Understanding More About Finance for Better Business Success

One of the secrets to better business success is understanding your numbers and having a good understanding of finance in general.

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.

If you want better business success, more easily, then getting a grip of finance and your numbers is essential.

I’ve covered quite a lot in my book 5-Minute Finance (the essential guide to finance for owners who want better business success) 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 Payable	Also called Creditors
Accounts Receivable	Also called Debtors
Accrual	A cost that has been incurred but not yet reflected in the accounts.  Accruals are liabilities.
Accrued Income	Income that has been earned but not yet reflected in the accounts.  Accrued income is an asset.
Acid Test	A liquidity ration ignoring the value of stock.
Amortisation	Matching the “cost” of an intangible asset to its economic life.
Asset	Something that is owned by the company.
Balance Sheet	The position of a company at a point in time, containing assets and liabilities.
Budget	A financial plan for future business operations.
Capital	Investment in a business which includes debt/borrowings and equity (shareholders’ investment).
Cash Flow Forecast	A view of possible future cash movements for the business.
Cash Flow Statement	A historic view of the cash position of a company and where the cash has come from and been used.
Cost	An expense to the business
Creditor	Someone/a business who is owed money by the business.
Current Assets	Assets 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.
Debt	Investment in the company that typically attracts interest and had an expected (usually specified) repayment date.
Debtor	Someone/a business that owes the company money.
Depreciation	Method of accounting for the matching of the “cost” of fixed assets to their economic life.
Direct Cost	A cost that can be attributed to a product or service that has been sold.
Dividend	Distributed profits to the shareholders of the business.
Earnings	Profits (usually net profits).
EBIT and  EBITDA	Earnings (profits) before Interest and Tax – and Depreciation and Amortisation.
Equity	Investment by shareholders that is not expected to be repaid in a specific timeframe.
Fair value	The expected replacement cost of an asset.
Fixed assets	Non-current assets used to run the business.
Fixed costs	Any 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)
Goodwill	The 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 costs	Any cost not directly attributable to the sales of products or services also called overheads.
Intangible Assets	Non-physical assets such as patents, licenses and goodwill.
Interest	A charge made over amounts of money loaned to a business – usually a % of the amount of a loan that is outstanding.
Inventory	Also called stock.
Liability	The amount owed by the company to another person/company.
Liquidation	Closure 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!
Loan	Also known as debt – amounts borrowed by the company.
Loss	Where total costs have exceeded total income.
Market value	The amount of money an asset can be expected to be sold for.
Net Assets	Total assets less total liabilities –  also known as shareholder capital.
Net Current  Assets	Current assets less current liabilities – also known as working capital.
Prepayment	An amount paid in advance of receiving goods or services.
Profit	The 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.
Receivership	If 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.
Refinancing	When 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).
Sale	Also referred to as Income, Revenue or Turnover.
Share Capital	The value of the shares in a company.
Shareholder	Owner of shares in a company.
Shareholders’  Funds	Share capital plus retained profits.
Statutory  Accounts	The accounts required by law under the Companies Act.
Variance	The 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).

Finance terms to understand for better business success.

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