Finance 101. A – Commercialese Jargon
- MIKE BURKE
- Mar 10, 2015
- 3 min read
Alright, as promised from Finance 101 here is some basic ‘Commercialese’ to help you communicate better with the Financially Acute.
If you need a refresher, I covered some of the more commonly used words in Finance 101 including: Income Statement; P&L, Revenue, COS, COGS, Overheads, Operating and Net Profit, Balance Sheet, Retained Earnings/Profits, Shareholder Equity, Current and Non Current Assets and Liabilities
And now for some new words...
NOTE: These are just some basic finance words and their basic ‘Mike'd’ definitions. Some you will never use these again, but they are good to know. Depending on your business, understanding some of these words and how they can work for you will be a godsend. And no, it is not the ‘full’ list.
Right, let’s do this…
Accruals: This is an accounting timing thing. Let’s say you have received some goods to sell but you have not received the invoice for these goods yet. You then ‘accrue’ this expense on your financial statements because it is an expense you still have to pay for albeit in the future. The payment appears on the P&L as ‘paid’ but the cash has not been transacted. This is flirting with the note of P&L mystic timing I mentioned in Finance 101.
CAPEX: This is financial shorthand for Capital Expenditure. These are payments made to buy or further expand long-term assets (non-current assets). Some people like CAPEX’ing things because it will increase the assets on the balance sheet without destroying your P&L in one hit (see depreciation/amortisation).
Depreciation / Amortisation: This is a measure on the P&L on how quickly long term assets wear out over time. You will see this on your Income Statement as it is an accounting method to remove the asset from the balance sheet as it depreciates in value.
The difference between depreciation and amortisation is simply for tangible vs. intangible assets.
Tangible Assets (depreciation): Shit you can touch. Like buildings, plant and equipment.
Intangible Assets (amortisation): Non-physical, things you can’t touch but has asset value, like rights owned by a business, patents etc.
Creditors / Debtors: These are people or businesses that you owe or are owed by you.
Creditors are people who have given you credit and you owe money to. Debtors are customers who owe you money. They are in debt to you.
EBIT /EBITDA: Acronym time. EBIT = Earnings before interest and tax. Normally used by corporates and Publically Listed Companies. It is Net Profit before, you guessed it, company interest and taxes. (EBITDA is earnings before interest, tax, depreciation and amortisation. This is rarely used.)
Goodwill: This is heavily used with some companies, especially around the sale of a business time, when it’s about to float (go public) or going to the bank to get another loan. Often explained as the value of the established reputation of the business or brand. And from those three examples you may have predicted - it is the difference between the actual cost or investment of a non-current asset (tangible and intangible) and its actual value, giving the business a greater value than the total cost of the assets and/or P&L health.
Provisions: A provision is an estimated value of an upcoming liability where the amount or timing cannot be precisely determined e.g. XYZ. Money is transferred off the P&L and into the Balance Sheet in anticipation of the imminent expense. Basically a “put aside” fund for a large future expense
Variance: The difference between actual results and budgeted or historical expectations.
Last reminder: This is a very brief and introductory list for the non-finance literate. Combine it with the words from Finance 101 and you’ll be doing well. If you enjoy this and want to learn more; I will be posting up some next level finance stuff like: decoding a P&L, Managing cashflow correctly among others. If you cannot wait for these posts to arrive, may I suggest you go to Uni, read a book or take an accountant out to lunch!
Happy financing
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