Jargon buster guide to business finance

When it comes to finance, there's a lot of terminology for smaller businesses to grapple with.

To help, we've compiled a list of some of the most frequently used financial and business accounting terms.

Accounting period

The time frame used for financial reporting, normally months, quarters or years.

Annual accounts

Also known as financial, company or statutory accounts.

Businesses must produce an annual set of accounts detailing business finances.

Annual Equivalent Rate (AER)

An interest rate reflecting what you'll actually pay, or earn, on your money after the effects of compounding are taken into account in order to normalize the interest rate.

Annual Percentage Rate (APR)

The rate of interest you agree to pay on money borrowed, and a useful way to compare how much interest you would pay on loans from different providers.

The higher the APR, the more you will pay.

Assets

Items of value owned by a company.

Audit

An official inspection of a company’s accounts.

Balance sheet

A summary of a company’s assets, liabilities and capital at a given point in time.

Base rate

Set by the Bank of England, this is the country’s base rate of interest and influences the rate of interest on financial products and services.

Bootstrapping

Building a company without external investment, often relying on personal savings and running with the lowest possible operating costs

Break-even point

The point in time when revenues exactly match expenses.

Capital

Anything invested into a company that has a tangible value or benefit to its own, such as a machinery, patents, or financial assets like cash.

Capital expenditure (CAPEX)

Funds used by the company to buy, maintain or improve its fixed assets such as buildings, vehicles, equipment, or land.

Cash flow

The movement of cash into and out of a business. Read our guide on how to create a cash flow forecast.

Corporation tax

Paid by UK companies on their profits.

Cost-push inflation

Cost-push inflation occurs when production input costs, such as wages and raw materials, rise and producers pass the increased costs on to consumers through price rises.

Creditor

A person or firm that has lent your business money or to whom you owe money.

Debtor

A person or firm that owes money to your business.

Demand-pull inflation

Occurs when demand is high, and suppliers increase prices until demand reduces.

Depreciation

The reduction in value of assets over time, usually due to wear and tear.

Dividend

Money paid by a company from its profits to its shareholders.

EBITDA

A form of operating profit. It stands for earnings before interest, taxes, depreciation, and amortisation.

Read our guide to EBITDA for smaller businesses.

Earnings per share (EPS)

A measure of how much profit a company is making for its shareholders.

Economies of scale

The cost advantages of buying items in bulk. The price of an individual item usually decreases as the amount bought increases.

Equity

Used by analysts to determine the financial health of a company.

It also represents what would be left if all of a businesses’ assets were liquidated and the debt paid off.

Read our guide to equity finance.

Financial management

Planning, analysing, monitoring, organising, reviewing, and controlling a company's finances.

Fiscal year

Also known as a financial year, this is a set period used to calculate financial statements.

A firm's fiscal year can run over any 12-month period, although the most common year-ends are March 31 and December 31.

Fixed cost

A cost that a company incurs regardless of its output volume.

Fixed costs usually include, for example, rent, interest, and salaries.

Gross

The total amount of money a company has earned in a period of time before deductions such as taxes.

Income statement

An annual summary of both income and expenses that determines the net income/profit of a business.

Inflation

A percentage figure that represents how much prices of goods and services increased over a specific period.

Insolvency

When a company becomes unable to pay off its creditors, or its liabilities exceed its assets.

Invoice factoring

When a business sells its invoices to a third party, which will then add their own fee to the charges and seek the money from the debtor.

Liquid asset

An asset that can be easily converted into cash.

Liquidity

The ease with which a company’s assets can be converted into cash.

Margin

The amount of money a company makes, expressed as a percentage.

For example, a gross profit of £1m on sales of £10m is a 10% profit margin.

Negative equity

When the value of an asset is less than what you initially paid.

Net

The amount of profit left after deductions such as tax have been made.

Nominal interest rate

An interest rate that isn’t adjusted for inflation.

Operating expenditure (OPEX)

On-going costs for running a business, service or system that includes day-to-day expenditure.

Operating profit/loss

The profit or loss a company makes, which reflects how a business is performing.

Overheads

Costs that do not change regardless of the level of production and are not typically involved with the cost of production, such as rent.

Patent

An official legal document stating that a company has the sole right to make, use, or sell a particular invention.

PAYE

Stands for Pay As You Earn. A method of collecting income tax on behalf of the Government by taking it directly from your employees’ wages.

Present value

Comparison of the money available to the company in the future with the value of money it currently holds, such as due to interest.

Product elasticity of demand (PED)

The degree to which demand for products or services changes due to changes in price.

Profit and loss account

A financial statement that shows the income and outgoings of a company over a certain period of time showing the net profit or loss for that time.

Real interest rate

The rate of interest minus the current rate of inflation.

Return on investment (ROI)

The earning power of an asset or activity measured as a ratio of the net income of the activity to the operational cost.

ROI lets a company know whether an activity is profitable enough to continue.

Revenue

Money received by, or owed to, a company for goods or services provided.

Security

Typically required by lenders against a loan, such as premises or plant equipment.

Turnover

The total sales of a business during a specified period.

Venture capital

Capital invested into projects with long term growth potential but also higher risks, such as start-up businesses.

Working capital

Funds a business uses in day-to-day trading. An indication of liquidity, it shows the business's ability to meet its current obligations.