Funding Glossary

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Small businesses were previously entitled to file Abbreviated Accounts to Companies House. Filed with Companies House 9 months after the year end (online or sent by post), these accounts contained a basic balance sheet, which showed the assets and liabilities of the company.

Replaced the previously accepted abbreviated accounts, abridged accounts cover a full reporting period, but omit detailed financial information. Companies can choose not to file the Profit & Loss and Directors report – these accounts are known as filtered accounts. Previously small and micro businesses had to create a full set of accounts for members and could submit an abbreviated version to Companies House. With the changes brought into effect from 1 January 2016, companies need to have the same accounts that they share with its members as on the public record. The result is many eligible businesses file abridged accounts instead. Only small companies and LLPs are able to file Abridged accounts. They now have 3 choices – Micro entity accounts, Abridged accounts or Full accounts.

Angel investors are typically wealthy individuals who invest in start-ups and high-growth companies, usually in exchange for convertible debt or ownership equity. Angel investors generally band together in investor networks, which are often based on regional, industry, or academic affiliations.

An annual plan is a business plan that leaves out plans for the second and third year; purely focusing one year at a time.

The ‘Annual Return’ is a specific term relating to filing your company information with Companies House. It is one of the many legal requirements and you can be filed for not compiling with the filing deadlines. The Annual Return was replaced by the Confirmation Statement at the end of June 2016. It is not a tax document and has no connection to your company accounts or HM Revenue & Customs.

Assets may include things like bank balances, equipment, vehicles and debtors (money customers owe you) and are often included on the company balance sheet. By adding up assets and taking away liabilities it gives a snapshot of your company’s net value.

Audited Accounts are a company’s financial records that have been officially examined by an auditing firm to check that they are accurate. Typically, a company requires audited accounts if its turnover exceeds £6.5 million, pro rata (if not a 12- month period), has total assets of more than £3.26 million, (as reported on the balance sheet) or employs more than 50 employees, (averaged on a monthly basis). There are certain exceptions to this.

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A balance sheet is a financial statement that summarises a company’s assets, liabilities and owner or shareholder equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.

Commonly used by accountants, salespeople and other professionals to estimate current or future results, a ballpark figure is a rough numerical estimate or approximation; a ‘guesstimate’.

Bookkeeping is the recording of financial transactions in a business; a record of your sales and costs. Although you are legally required to maintain accurate financial records, having a better understanding of your income, costs and cash flow day-to-day can also help you manage your business more effectively.

The bottom line is the last line of a company’s financial statement. It shows the net profit or loss. The bottom line is affected by many factors but, mainly, costs. Often incorporated into day-to-day speech, it has also come to mean ‘the deciding or crucial factor’ or ‘the ultimate result’.

This is simply, the amount of money your business needs to make in order to cover your costs before you can generate a profit.

A budget is a plan for how your business will spend money. Solid budgeting can help you to control your business finances and manage your cash flow more closely.

A business plan is arguably one of the most important documents in a business. It is prepared by a management team and describes, in detail, how a business is going to achieve its goals from a marketing, financial and operational viewpoint.

The plan comprises of an organised collection of milestones, tasks, assumptions and basic business numbers. It covers strategy and details what’s supposed to happen when, who’s in charge of what, how progress is measured, when money is to be spent, and from where, and when money is expected to come in.

Business plans need to be reviewed regularly so should be practical and just big enough to serve the business’ needs.

It is likely to be the single most important document when looking to access finance. However, if looking to access finance from investors, you will need to create an investor-ready or funding-ready business plan which is more focused on ‘selling’ the value of your business to investors.

This is an objective view of your business. A combination of strengths and weaknesses, opportunities and threats (SWOT), your target market, what you’re taking to market and the fit between the two. Often, being aware of what you don’t offer and who you don’t sell to can be more useful. This document can be written as a set of bullet points, slides, and a few key paragraphs.

Your business forecast is a simplified, manageable set of assumptions about future profit and loss and cash flow; including sales, cost of sales, expenses, assets, liabilities and capital. It’s an exercise of joining the dots to form monthly projections over the next year and your annual forecasts for the subsequent two years.  The relationship between the dots is more important than the actual figures; e.g. if your actual sales are higher than expected, you can tell from your forecast that direct costs will also be higher than expected. Factors like capacity, sales and marketing activities can also be taken into account. However, it is not a one-time job. Generally, companies with a good forecasting process rarely get through a month without some change in the forecast.

Bankers are generally interested in two things when they assess a loan application; payment history and assets backing the loan. A Bank-ready business plan is therefore formatted for easy reading, highlighting past financial performance and current financial position, as well as a projected position.

