance over form An accounting concept by which transactions are reflected in the financial statements according to their economic reality rather than their legal form.
TALCL Total assets less current liabilities. Also known as capital employed.
Tangible fixed assets Assets that possess physical substance.
Tax gap Measure of the difference between the amount of tax collected by a country’s tax authorities and the amount that should be collected.
Trial balance List of every account in the nominal ledger and its associated ‘balance’ (or total), categorised into profit and loss account and balance sheet items.
True and fair Legal term interpreted to mean that accounts are free from material misstatements and faithfully represent the financial performance and position of an entity.
Turnover Sales recognised within an accounting period. Also referred to as sales revenue or income.
VAT Value added tax.
Venture capital (VC) Funds raised from institutional investors and wealthy individuals available to invest in business. VCs typically buy minority stakes in businesses and expect a ‘seat on the board’.
WACC Weighted average cost of capital. A weighted average cost of a company’s different sources of finance.
Whistleblowing Reporting of wrong-doing (fraud, illegality or unethical practice) at an organisation.
Working capital Difference between current assets (stock, debtors and cash) and current liabilities (creditors and bank overdrafts).
Working capital management Working capital management is the ability to make cash available when needed and to make the best use of surplus cash.
Zero-based budgets Budgets which are calculated from a ‘zero base’, i.e. starting from scratch.