Glossary

Bad debt – if a customer cannot pay you for the amounts, they owe you it is referred to as a bad debt and has to be written off against your business’s profit.

Balance sheet – a report of the financial position of an entity showing assets, liabilities, and ownership interest at a specific date, normally year end. You might also see this called a Statement of Financial Position

Budget – a plan for the next 12 months usually used to compare actual performance against

Business plan summary – a snapshot of the business forecast giving high level, relevant information. A good summary to send to funders.

Capital – an injection of finance provided, generally by the owners or shareholders but could be anyone, to enable a business to acquire assets and sustain its operations. This is shown on the balance sheet within the bottom funded by section.

Capital expenditure (Capex) – spending on fixed assets.

Cash flow forecast – report of cash receipts and payments expected to flow into and out of a business. Can be created as short term (daily, weekly) or longer term on a monthly basis.

Corporation tax – Tax payable by registered Public (PLC) and Private (Ltd) Limited companies, based on the taxable profits of the period. All corporation tax calculations should be done by qualified tax professionals as part of a financial year end reporting process.

Cost of sales – materials, employees and other costs directly related to the goods sold. You might also see this called cost of goods sold. These costs are deducted from your sales income to calculate gross profit.

Credit (days to pay) – agreements to allow the customer to make payment after the delivery of the goods or services. Typical credit periods range from 30 to 60 days, but each agreement is different. You may receive credit terms from your supplier or grant credit terms to your customers.

Creditor – someone you owe money to. You will see your suppliers referred to as Trade creditors.

Current asset – assets that are expected to be converted into cash within the trading cycle. Normally includes stock, trade debtors and cash.

Current liability – a liability which is expected to be settled in the business’s normal operating cycle, generally within 12 months.

Debtor – someone who owes you money. You will see your customers referred to as Trade Debtors.

Deferred taxation – you may see this on your balance sheet. Deferred tax covers any timing differences of income & expenditure recognised in different periods for accounting and tax purposes. This should only be calculated by qualified tax professionals.

Depreciation – writing off the cost of a fixed asset over its useful life. This splits the cost over a specified time period rather than the full cost at once when you buy the asset.

Director(s) – Person(s) appointed by shareholders of a limited liability company to manage the affairs of the company.

Dividend – amount paid to a shareholder, out of a company’s post tax profits, as a reward for investment in the company. The value of the dividend paid is proportionate to the number of shares held and the classes they sit within.

Drawings – money taken out of the business for personal use, in sole trader or partnership businesses, treated as a reduction of ownership interest.

EBITDA – Earnings Before Interest Tax Depreciation and Amortisation. A measure used to compare the underlying debt-free cash generation performance of a business. Find out more about EBITDA in our blog.

Employee – member of staff contracted to work for the business and paid a salary/wage through the payroll to do so.

Entity, entities – something that exists independently, such as a business which exists independently of the owner in the case of limited companies.

Equity – share capital of an entity. You receive equity upon sales of shares in your limited company.

Expense – the running costs of a business.

Financial statements – commonly known as ‘accounts’, these statements show the financial position of the business at a specific point in time.

Fixed asset – high value purchases which you depreciate the value of over time. Described as tangible, things you can touch like cars and machinery or intangible, things you can’t touch like IP and goodwill.

Fixed cost – a cost which is not affected by changes in the level of output e.g., machinery rental, rent and rates.

Forecast – estimates on performance for any future time period. A longer outlook than a budget that can be overlaid with strategies and events that you can speculate on to see how they would affect your business. Normally done for 3 years but there is no limit. Funders or investors will usually want to see forecasted profit and loss, balance sheet and cashflows.

Goodwill – the excess of the fair value of a business and the value of the underlying assets recorded in the accounts. You would see this as an intangible asset on your balance sheet if it has been calculated.

Grants – money from organisations that doesn’t have to be paid back. These have to be applied for and certain parameters have to be met through the duration of the grant term to prevent funds being reclaimed. They can be capital based for large projects or purchases or revenue based, much like the recent Job Retention Scheme and can be an ongoing income.