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One of the most important factors in the day-to-day running of your business, this is simply the relationship between the cash entering and the cash leaving your business. You need enough cash coming into your business so that you can pay your bills on time.

A credit control system ensures that you only offer credit to customers who are able to pay and make sure that they pay on time.

Crowdfunding is an alternative way of funding a business, project or venture. It involves the raising small amounts from many people, typically online. In return for the investment, these people receive shares in the company, interest on their loan or sometimes just small ‘gifts of appreciation’. Due to the social and competitive nature of crowdfunding it is often as much of a marketing exercise as it is a financial one.

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Debt financing is any money that you borrow to run your business. It can be divided into two categories, based on the type of loan you are seeking. Long-term debt financing and short-term debt financing. Debt financing will usually require some form of security – usually in the way of a charge against an asset or a personal guarantee.

A detailed analysis and appraisal of a business – by specialists such as accountants, consultants and lawyers – who are looking to assess the assets and liabilities of a business in order to determine its commercial viability.

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Your business in a nutshell. This is a very brief speech (usually less than 60 seconds) that outlines a product, service or project. Often used in pitches and at networking events, it is a snapshot and highlight of what you bring to the table.

This is the method of raising capital by selling ownership shares in your company to investors. Whilst often seen as giving up control of the business, the right equity investors can also help to accelerate business growth and success through their expertise, contacts and experience.

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Forecasting is the use of historic data or information to predict the future results. You may for example use last year’s annual sales figures to forecast this year’s. Or perhaps use last year’s sales figures with cost data to forecast cash flow. Investors will often like to see forecasts to predict their potential ROI.

Money that allows an owner to start, run or grow their business. There is a variety of sources of funding for different stages of business growth and for companies of varying sizes.

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GAAP stands for ‘Generally Accepted Accounting Principles’ and is what companies use to compile their financial statements. Most countries have their own GAAPs although, in Europe and many other parts of the world, countries are now adopting the international financial reporting standards (IFRS).

Gross Domestic Product (GDP) is a measure of a nation’s total economic activity. It represents the monetary value of all goods and services produced within a nation’s geographic borders over a specified period of time. These estimates are typically used to determine the economic performance of a whole country or region, and to make international comparisons.

This refers to a company that has all the resources it needs to continue trading for the foreseeable future. If a company is not a going concern, it may mean it is trading insolvently.

An important figure for any business owner. Gross profit is calculated by taking your turnover (your total sales) and deducting the cost of sales and direct costs. You can then calculate your gross profit percentage by dividing your gross profit by your turnover and multiplying by 100.

So:

Gross profit = turnover – cost of sales and direct costs.

Gross profit percentage = gross profit/turnover x 100.

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An acronym for Her Majesty’s Revenue & Customs. This is the UK Government department that’s responsible for collecting taxes, while also administering other regulatory regimes such as the National Minimum Wage.

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A document or pitch created specifically for business investors, describing their potential areas of interest in the business. Derived from the business plan, the most common and essential highlights are management team, product-market fit, potential market, potential growth, defensibility/barriers to entry for competitors (hard-to-copy elements like technology or knowhow), scalability and potential return for investors. Investors look for only one thing – a business with real prospects – and this business plan needs to show that.

Incorporation is the legal process of forming a company, which is a separate legal entity to its owners. This means that there is unlikely to be any personal financial liability should the business fail.

An invoice is bill for goods or services that you send to your customers/clients for payment. Invoices must include certain details. As well as details relating to the sale (what has been supplied and at what price) you also need to include VAT (if your business is VAT registered), your VAT registration number (if VAT has been charged), company registration number and invoice date. You may also include Purchase Order numbers supplied by the customer/client at the time of order and your standard payment terms/payment due date as per your contractual agreement.

Invoice finance/invoice factoring is a form of finance used to ease cash flow. A third party, such as a bank or factoring company, ‘buys’ your unpaid invoices for a fee. You receive a lump sum to a percentage value of your outstanding invoices (minus the fee). The invoice financier then manages your sales ledger collecting the money owed by your customers. It is particularly useful for smaller companies that work as a part of a larger supply chain with less forgiving payment terms. The fee may consist of the following elements – an admin charge, interest charged on the borrowed money, plus other charges.

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Used regularly in business, KPIs give you a way to measure your business’ performance in particular areas to encourage improvement. Most commonly monitored via monthly sales, new customers, net profit, customer retention rate, etc. Individuals can also work to KPIs to monitor personal performance.

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When leasing, you are granted the right to the assets exclusive possession and use for a specific period and under specified conditions, in return for specified periodic rental or lease payments. At the end of the lease, you return the asset, potentially extend the lease period or in some instances you may be able to purchase the asset. It can be a more cost-effective solution particularly if your business needs machinery, equipment or a vehicle, as their values can depreciate rapidly.

