Navigating the world of business finance can sometimes feel overwhelming, especially when faced with a flood of complex terminology. To make it easier, here’s a straightforward guide to common finance terms that business owners in the UK may encounter. Understanding these phrases will help demystify the world of funding and corporate finance, so you can make informed decisions for your business.
Accounting Period
An accounting period is the timeframe a business uses for financial reporting, which might be a month, quarter, or year. At the end of each period, companies prepare financial statements to summarise their activities.
Annual Accounts
Annual accounts, also known as financial or statutory accounts, are the yearly records a business must produce to detail its financial status. These documents are often required for tax purposes and provide insights into the business’s financial health.
Annual Equivalent Rate (AER)
AER is the interest rate that shows what you will actually earn or pay over a year once compounding is taken into account. It’s commonly used for savings accounts to help compare returns on different products.
Annual Percentage Rate (APR)
APR is the yearly rate of interest charged on borrowed money. It reflects the cost of borrowing and includes any fees, making it a useful way to compare loans or credit products. The higher the APR, the more expensive the loan.
Assets
Assets are items of value owned by a business, such as cash, equipment, or property. They are classified into different types, including current assets (easily converted to cash) and fixed assets (long-term items like buildings).
Audit
An audit is an independent examination of a company’s financial statements to ensure accuracy. It’s typically required for larger businesses or those with specific regulatory obligations.
Balance Sheet
A balance sheet is a financial statement that shows a company’s assets, liabilities, and equity at a specific point in time. It provides a snapshot of the business’s financial position.
Base Rate
The base rate is the interest rate set by the Bank of England, influencing the cost of borrowing across the economy. Changes in the base rate often affect loans, mortgages, and savings interest rates.
Bootstrapping
Bootstrapping means building a business without external funding. Business owners use their own savings and keep expenses low to grow their company organically.
Break-even Point
The break-even point is when a business’s revenue equals its expenses. Reaching this point means the business is covering its costs but not yet making a profit.
Capital
Capital refers to resources, such as money or assets, invested in a business. It is essential for funding operations and growth. Capital can come from personal savings, investors, or loans.
Capital Expenditure (CAPEX)
CAPEX refers to the funds a business spends to buy, maintain, or improve long-term assets like property, equipment, or vehicles. These investments support the company’s future growth.
Cash Flow
Cash flow is the movement of money into and out of a business. Positive cash flow means more cash is coming in than going out, which is essential for a healthy business.
Corporation Tax
Corporation tax is the tax UK businesses pay on their profits. It’s calculated as a percentage of net earnings and is due annually.
Creditor
A creditor is someone a business owes money to, such as a supplier or lender. Managing creditors is crucial to maintaining healthy cash flow.
Debtor
A debtor is an individual or entity that owes money to a business. These amounts are typically outstanding payments from customers.
Depreciation
Depreciation is the gradual decrease in an asset’s value over time, often due to wear and tear. This reduction in value is recorded as an expense on financial statements.
Dividend
A dividend is a portion of a company’s profits distributed to shareholders. It is a common way for investors to earn returns on their investment.
EBITDA
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It’s a measure of operating profit, often used to assess a company’s performance.
Equity
Equity represents ownership in a company. In financial terms, it’s the value that would remain if all assets were sold and all debts paid. Equity financing involves selling shares to raise capital.
Fiscal Year
A fiscal year is a 12-month period used for accounting purposes, which may not align with the calendar year. Common year-ends are 31 March or 31 December.
Fixed Cost
Fixed costs are expenses that do not change based on production volume, such as rent or salaries. They remain constant regardless of how much the business produces or sells.
Gross
Gross refers to the total amount before any deductions. For example, gross income is the revenue before subtracting expenses or taxes.
Income Statement
An income statement, also called a profit and loss account, shows a company’s revenue and expenses over a certain period. It calculates the net profit or loss for that time.
Insolvency
Insolvency occurs when a company cannot pay its debts as they become due, or its liabilities exceed its assets. This is a serious financial state that can lead to business closure.
Invoice Factoring
Invoice factoring is when a business sells its unpaid invoices to a third party at a discount. This helps improve cash flow by getting immediate funds rather than waiting for customer payments.
Liquid Asset
A liquid asset is one that can be easily converted into cash, such as money in a bank account or publicly traded shares. High liquidity is crucial for meeting short-term obligations.
Liquidity
Liquidity is a measure of how easily a company can meet its short-term debts. Cash is the most liquid asset, as it can be used immediately.
Margin
Margin is the difference between sales revenue and costs, often expressed as a percentage. For example, if a business makes £100 in sales and spends £60 on costs, its profit margin is 40%.
Net
Net refers to the final amount left after all deductions, such as taxes and expenses, have been taken out. For example, net profit is gross profit minus all expenses.
Nominal Interest Rate
The nominal interest rate is the stated interest rate on a loan, without adjusting for inflation. It’s the rate quoted by lenders.
Operating Expenditure (OPEX)
OPEX is the money spent on the day-to-day running of a business, such as rent, utilities, and salaries. Unlike capital expenditure, OPEX covers ongoing costs rather than long-term investments.
Overheads
Overheads are the fixed costs of running a business that don’t change with production levels, like rent, utilities, and administrative expenses.
PAYE (Pay As You Earn)
PAYE is the system through which the government collects income tax from employees. Employers deduct it directly from employees’ wages.
Return on Investment (ROI)
ROI measures how much profit a business gains relative to its investment cost. It’s a useful metric for assessing the effectiveness of a project or purchase.
Revenue
Revenue is the total income a business generates from selling goods or services, before any costs are deducted. It’s also known as turnover.
Security
Security is an asset pledged as collateral for a loan. If the borrower defaults, the lender can claim the security to recover their money.
Turnover
Turnover is another term for revenue – the total sales a business makes over a given period.
Venture Capital
Venture capital is funding provided to startups and early-stage companies with high growth potential. Venture capitalists invest in exchange for equity, taking on more risk for a chance at high returns.
Working Capital
Working capital is the cash a business uses to cover its day-to-day expenses. It’s calculated as current assets minus current liabilities and indicates a business’s short-term financial health.
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Understanding finance jargon can empower business owners to make informed decisions about funding and managing their finances. Whether you’re looking for a loan, planning your cash flow, or seeking investment, knowing these terms will make the process easier and help you communicate confidently with finance professionals.