Gross – the net value of something plus any VAT applied. You might see this on an invoice.

Gross salary – values paid to employees before any deductions of PAYE and National Insurance. 

Gross profit (or margin) – sales minus Cost of Sales.

Inventory – you might see the stock that you hold for resale referred to as inventory.

Invoice (bill) – a document from a supplier detailing goods or services supplied and the costs. If the supplier is registered for VAT and it is applicable to that charge, their VAT registration number, tax point and company details should be included on their invoice.

Liabilities – monies owed by a business to others.

Limited liability company (Ltd) – a company registered at Companies House with shareholders and directors. By registering in this way, a company owner limits the liability they have on company values.

Loan – money borrowed from a financial institution, like a bank, or an individual.

Margin – the profit you make on a sale.

National Insurance (NI) – both employees and employers have to pay National Insurance to HMRC. Employee contributions are deducted from their salary and employers’ contributions have to be included in the profit and loss account as a cost. Both values are paid over to HMRC by the employer the following month.

Net assets – the value of all assets minus all liabilities on a balance sheet.

Net book value (NBV) – the value of a fixed asset minus any depreciation charged so far.

Net profit (or margin) – sales minus cost of sales, (gross profit), minus overheads.

Ordinary shares – shares in a company which entitle the holder to a dividend.

Other income – any other income your business receives outside normal trading. This could be renting out a property or leasing space for a mobile phone mast.

Overdraft – a limit set by your bank which provides pre-agreed flexible funding over the balance of your bank account.

Partnership – two or more persons (or companies) in business together with the aim of making a profit. These can be registered as Limited Liability Partnerships, (LLPs), following professional advice.

Pay As You Earn (PAYE) – tax paid by employees as a deduction on their salary. Paid over to HMRC on the employee’s behalf by the employer.

Prepayment – anything you pay in advance for which can then be split into periodic charges over the benefit of the purchase. The most common prepayments are insurance premiums and annual subscriptions which are paid for at the start of the term, but the full value is gained over the year. These would be shown on the balance sheet as other debtors.

Profit – sales minus costs.

Profit and loss account – a financial statement showing sales, costs and profit. You might see this called a Statement of Income and Expenditure or casually as a P&L.

Retained earnings – accumulated past profits that have been kept within the company and not paid out in dividends to shareholders. You might also see these called reserves.

Revenue – another way to describe incoming values and sales.

Share capital – to the total amount of cash contributed by shareholders. You will see this on a balance sheet, sometimes consolidated with share premium.

Share premium – price paid for shares in a company over and above their nominal value. You will see this on a balance sheet, sometimes consolidated with share capital. 

Shareholders – owners of a limited liability company. Shareholders can have different share classes with different voting rights and dividend awards.

Sole trader – a lone owner of a business. Sole traders can employ other staff, but the original trader is responsible for the running of the business.

Stakeholders – anyone who may have a valid interest in a business and its information. This could be an investor, a funder or any other linked party.

Stock – the goods you hold for resale. You might also see this called inventory.

Trade creditors – someone you owe money to in exchange for goods and services they have supplied to you in the normal course of running your business. This is normally the amount you owe your suppliers.

Trade debtors – someone who owes you money in exchange for goods and services you have supplied to them in the normal course of running your business. This is normally the amount your customers owe you.

Turnover – sales of a business or other form of revenue from normal running of your business.

Value Added Tax (VAT) – companies with sales over £85,000, (as at 2021/2022) can and should register for VAT. This is a tax, (currently at 20%) added onto applicable sales you make which is paid over to HMRC. If you are registered for VAT, you can also reclaim any VAT that has been charged to you from suppliers. You have to supply periodic VAT returns to inform HMRC of these values.  There are different VAT schemes which could help your cashflow according to your circumstances e.g. cash accounting, flat rate – see HMRC website for more details.

Working capital – the difference between your current assets and current liabilities. This value indicates how much the company has spare to fund the day to day running of the company.

Work-in-progress (WIP) –used within a manufacturing company, this is a valuation of goods that are part way through their production process included in the stock valuation on the balance sheet.