Liabilities may include loans, overdrafts, trade creditors (money you owe suppliers.) and are included on the company balance sheet. By adding up assets and taking away liabilities it gives a snapshot of your company’s net value.

Probably one of the most common types of business structure. A limited company is a separate legal entity to the owner of the company. it can enter into contracts in its own name and is responsible for its own actions, finances and liabilities. The owners of a company are protected by ‘limited liability’, which means they are only responsible for business debts up to the value of their investments or what they guarantee to the company.

One of a number of business legal structures, limited liability partnerships are traditionally popular with solicitors, accountancy firms and dental practices. Partners within an LLP aren’t personally liable for the business’ debts, but rather their liability is limited to money they’ve invested in the business.

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An important term when thinking about the profitability of a business, margin is simply the difference between sale price and cost of bringing a product or service to market. Gross profit margin is gross profit expressed as a percentage (i.e. gross profit/sales revenue x 100).

A medium business is defined as one having between 50 and 250 employees and/or a turnover of between €10m and €50m a year.

Increasingly popular, a mentor is usually an experienced businessperson who provides advice, guidance and support to help you start and grow your business. This is usually done for a fee, although there are some free mentoring services available.

A business with fewer than 10 employees and with a turnover of less than €2m.

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Another important figure for any business owner, net profit is simply your Gross Profit minus indirect costs and expenses. To calculate your net profit percentage, you divide your net profit by your turnover and multiply by 100.

So:

Net profit = gross profit – indirect costs and expenses

Net profit percentage = net profit/turnover x 100

Stakeholders are becoming increasingly interested in companies’ corporate environmental, social and ethical performance. Non-financial reporting therefore, often referred to as sustainability reporting, enables businesses to be transparent in how they communicate about these non-financial aspects of their management and performance.

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Overheads refer to the day-to-day running costs of a business such as rent and rates. They can be referred to as called fixed costs, because they aren’t affected by how many products you make or sell. Conversely, variable costs increase when you make or sell more.

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Restructuring refers to a major change in the structure, debt or operations of a company. Companies usually restructure when there are significant problems that put the future of the business in jeopardy.

Companies face risk every day from uncertainty in financial markets, project failures and legal liabilities to accidents, natural disasters and deliberate attacks. Risk management is the process of identifying, assessing, monitoring and minimising the risks they face.

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Some businesses only run during a particular season; summer, Christmas, etc. These businesses are referred to as seasonal businesses and often have a different set of considerations as they have a reduced window in order to achieve their desired sales.

Sector refers to a part of the economy in which businesses share the same or related products or services.

This is a group of customers or buyers who share common characteristics, tastes, habits, wants and needs. ‘Segmentation’ is the process of splitting a larger market into different groups. It is particularly useful in sales and marketing where the value proposition can be presented more effectively to the different segments.

A small business is defined as one having between 10 and 50 employees and/or a turnover of between €2m and €10m a year.

Small and medium-sized enterprise – a term that is really only useful when distinguishing large businesses from all others.

A social enterprise is a business that exists to “tackle social problems, improve communities, people’s life chances or the environment. These businesses earn their money from selling goods and services in the open market but reinvest profits back into the business or local community. Social enterprises don’t exist to make a profit.

Another name for someone who is self-employed.

A start-up is a newly established business. Record numbers of start-ups are being registered each year as the UK develops a cultural bias for self-employment.

A plan of action designed to achieve a long-term or overall aim. A business’ strategy and objectives should be explained within its business plan.

An essential part of any sound business plan, doing a SWOT analysis enables you to identify your business’ strengths and the opportunities these offer, as well as your weaknesses and the threats these pose. You should carry out a fresh SWOT analysis once per year at a minimum.

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Turnover is simply the total value of sales made by a business in a particular period (usually a year).

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A unicorn is a privately held startup company valued at over $1 billion. The term was coined in 2013 by venture capitalist Aileen Lee.

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A well-used acronym which stands for Value Added Tax, is a transaction tax applied to the sales of goods and services.

Companies turning over more than £85,000 (correct as of 2018) are required to become VAT registered, charge VAT to their customers and file VAT returns with HMRC, paying over the VAT charged. You may be able to reclaim some of the VAT you’ve paid.

There are three schemes available to smaller businesses as an alternative to Standard VAT accounting to assist them with their VAT payments – they are Flat Rate, Annual Accounting and Cash Accounting.

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This is the cash that your business needs to trade day-to-day and stay afloat. (i.e. your current assets minus your current liabilities).

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Zombies are companies that continue to operate even though they are insolvent or near bankruptcy.