Your Glossary for Financial Jargon

Running a small business successfully always means being ready to learn new things; there are so many new skills that need to be developed, from understanding how social media can help reach new customers to the ins and outs of payroll.

And while it’s true that other people – either employees, contractors, or agency services – can handle some of these for you as you grow, it still pays to be able to understand what they’re telling you.

While we can’t speak for every industry, we know that the jargon used by banks and accountants can be daunting to people who aren’t used to it. Hence this: a simple, easy reference for small business owners looking to better understand their finances.

Accounts Payable (AP)

Accounts Payable records all money you owe to your suppliers and haven’t yet paid. On your balance sheet, it’s entered as a current liability, and invoices are used for keeping AP up to date. Suppliers you haven’t yet paid can also be referred to as creditors.

Accounts Receivable (AR)

It’s best to think of Accounts Receivable as the opposite to Accounts Payable. This is the money you’re owed for services or goods that have been provided but which you haven’t been fully paid for yet. On balance sheets, AR is recorded as an asset even though it’s outstanding – your customers are legally obligated to pay you. And just as suppliers of AP are creditors, customers for AR are known as debtors.

Assets

Assets is a broad category; simply put, assets are everything the business owns which has a financial value, including cash. Raw materials you’ll use to make goods are assets; so is any equipment used by the business. You might also hear this referred to as capital or capital assets.

Not quite the same thing are current assets; this means your cash, as well as anything you can convert to cash within 12 months – for example, any stock you have that’s ready to sell.

Audit

Included in this list for reassurance purposes, audits don’t automatically mean anything’s gone wrong. The term covers any official review of financial records that seeks to establish whether or not they’re correct. Audits are carried out to confirm compliance or as part of the due diligence that may be required for investment.

Bank Reconciliation

At regular intervals, you should match your cashbook up against your bank statements, looking for any discrepancies that may indicate bookkeeping errors or unrecorded financial transactions. This process is known as bank reconciliation, and carrying it out frequently helps catch issues before they become a problem.

Business Credit Report

Useful for lenders, insurers, and investors, business credit reports create a record of the business’ credit history. A poor business credit report can have repercussions for a long time.

Capital Gains

If you sell an asset for more than you paid for it originally, the profit is recorded as a capital gain.

Defaulting

Failing to make payments on Accounts Payable is known as defaulting. This seriously affects your Business Credit Report, as well as your reputation with those creditors.

If you default and can’t arrange to defer payment, you enter insolvency.

Equity

The value of all assets minus your liabilities is also called your equity, and it’s used when assessing the value of stocks or shares in the business.

Financial Year

Split into four quarters usually written as Q1, Q2, Q3, etc., a business’ financial year doesn’t always run alongside the calendar year, though it can; most businesses either use the tax year (April to March) or the calendar year, but you can start your financial year at any point.

As a result, when dealing with someone else’s business and hearing terms like Q1 or Q2, you could be looking at any three-month period; make sure you have the dates correct if it’s relevant to your planning.

Gross Income

Simply enough, gross income is all money that comes into the business, with no deductions. It can also be referred to as revenue.

Gross Profit

Gross profit is your gross income minus the cost of sales, before any other costs are factored into account.

Insolvency

Mentioned earlier in the entry on defaulting, insolvency is a situation where the business cannot pay due debts. If the business is insolvent for a period of time and no way out can be found, bankruptcy proceedings may be called for.

Liability

Liabilities are any debts and other financial obligations. As with assets and current assets, there is also current liability, which is any liability due to be paid within the next 12 months.

Margin

More properly called a profit margin, your margin is the proportion by which your sales exceed the cost of sale.

Net Assets

Your Net Assets are calculated by deducting your total liability from your total assets. You’ll also see the term Net Worth, which refers to the same thing.

Net Profit

Deduct overheads from Gross Profit to calculate your Net Profit, also known as Net Income. This is a key figure to keep an eye on; if your Net Profit is negative, you’re losing money.

Overheads

All static costs in running your business are included in your overhead; essentially, it covers all costs except the cost per sale. This includes rent, utilities, and marketing.

P&L

Your P&L is also known as your Profit and Loss Statement. It sets out your sales and expenses over the past year, showing your profit and loss (hence the name). A very useful document in mid-term planning.

Return on Investment (ROI)

A key part of business planning, ROI is a way to measure profitability. You can measure the ROI on your entire business, an investment (say, bringing in a second expert to increase your capacity), or a specific project like the launch of a new product.

ROI can refer to calculating the actual profitability of actions already taken, or expected profitability for actions yet to be taken.

Start-Up Loan

Start-up loans are available for business owners looking to start or grow a small business.

Turnover

Turnover for a period of time simply means the total sales made over that period.

Working Capital

Working capital is the term used for the money a business has for day-to-day expenses. You calculate your working capital by subtracting current liabilities from current assets.