Glossary
A
Assets - Resources of the business with economic value. They always equal the Liabilities.
B
Balance Sheet - A statement of the assets and liabilities of a business at a particular time. It can be restated several different ways according to accounting conventions.
Bootstrapping - Bootstrapping means starting and operating a business with little or no money or assistance from outside investors. It requires a business model based on the early generation of revenue to sustain business growth.
Business Angel - A business angel is an affluent individual who provides capital for a business, usually in exchange for ownership equity. Unlike venture capitalists, angels typically do not manage the pooled money of others in a professionally-managed fund. However, angel investors often organise themselves into angel networks or angel groups to share research and pool their own investment capital.
Business Model - The mechanism and interrelationships between resources, markets technology and people that allows a business to operate successfully.
Business Plan - A business plan is a summary of how a business owner intends to organise an entrepreneurial endeavour and implement activities necessary and sufficient for the venture to succeed. It is a written explanation of the company's business model.
C
Capital Allowance - A tax allowance which takes account of depreciation of certain types of business assets such as plant and machinery and motor vehicles etc.
Capital Gearing - Gearing, or leverage, describes the mix of long-term corporate funding provided internally (by shareholders) to that contributed externally (by lenders) i.e. the relationship between the debt base of a business and the gross assets.
Cashflow Forecast - A narrative showing how receipts and payments of funds arise over time. It usually shows analysis on a month by month basis, but can be done for other intervals such as weekly or quarterly periods. At the end of each interval a total of the net funds needed (or generated) is calculated and then this cumulative figure carried forward. The highest funds needed figure (plus an contingency amount) is the Funding Requirement.
Conditions Precedent - An event or actions that are required before something else will occur. For instance, the provision of specific documentation or achievement of a target prior to the disbursement of funds.
Contingency - An amount set aside in the plan to cover unexpected developments
Corporate Venturing - Corporate venturing is the process of two companies entering into a mutually beneficial partnership. Usually in this form of relationship the larger of the two companies will invest either money or goods and services into the smaller company in return for access to technology or skills held by the smaller.
Current Assets - Cash or assets convertible into cash at short notice
Current Liabilities - Usually appearing on a company's balance sheet, it represents the amount owed for interest, accounts payable, short-term loans, expenses incurred but unpaid and other debts due within one year. Essentially these are the bills that are due very shortly, usually less than one year.
D
Debt - Financing Items on which there is a commitment to pay interest and usually commitment to repay. Usually a debt provider has some security to ensure there is no loss.
Debenture - A type of long term bond (loan), taken out by a company, which it agrees to repay at a specified future date. The company will usually pay a fixed rate of interest to debenture holders each year until maturity, and if it fails to pay either the interest or the principal amount of the loan when the time comes, the debenture holders can force the company into liquidation and recover their money from a sale of the its assets.
Depreciation - An amount that is charged to the Profit and Loss Account for the use of an asset during a period such as a year. When an asset becomes nil value then it is written off – but still may in use with the business
Dividends - The distribution of current or accumulated earnings to the shareholders of a corporation pro rata based on the number of shares owned. Dividends are usually issued in cash.
Due Diligence - An investigation or audit of a potential investment. It includes reviewing all financial records plus anything else deemed material to the investment.
E
Enterprise Investment Scheme - The Enterprise Investment Scheme (EIS) is a series of tax reliefs designed to encourage investments in small unquoted companies carrying on a qualifying trade in the United Kingdom. For more information please see http://www.eisa.org.uk/TheEIS.html.
Equity - All Financing Items which are not debt such as grants, shareholders funds and retained profits. A business' equity decreases when it sustains losses and increases when profits are made.
Equity Gearing - The relationship between Equity provided as Ordinary shares and Preference Shares
Exit Route - Investors will look to make an ‘exit’ or realise their investment within a 3 to 7 year timeframe. A flotation, trade sale or buy back of the shares are mechanisms which will provide an exit route for the investor.
F
Factoring - Factoring is where a Factoring company buys a businesses invoices at a discount and takes responsibility for collecting the payments due on them. This process brings cash to the business due from the customer, sooner than the terms that the invoice would normally allow.
Financed Items - The assets (such as Fixed and Intangible Assets, and working capital (stock and debtors, less current liabilities such as Creditors)) needed to make a business operate. It equals Financing Items, and equals the Gross Assets, and is the same as Assets less Creditors (i.e. Current Liabilities)
Financial Design - Ensuring that the rules associated with each type of finance are met by the business proposition
Financial Packaging - The process of bringing together various funding instruments to help with a round of funding
Finance Lease - A finance lease or capital lease is a lease which meets at least one of the following criteria:
- the lease term is greater than 75% of the asset's estimated economic life
- the lease contains an option for the lessee to purchase the asset for less than fair market value
- ownership of the asset is transferred to the lessee at the end of the lease term
- the present value of the lease payments exceeds 90% of the fair market value of the asset.
