Understanding Financial Jargon for SME Businesses

If you’re new to running a small business, you’re discovering what thousands of others up and down the country know; at any given time you may have to learn something new about some aspect of your business, whether it’s mastering social media or tackling the complexities of small business accounting. In turn, that puts you on a collision course with financial jargon. Here at ICS Accounting we believe strongly in supporting small businesses. We’ve seen that it can be one of the best ways to support a wider community and help a local economy. So we’ve put our heads together to give you a financial glossary. What do you need to know?

Small Business Financial Glossary

Accounts Payable (AP)

Your Accounts Payable is a record of all money you owe to your suppliers that isn’t yet paid. Accounts Payable is usually recorded in invoices and should show up on your balance sheet as a current liability. Any person or business you have yet to pay for services or goods received is known as a creditor.

Accounts Receivable (AR)

The opposite of Accounts Payable, Accounts Receivable records money owed to you for services or goods you’ve provided. AR is typically recorded on balance sheets as an asset even though it’s outstanding, because the customer (also known as a debtor) is legally obliged to pay you.

Assets

Everything the business owns with financial value is an asset (and yes, that includes cash held by the business). Property and equipment are the most common types of asset, but you may also have a vehicle or even a small fleet, and raw material for goods are also assets. If you hear the term current asset, that means cash or anything you could convert to cash within 12 months. Most obviously, any goods you have in stock ready to sell are current assets.

Audit

Audits refer to any official checks ensuring your financial records are correct. This may be for compliance purposes or as part of due diligence if you are looking for an investment. The FRC recently launched a campaign supporting SMEs accessing audit services to help them secure the investment necessary to grow.

Bank Reconciliation

Bank reconciliation is the process of checking that your cashbook matches up to the relevant bank statements. This helps catch any discrepancies so that errors can be identified and any underlying issues can be corrected.

Bookkeeping

Simply put, bookkeeping is the term for recording a business’ financial activity, tracking incomings and outgoings, and producing reports that can be used to make decisions.

Business Credit Report

A business credit report is a record of that business’ credit history. These are used to calculate the business’ credit score; they’re very important to lenders, insurers, and investors.

Capital

Capital is, quite simply, the assets owned by the business. It is usually in the form of property or money.

Capital Gains

If you sell an asset for more than you paid for it originally, that is a capital gain.

Cost of Goods

The cost of goods is the amount of money spent to produce those goods or deliver a service.

Defaulting

Defaulting is failing to make payments on loans or debts – your Accounts Payable. This can significantly affect your Business Credit Report. If your business defaults and you cannot make arrangements to defer payment, your business will become insolvent.

Equity

Equity is the value of your assets minus your liabilities. It can be used to assess the value of stocks or shares in the business; if all assets were sold and all liabilities paid off and the business wrapped up, shareholders would receive that money.

FCSA

The FCSA is a trade organisation which assesses accountancy companies for compliance with stringent regulations. ICS Accounting is an FCSA accredited member.

Financial Year

Each business has a financial year ending on a particular date, usually the end of the month. This is commonly aligned with the calendar year (January to December) or the tax year (April to March) but not always. Financial years are split into four three-month sections, naturally called Quarters. These are usually written as Q1, Q2, etc. This can lead to confusion, so double-check the relevant dates!

Gross Income

Gross income is the term used for all money the business brings in before any expenses have been deducted.

Gross Profit

Similarly, gross profit is the term for money brought into a business after the cost of sales is deducted.

Insolvent

A business is considered insolvent if it cannot pay debts when they are due. Companies that are insolvent for a period of time may need to declare bankruptcy.

Liability

A liability is any amount of money owed or other financial obligation. You may also hear the term current liability, which is any liability due within the next 12 months.

Line of Credit

A line of credit s an agreement with a financial institution allowing you to withdraw money up to an approved credit line when borrowing money.

Merger

A merger sees two existing companies legally united into one company. Often the result of a takeover or buyout.

Net Assets

Your business’ Net Assets is the total value of your assets minus your total liabilities. This is also called Net Worth.

Net Income

Also known as Net Profit, your net income is the profit made after the cost of sales and your overheads are deducted. If your Net Income is negative, you are losing money.

Overheads

Overheads is the term used for the costs of running your business outside of the cost per sale. It includes rent, utilities, and marketing.

Personal Guarantees

Sometimes a director or shareholder may have to give a personal guarantee for a debt. This means that if the company defaults on the debt, the director or shareholder accepts personal liability. This is done only rarely.

Profit and Loss Statement

Also known as a Profit and Loss account or simply as a P&L, this statement lists sales and expenses for the past year, demonstrating profit and loss and allowing you to calculate gross and net profit.

Profit Margin

Your profit margin, sometimes simply called your margin, is the amount by which your sales exceed the cost of sale.

Revenue

Your total income from the sale of your goods or services before any deductions can also be called your revenue.

Return on Investment (ROI)

The return on investment is a calculation of the profitability of either your business, a specific project (for example, the launch of a new product), or an investment. It can refer to a calculation of the actual profitability of a decision taken some time in the past, or a calculation of the expected profitability of a pending decision. For example, you would look at the money saved over the lifespan of a new solar panel installation against the cost of that installation.

Start-Up Loan

A start-up loan is a particular type of loan available to UK business owners looking to start or grow a small business.

Turnover

Your turnover is the total sales made by your company over time.

Venture Capital

Venture capital is a term used for investments made in start-up companies that are seen as having growth potential. It is also used as a term for firms and funds specialising in these investments.

Working Capital

Working capital is the money used for a business’ day-to-day expenses. It is calculated as current assets minus current liabilities.

Yield

Yield is the term for income returned on a successful investment. If the purchase of a new machining tool allowed the company to double its business, the income from that extra business would all be referred to as the yield.