Glossary of financial terms

Accounting period. The period for which a company prepares its accounts (see Accounts).

Accounts. The documents prepared by accountants which give an indication of how a business has performed over a specified period (usually a year).

Accounts payable (or creditors). The debts shown on the balance sheet (see Balance sheet) of an organisation when goods or services have been bought on credit.

Accounts receivable (or debtors). The money owed by customers when they have been sold goods or services on credit by an organisation.

Accruals. Provisions for liabilities (see Liabilities) incurred in an accounting period for which an invoice has not been received.

Accruals basis. A method used in accounting in which sums of money are recorded at the time something is bought or sold, although cash payments may not yet have been made or received.

Amortisation. The practice of spreading the cost (see Cost) of an intangible asset (see Intangible assets) over that asset’s useful life.

Assets. A resource with economic value that an individual or organisation owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet (see Balance sheet). 

Balance sheet. A statement of financial status at a given point in time.

Budget. A plan of action expressed in quantitative monetary terms, i.e. a statement of how much money is allocated to different items or activities that a team will undertake.

Capital cost. The cost (see Cost) of purchasing a fixed asset (see Fixed assets).

Capital expenditure (or capex). Money spent on a major project or asset (see Assets), such as premises. Capital expenditure is given a value on the balance sheet (see Balance sheet) rather than being written off to the profit and loss account.

Cash. Current assets (see Assets) comprising currency or currency equivalents that can be accessed immediately or near-immediately.

Cash equivalents. Highly liquid investments with a maturity of three months or less.

Cash flow forecast. A way of projecting the likely cash (see Cash) that will flow through the organisation, useful for predicting any shortfalls that may arise. It is different to the P&L (see Profit and loss statement) as it shows only cash and it records the likely timing of cash payments and receipts, usually on a monthly basis. The P&L shows income (see Income) and expenditure in the period when an invoice is issued or received, not when the actual cash is physically received or paid out.

Cash flow statement. Summarises the inflows and outflows of both cash (see Cash) and cash equivalents (see Cash equivalents), such as grants and loans, during a given period. 

Cost. Financial sacrifice made for goods or services. May be outlay or opportunity cost (see Opportunity cost).

Cost of goods sold/Cost of sales. Cost (see Cost) of acquired and resold merchandise.

Current assets. Cash (see Cash) and assets (see Assets) that are likely to be converted to cash within the operating cycle (usually within one year).

Current liabilities. Existing debts due to be paid within the coming year.

Current/working ratio. Ratio used to work out a business’s ability to cover short-term obligations and cash flows.

Depreciation. Spreads the cost (see Cost) of using an asset (see Assets) over the length of time which it is in use. This cost is calculated as the cost of purchase less the resale value at the end of its useful economic life.

Dividend. A way of distributing the profits (see Profit) of a business among its shareholders. If a dividend is paid, it is usually paid annually.

EBIDTA (Earnings before interest, tax, depreciation and amortisation). Net profit (see Net/operating profit) before the deduction of interest, taxes, depreciation (see Depreciation) and amortisation (see Amortisation). It is a measure of the company’s general financial performance and can be used to analyse and compare profitability among companies and industries.

Expense. A gross decrease in assets (see Assets) from the purchasing of goods and services.

Fixed assets. Items purchased by an organisation for use in its operations. An item should be able to be used for more than a year as it shouldn’t wear out or end up being of no benefit to the organisation before the 12 months is up.

Fixed cost. A cost (see Cost) that is not affected by a change of related total activity or volume during a set time period.

Financing activities. Cash flow from debt and equity financing activities (for example, money from investors, selling stocks or taking out a loan).

Goodwill. The value of a business over and above its net tangible assets (a company’s reputation, brand, intellectual property and commercial secrets) (see Tangible assets). This value is derived largely from the market value.

Gross profit. The profits (see Profit) made by a business before overheads and other fixed costs (see Cost). Essentially gross profit = goods sold - cost of goods sold (see Cost of goods sold).

Gross profit margin. A calculation that indicates how efficiently an organisation is using its resources to produce goods or deliver services. (Gross profit/total revenue x 100.)

Income/Revenue. Sales that have been invoiced or funding that has been awarded. Not the same as cash (see Cash).

Intangible assets. A class of non-physical, long-lived assets (for example, patents and trademarks) (see Assets).

Investing activities. Cash flow from buying or selling assets (for example, property, patents, equipment) (see Assets) – involving cash (see Cash) not debt.

Liabilities. The money that an organisation is committed to pay another at some point in the future.

Losses. The opposite of profits (see Profit); when an organisation spends more than it earns.

Management accounts. Accounts (see Accounts) that are prepared for use when managing the business. They may be produced internally on a monthly or quarterly basis, while financial accounts will be made for a period of one year (also known as a financial year or accounting period).

Net income. The calculation for a given period of time which registers the excess of revenues and gains over expenses and losses (see Losses).

Net current assets. Current assets (see Assets) minus current liabilities (see Liabilities).

Net/operating profit. The total profit (see Profit) made by the business after overheads and other fixed costs (see Fixed cost) have been deducted, but before any dividends (see Dividend) and tax payments have been made.

Net profit margin. A calculation of a company’s profitability. (Net profit/revenue x 100.)

Operating activities. Cash flow related to goods and services: revenue from sales and the costs (see Cost) of making and selling these, including salaries and income tax payments.

Opportunity cost. The potential contribution to profit (see Profit) foregone in order to deploy limited resources in another area.

Payback period. The amount of time taken to recoup, in terms of cash (see Cash) inflows, the initial amount of outlay.

Profit. The capital left in the business when all liabilities (see Liabilities) have been met.

Profit and loss statement (P&L). A summary of whether, over a chosen period of time (often a month or year), the income of an organisation has been greater than the expenditure, or vice versa. In other words, it shows whether the organisation is making a profit/surplus (see Profit) or a loss/deficit (see Losses).

Retained earnings. The cumulative profits (see Profit) that remain after a company pays dividends (see Dividend) to its shareholders. 

Revenue/Income. Sales that have been invoiced or funding that has been awarded. Not the same as cash (see Cash).

Shareholder’s equity. Most commonly refers to owner’s equity, i.e. the money owners have put into the business.

Sunk cost. A cost (see Cost) that has already been incurred and is therefore irrelevant to the future decision-making process.

Tangible assets. An asset (see Assets) that can be touched and seen, such as land and buildings, fixtures and fittings.

Variable cost. A cost (see Cost) that changes in total in direct proportion to changes in the related total activity or volume. A variable cost varies in direct proportion to activity.

Variance. The unexpected deviation of actual results from those budgeted or expected.

Working capital. Current assets (see Assets) and current liabilities (see Liabilities), i.e. the amount of money tied up in the day-to-day operations of the business.

Zero-base budgeting (or ZBB). A budgeting practice in which managers are asked to justify all of their activities as if they were being undertaken for the first time.