Finance Glossary
The finance industry, like many other industries, has its own specific technical language, which if you are not familiar with, can be difficult to understand. For example, terms like liquidity, retained earnings or operating profit may not be part of your everyday vocabulary. Finance is also an industry that is constantly evolving, and new terms and concepts are being introduced all the time. This can also make it difficult to keep up with the latest terminology and trends.
To help you get a grip on some of the jargon that you may encounter when dealing with your food or drink business’ finances, we have developed a searchable glossary of terms. Have a go at searching some of the terms that often catch you out below!
We will be adding to the glossary regularly, so if you don’t see a term that you’re looking for, get in touch.
PROFIT & LOSS
Costs that relate directly to the production of your sales e.g. wheat, flour, packaging etc.
PROFIT & LOSS
An expense on your profit and loss which represents the loss of value of your assets over time due to deterioration or normal wear and tear e.g. as you use your car, it becomes more worn and therefore loses its value.
PROFIT & LOSS
Earnings Before Interest, Tax, Depreciation and Amortisation. EBITDA = Net profit + Interest + Tax + Depreciation + Amortisation
PROFIT & LOSS
Costs incurred by a business regardless of sales volume e.g. it doesn't matter what your sales are, you still have to pay for the lease on your building.
PROFIT & LOSS
The profit made if you only take production and selling costs from sales. Sales - cost of sales = gross profit.
PROFIT & LOSS
Sales minus the cost of goods sold (variable costs/ direct costs) expressed as a percentage e.g. if a product sells for £100 and costs £80 to manufacture, its gross margin is £20. In percentage terms, this means the gross margin is £20/£100 = 20%
PROFIT & LOSS
Mark-up is the amount by which the cost of a product is increased in order to derive the selling price. To use the preceding example, a markup of £20 from the £80 cost yields the £100 price. In percentage terms, this means the mark-up is £20/£80 = 25%
PROFIT & LOSS
The profit made if you took production, selling and admin costs from sales. All expenses at this point should make up the core business functions. Don't include interest expenses or taxes. Sales - cost of sales - operating costs = Operating profit
PROFIT & LOSS
All the things you are giving up in order to do the thing you are doing now. This doesn't have to be expenses e.g. if your factory only has capacity to increase by 1 line item, and you had 2 potential line items you could make, the opportunity cost of producing item 1 is the foregone profit from not making item 2.
PROFIT & LOSS
Often referred to as turnover, sales is the income received from customers that you have supplied goods or services to, minus the VAT.
PROFIT & LOSS
Sunk costs are past costs that cannot be recovered and should not affect the decision-making process for a business in the future e.g. the installation of a boiler, the origination costs of art-work or a packaging mould, design and launch costs for a brand or new-product. The costs might be able to be capitalised and/or amortised.
PROFIT & LOSS
Costs that change based on your sales e.g. if you are a baker, flour would be a variable cost as you will purchase more flour the more bread you bake.
BALANCE SHEET
An asset is anything that a company owns that could be sold for or will generate cash.
BALANCE SHEET
Assets that are expected to be sold or used within a year, both because that is their purpose and it is easier to do so. An example of this is inventory.
BALANCE SHEET
Also referred to as non-current assets, fixed assets are those that could not be easily sold in a year. Fixed assets are usually used to generate income (such as a machine) or facilitate that ability (such as a factory building).
BALANCE SHEET
A summary report of what your business owns (assets) and what it owes (liabilities). This equals (balances) with the equity in your business. The balance sheet is a snapshot in time.
BALANCE SHEET
Capital refers to your sources of funding, which can be split into four key categories:
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Equity
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Debt
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Non-dilutive
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Retained earnings
BALANCE SHEET
The sum of your assets less your liabilities. This can also be referred to as the shareholders’ funds or Net Capital Resources (NCRs).
BALANCE SHEET
Also known as stock, this is your holdings of ingredients, packaging, WIP, finished goods etc. associated with products that you sell.
BALANCE SHEET
Often shown on the balance sheet as liabilities repayable < 1 year, that is precisely what they are; Debts which will be repayable within the next year.
BALANCE SHEET
Debts due in > 12 months, typically bank loans and mortgages. Known as long term liabilities.
BALANCE SHEET
Retained earnings are the cumulation of your profits held for future use, from which you are able to pay dividends out of your business.
BALANCE SHEET
The capital of a business which is used in its day-to-day operations, which is calculated as the current assets minus the current liabilities.
FINANCIAL RATIOS
& FORMULAE
Debtor turnover ratio indicates the number of times average debtors have been converted into cash during a year. This is also referred to as the efficiency ratio that measures the company's ability to collect revenue.
FINANCIAL RATIOS
& FORMULAE
This is the measure of a company’s total value of assets as well as the potential profit generation from those assets. Think of the enterprise value as the total value of a house.
FINANCIAL RATIOS
& FORMULAE
The value of a company after taking into account the debts and cash held by the business. Think of the equity value as the value of a house, less the mortgage still owed on the that house.
FINANCIAL RATIOS
& FORMULAE
Financial leverage specifically refers to a business that takes on debt to buy assets. The business expects the assets to produce profits that exceed the cost of the borrowed money.
