Financial Terms Explained

Assets

An asset is a tradable or transferable asset with a monetary value, representing a claim to future cash flows or financial benefit. An example is a

Liquidity

Liquidity refers to the ability to quickly convert assets into cash or cash equivalents without significantly affecting their market value.

Profit and loss

A financial report showing your invoiced sales and purchases you’ve had an invoice or receipt for. It shows your business performance for a given period of time such as a month, quarter or year. Sometimes referred to as an Income Statement.

Balance Sheet

A financial report showing a statement of everything the business owns and owes. It demonstrates the financial health of the business at a given moment in time.

Income / Turnover /Revenue

The sales and other sources of income generated by the business during the period.

Cost of Sales

Direct and indirect costs associated with producing or purchasing the goods or services required to make a sale. An example is payment processing cost through a payment provider like Stripe.

Gross Profit

Turnover less your cost of sales. Gross profit is an important metric because it helps identify the sustainability of a business model.

Operating Expenses

Often referred to as OPEX, are the ongoing costs incurred by the day to day running of the business. Unlike Cost of Sale, these are not directly linked to the sale of products or services. An example is insurance costs.

Net Profit

There are various version of net profit, in its simplest form it is the total turnover less the cost of sale AND the operating expenses. This is sometimes also referred to as Net Profit Before Tax or Operating Profit

Net Profit After Tax

This is your Net Profit, but after tax has been taken off.

EBIT

Earnings before interest and tax are taken off. This is your Net Profit figure before any interest costs or tax costs have been incurred.

EBITDA

Earnings before interest, tax, depreciation and amortization. This is your Net Profit figure before any interest, tax, depreciation or amortization have occurred. It is often used as a metric to underpin a businesses valuation where an investor/purchaser might pay a multiplier of the EBITDA figure. For example, a three times multiplier on a business with £100k EBITDA would be a £300k valuation.

Depreciation

An accounting method that reduces the value of a Tangible Asset over a specific lifespan. For example, a laptop might cost £2000 but have an expected life of 5 years; this could be depreciated over the 5 years slowly reducing in value. There are several methods of depreciation.7

Amortisation

This is the same as depreciation but the term used when this happens on Intangible Assets.

Appreciation

When an asset increases in value, such as when a property goes up in price

Tangible Asset

A physical asset, something that has a physical form and can be touched or seen. Tangible assets include items such as buildings, land, machinery and equipment.

Intangible Asset

These are assets that cannot be seen or touched. Intangible assets include patents, trademarks and franchise agreements.

Opening Balance

Shows the balance of a bank account or multiple bank accounts at the start of a period. It can also include cash from till takings or petty cash pots.

Closing Balance

Shows the balance of a bank account or multiple bank accounts at the end of a period. It can also include cash from till takings or petty cash pots.

Petty Cash

Some companies need to keep a small amount of cash to deal with day to day expenses, this is called Petty Cash. This is becoming increasingly rare, with purchases being made by card, phone or watch.

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