Definitions of terminology useful for small and medium size businesses.
The indebtedness of your company to your suppliers for goods and services you have received. The invoice will usually give you a payment term, for example 30 days. Accounts payable should show a liability on your balance sheet.
The amount owed to you by your customers, to be paid within your agreed payment terms. These should show as an asset on your balance sheet.
Annual earnings rate on an investment.
Asset Finance is the provision of equipment finance to all types of businesses. It is not to be confused with standard car finance or loan finance.
The financial accounts of a small business may be subject to an audit, usually by the tax authorities. This will check that your financial statements are fair and accurate.
Your companies accounting statement that shows your assets and liabilities. Assets minus liabilities equal the net worth of your business.
This usually refers to the Bank of England base rate, on which many lenders base the interest rate they charge to SMEs. So if you are quoted for a loan at base rate plus five per cent, and the base rate is one per cent you would pay six per cent. The rate is variable, and can be changed each month.
One on hundredth of a percentage point. So if you were receiving interest at 6.5 per cent, you would be earning 650 basis points.
This is interest on interest, so if you have a loan and are not making repayments, the amount you owe would increase exponentially as you are increasing the overall debt.
This is a way of hiring an item of large capital value where the maintenance is the responsibility of the company that hires out the item. A fixed monthly figure is paid and the item can be sold, usually to an unconnected third party.
Assets, such as vehicles or machinery, can lose their value over time. Depreciation is the annual rate at which their value falls. So if you have an item worth £10,000 when you bought it and it has a depreciation rate of 10 per cent, its value would drop by £1,000 a year.
The amount paid out to business owners based on the company’s earnings. Dividends are taxed differently from other income, such as salary or commission.
This is when a business sells its invoices to a specialist company or bank which chases the payment and pays a percentage of the invoice back to the original business. The business can then continue with its work and problems from cash-flow are reduced by having money from unpaid invoices up-front.
When a company cannot pay its bills, it is said to be insolvent.
A business enterprise formed between two – or more – other companies.
Someone considered to be critical to the success of the business.
The London Inter Bank Offer Rate, the rate at which financial institutions lend money to each other, and often the basis upon which loans to SMEs are calculated.
A loan secured on an asset, almost always property or land.
If an asset is found to be overvalued on a company’s balance sheet, its lower value is put down in what is known as a write down. If it’s found to be worthless, the asset is known as a write-off -this often comes up as a result of bad debts, or damage to assets.