FINANCIAL RATIOS
& FORMULAE
Gearing refers to the relationship between debt and equity. It shows the extent to which a firm’s operations are funded by lenders (debt) versus shareholders (equity).
FINANCIAL RATIOS
& FORMULAE
Liquidity is the ease in which an asset or security can be converted into cash e.g. cash is fully liquid, while a property could cost money and take weeks to sell before converting to cash. The more liquid assets a company has, the better its liquidity.
FINANCIAL RATIOS
& FORMULAE
Measures the ability of a business to meet its financial commitments as they fall due i.e. it checks whether the business has the ‘cash’ resources to pay bills when due.
FINANCIAL RATIOS
& FORMULAE
The profit made per £ of investment into machinery or other assets.
FINANCIAL RATIOS
& FORMULAE
A good stock turnover ratio is between 5 and 10 for most industries, which indicates that you sell and restock your inventory every 1-2 months. This ratio strikes a good balance between having enough inventory on hand and not having to reorder too frequently. NB: The definition of a good ratio varies from business to business.
INVESTMENT
Where one entity will pay for more than 50% of the shares of a company, resulting of a takeover of that company.
INVESTMENT
A type of equity funding where a single high net worth individual will invest in a less than 50% share of a business by purchasing shares for cash that the business can then use to invest.
INVESTMENT
A type of equity funding where a group of high net worth individuals will invest in a less than 50% share of a business by purchasing shares for cash that the business can then use to invest.
INVESTMENT
A type of equity funding where the funding source comes from a major corporation. The corporation will buy less than 50% of the shares in another company for cash.
INVESTMENT
A type of equity funding where multiple (100s-1000’s) individuals purchase shares in the business in exchange for cash. These individuals will own a very small amount of shares, and in aggregate, they will own a less than 50% share of the business.
INVESTMENT
A merger refers to two companies who willingly join together to create a new, joint single entity.
INVESTMENT
Private equity comes in various formats and guises, but broadly speaking private equity firms use money raised from institutional investors to acquire a majority stake in private businesses.
INVESTMENT
A form of funding where multiple individuals will pledge cash in exchange for a reward once the business has fulfilled its funding target and has used the cash to fund a project. No shares are involved.
INVESTMENT
Venture capitalists are professional, institutional investors that invest money on behalf of funds, such as pension funds, foundations etc. Venture capital is provided as minority shareholding, but always comes with terms and conditions which can be demanding on the business, and may include, for example, one or more seats on the board of directors, performance targets to meet and agreed exit strategy and timing.
DEBT
A form of debt funding which allows you to repay the cost of an asset such as machinery or vehicles over time. The asset is the security for the lender.
DEBT
A business credit card will give you a credit limit (loan limit) based on your business’s credit score, which is the maximum limit that can be outstanding on the card. The card can be used to pay business expenses and will have a set repayment period before interest is charged on the outstanding balance.
DEBT
A form of capital funding where a company borrows money from another entity and repays the amount owed with interest on top. Money owed by a company to another entity.
DEBT
A system where money is lent to the business by the directors, meaning that the directors will be owed money by the company. This is often tracked via a nominal code in your accounting systems.
DEBT
A form of debt where a lender will give cash in exchange for the debts you are due from your debtors. This amount will likely be the total value of the debtors, less a fee. In this instance, the lenders will collect payments.
DEBT
A form of debt where a lender will give cash in exchange for the debts you are due from your debtors. This amount will likely be the total value of the debtors, less a fee. In this instance, your business will collect payments.
DEBT
This is free funding, such as grant funding, where no equity is given up by the owners, and no debt is put onto the balance sheet.
DEBT
A flexible loan which allows you to borrow money through your business current account once you have run out of your own cash within the account. The amount available to be loaned will be determined by the bank who hold the current account.
DEBT
The ability to borrow money directly from another individual cutting out the bank as the middleman.
DEBT
In terms of debt, security is an asset or an amount of cash that is pledged as repayment of the loan if the business fails to make the payments themselves.
DEBT
This is a loan to help finance purchasing stock. The money borrowed is secured over the stock and is repayable once the stock has sold. Often provided by suppliers or specialist banks.
DEBT
A form of debt funding where your business will receive early payment on its invoices from a lender. In this instance, your customer will make the arrangement with the lender. Your business will then be charged a fee for the early repayment. The customer will then settle with the lender.
DEBT
A flexible loan which allows you to borrow money through your business current account once you have run out of your own cash within the account. The amount available to be loaned will be determined by the bank who hold the current account.
DEBT
Often shortened to WACC, this is the average after-tax cost of a company’s various capital sources. Including the cost of shares (e.g. the dividends paid to shareholders), as well as the cost of debt (e.g. the interest paid on debt sources).
STRATEGIC TERMS
A cashflow forecast is an estimate of the business’s level of cash in the future, based on expected operations.
STRATEGIC TERMS
Forecasting is used to estimate a company’s future financial and operational outcomes by analysing historical data and anticipating future trends, while also accounting for risk associated with those trends.
STRATEGIC TERMS
This is the financial and operational information from your business, such as profits, margins, inventory levels and values.
STRATEGIC TERMS
This is the process by which you divide your broad consumer or business market into groups based on shared characteristics.