Why do business people speak a different language? specifically accountants?
One of our clients said this morning they love talking to us because we talk in ‘Plain English’, unfortunately I know what they mean, accountancy jargon can almost be like a foreign language if you’re not used to the accountancy environment – some we can’t change, but most, we can!
So, in an attempt to put meaning to some accountancy words, we thought we’d use our blog page... here’s our A to Z of some accountancy words.
Accounts – business transactions, the financial records of a business.
Break Even Point – the calculation to show the point where the business just sells enough products or services to cover costs, this is calculated to understand the number of units that need to be sold, so total income equals total cost.
Cash Flow – an analysis of cash in and cash out, timing for bank clearance should be considered, gives an idea of the businesses ability to keep running.
Debtors – customers who owe the business money, created when you sell goods or services on credit, customers don’t pay immediately, typically in 30 days, but could be whatever you agree.
Equity – business assets less business liabilities, this gives the business owner the value of their business.
Forecast – this is where we crystal ball gaze, on a serious note, for new businesses it can be crystal ball gazing, as it will be the best guess of the future financial position of the business – so you will forecast sales and expenses.
For established businesses, the forecast will be based on historic accounts figures, along with any knowledge of the expected trade movements.
Why forecast? it gives businesses an expected plan, if ‘x’ happens, expect ‘y’ to follow, if ‘x’ sales are achieved, then ‘y’ profit should be achieved.
Gain – the amount earned on a business transaction – the gain is purely sales less total cost to achieve the sale, so all operational costs – also called Gross Profit – or Gross Loss if costs are more than sales.
Historical – from a cost point of view, this could be the original cost of an asset, raw material, stock, etc. So if cost increases as a market value, the purchase is still shown as the original cost – for example, property generally increases in value – you wouldn’t normally realise the increase in the property value until you sell it.
Invoice – from a sales point of view, this is the document raised to a customer when you have completed work that you would like to pay for, you issue a sales invoice, stating your terms and conditions of the sale. From a purchase point of view the supplier will issue you with an invoice that you will then pay within their terms agreed.
Journal (entries) – this is a technique used by accountants to enter transactions into your accounts. It forms part of double entry bookkeeping and will be used to keep records correct in your accounts for your business.
Kaizen – this word originates from Japan, and means continuous improvement, if you create a Kaizen structure in your workplace then you focus on reducing waste – this could be time, processes, efficiencies – reducing waste increases efficiency.
Liability – amounts payable by the business, you may have short term liabilities, usually payable within one year, or long-term liabilities for borrowings which are payable in excess of one year, for example a bank loan payable over five years.
Management Accounts – these accounts can be in any style that’s best for the business, the purpose of management accounts are to give you detail about your business - tailored specifically for the directors and managers to make informed decisions about their business, there are no rules for these accounts, unlike financial accounts that have to be in a specific format and style. Management Accounts will show trends, be very detailed, identify problems, and if used correctly, are one of the best business tools you will ever use!
Net Profit Margin – net profit is when turnover is greater than total expenditure, net profit margin is a calculation of net profit as a percentage of sales, if you work out the net profit margin you are able to use this percentage to forecast net profit on variations of sales, an effective planning tool.
Overheads – are the indirect expense items of running a business, for example, rent, rates, insurance, vehicle running costs, etc – everything that you buy in your business, but are not a direct purchase to achieve a sale.
Pareto Principle – typically the 80:20 ratio applied to different situations, for example, 80% of your sales are generated from 20% of your customers, 80% of your quality problems arise from 20% of your products/services – this type of ratio can help to identify where to concentrate efforts in a business, identify cost and activity drivers.
Quick Ratio – also known as the Acid test ratio – establishes a business’s ability to pay current debts when they become due – takes into consideration cash, cash equivalent securities, and debtors, as these are items that can be turned into cash very quickly.
Reconciliation – identifies the differences between two sets of data, for example a bank reconciliation reconciles the business bank account on your account’s software to the actual bank balance as per the bank statement.
Sales Forecast – this is purely a best guess sales figures that creates part of your forecasting procedures, it’s typically part of a detailed business plan, as you will forecast the sales you think you can achieve in the future months (typically 12 months ahead) then plan outgoings against the income generated by the sales – this helps you to plan expenses and question actual sales achieved against the forecast. A great planning tool!
Tangible Assets – an asset the business owns that you can physically see and touch, for example, tables, chairs, machinery, cars, vans, buildings - they are an asset to the business and have a physical presence, as opposed to intangible assets, that are also assets to the business but you can’t touch them, for example, trademarks, patents, goodwill, copyrights – all assets with no physical presence.
Unavoidable Costs – these costs are incurred by the business and will have no relation to sales income generated, for example, rent, rates, car/van insurance – all have to be paid, irrespective of whether the business generates £100 of sales or £10,000 of sales – their value will not increase or decrease dependant on business activities.
Variable Cost – this is a cost that will vary as sales increase or decrease, for example if your business purchases stock to resell, the more you sell, the more stock you will have to purchase – so the stock purchased is a variable cost based on sales.
Waste – any part of any process or service that is completed but not really needed … for example, it would be a waste of time and fuel for a transport company to allow the driver to drive across town all day, to be efficient, they would give the driver a circular route plan from one delivery to another to save on time and fuel. In retail, it would be a waste of cash to hold too much stock.
XBRL – this is essentially a language where IT systems can talk to each other, used on the internet, for example, online filing of documents.
Year End – when finalising your financial accounts, your accountant will make adjustments to ensure all transactions incurred by your business are accounted for, then will discuss the financial position of your business with you. When you agree the accounts for that particular year are complete, they will finalise the year, end the year, then no other transactions will be entered into that year – this is known as Year End.
Zero Based Budgeting – this is when a budget for a particular spend, for example, advertising, is allocated a zero budget for the year, then the person responsible for advertising would have to justify any spend to be allocated the funds to spend, so if they wanted to advertise in a trade magazine at a cost of £500, they would justify why they thought that would be a good idea business.