09 May Financial Jargon Buster for Small Businesses
Jargon – it can be a tricky one to get your head around, especially with so many obscure terms floating around. As a small business, trying to navigate the financial world can be difficult enough without the added extra of terminology.
To ease the process we have taken a look at some of the financial jargon that all organisations are faced with, and what they actually mean. Hopefully by understanding these terms you will feel more comfortable in engaging in financial agreements.
So, what do these terms actually mean?
Accruals are adjustments for 1). revenues that have been earned but are not yet recorded in the accounts. And 2). expenses that have been incurred but are not yet recorded in the accounts.
Amortisation is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. It’s like depreciation for intangibles, such as marketing spend.
The annual percentage rate (or APR) is the amount of interest on your total loan amount that you’ll pay annually. This amount is averaged over the full term of the loan.
A statement of the assets, liabilities, and capital of a business or other organisation at a particular point in time. The balance sheet details the balance of income and expenditure over the preceding period.
The term budget refers to projections on an organisation’s income and expenses both on a short-term basis and long-term basis. Short-term plans should cover at least one financial year, while long-term plans ought to cover at least three years.
The amount of cash, or cash-equivalent, which the company receives or gives out by the way of payment(s) to creditors is known as cash flow.
Crowdfunding is a way of raising finance by asking a large number of people each for a small amount of money. This method is favoured by many creative start ups, and is becoming more prominent on the internet.
Depreciation is a reduction in the value of an asset over time, due in particular to wear and tear.
EBIT also known as Earnings Before Interest and Tax is a measure of a company’s operating performance.
A profit and loss statement (P&L) is a financial statement that summarises the revenues, costs and expenses incurred during a specific period of time. Typically the period of time summarised is a fiscal quarter, or year.
A proforma is an abridged or estimated invoice sent by a seller to a buyer in advance of a shipment or delivery of goods. Proforma invoices are commonly used as preliminary invoices with a quotation.
Typically, revenue is shown as the top item in an income statement. All charges, costs, and expenses are then subtracted from that item to arrive at the net income.
The term “underwriting” refers to the process that leads to a final loan approval or denial. This decision is determined by a professional underwriter. Many factors are at play in a lender’s final decision on a loan.