From an accounting point of view, such a lease is classified as a purchase by the lessee and appears on the lessee's balance sheet.
Fixed Assets - Property, such as machinery or buildings, utilized in a business that will not be used or liquidated during the current fiscal period.
Flotation - The process of changing a private company into a public company by issuing shares and soliciting the public to purchase them.
Funding Requirement - The amount of funds needed to bring the project to profitability and cash generation
G
Goodwill - An accounting term to show in the balance sheet the surplus paid for a business over the net asset price.
Grants - A grant is money given to an individual or an organisation that does not hold an obligation of repayment. In that respect, it differs from a loan, and does not incur any debt or interest.
Gross Assets - Original value of an asset that usually coincides with the buying price or production cost, without write-downs or depreciation allowance having been applied.
H
Hire Purchase - The right to purchase an asset by the user of the asset according to a pre-agreed method. The user may be the owner for tax purposes.
I
Incentive Ratchet - A strategy sometimes used by investors to reduce the level of risk in an investment. For instance, preference shares may be redeemed if agreed targets are reached, but converted to ordinary shares if agreed targets are undershot. Thus, an investor can build some certainty of reaching his target returns by passing more risk to the existing owner.
Indemnity - An indemnity arises when one individual takes on the obligation to pay for any loss or damage that has been or might be incurred by another individual.
Invoice Discounting - Invoice discounting is an alternative way of drawing money against your invoices. However, the business retains control over the administration of your sales ledger. It provides a cost-effective way for profitable businesses to improve their cash flow.
Investment - The funds that an investor provides to allow a project go ahead usually in return for interest payments or equity returns or provision of a facility
Investment Readiness - The state reached when a business has a plan and forecast that allows those who are intending to invest to gain confidence in the proposition and understand the risks
Investor - A person or organisation who puts funds into a business, usually in the expectation of achievement of agreed forecasts.
Insolvency - It is experienced by a business entity when assets no longer exceed their liabilities (commonly referred to as 'balance-sheet' insolvency) or when the entity can no longer meet its debt obligations when they come due (commonly referred to as 'cash-flow' insolvency).
Iterative process - A process that is repeated until the all conditions (of financiers) are satisfied
Interest Cover - Interest cover measures the amount of interest paid by a company on its borrowings against its operating profit in the same period. The ratio shows the impact of gearing on a company's profit and loss account. If the figure is low, a small reduction in operating profits, or a rise in the cost of borrowing, can wipe out pre-tax profits. To calculate interest cover, divide the operating profits by the interest paid.
L
Letters of Credit - A written instrument from a bank or merchant in one location that requests that anyone or a specifically named party advance money or items on credit to the party holding or named in the document.
Limited Liability - The liability of a firm's owners for no more capital than they have invested in the business
Limited Liability Partnership - The Limited Liability Partnership (LLP) is essentially a general partnership in form, with one important difference. Unlike a general partnership, in which individual partners are liable for the partnership's debts and obligations, an LLP provides each of its individual partners protection against personal liability for certain partnership liabilities.
Liquidity - The unused cash resources of a business. It can include unused borrowings. A business with high liquidity can consider ambitious long term plans, whereas a business with low liquidity must take short term measures to ensure survival so that the Equity base and cash resources are rebuilt.
Long Term Liabilities - Recorded on the balance sheet, a company's liabilities for leases, bond repayments and other items due in more than one year. A company's long-term liabilities are accounted for by its debt obligations to other parties which last longer than one year.
M
Mezzanine Finance - Unsecured debt or preference shares offering a high return with a high risk. Ranked behind secured debt but ahead of equity.
Milestone - An objective set for a round of funding
Minority Protection Rights - Minority protection rights as those required to safeguard a financial interest which include the right for its shareholding not to be diluted without consent
N
Not-for-profit Business - A corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive. These organisations cannot distribute corporate income to shareholders. The funds acquired by nonprofit corporations must stay within the corporate accounts to pay for reasonable salaries, expenses, and the activities of the corporation.
Net assets - An accounting term to show the Gross Assets less long term liabilities
O
Operating Lease - A lease contract that allows the use of an asset, but does not convey rights similar to ownership of the asset.
Ordinary Shares - Ordinary shares are also known as equity shares and they are the most common form of share in the UK. An ordinary share gives the right to its owner to share in the profits of the company (dividends) and to vote at general meetings of the company.
P
Personal Guarantee - Promise made by an entrepreneur which obligates him/her to personally repay debts his/her corporation defaults on.
Preference Shares - Preference shares offer their owners preferences over ordinary shareholders. There are two major differences between ordinary and preference shares 1) preference shareholders are often entitled to a fixed dividend even when ordinary shareholders are not and; 2) preference shareholders cannot normally vote at general meetings.
Profit and Loss Account - A narrative over a period of time showing what Sales and Costs associated with those Sales occur during that period. The net result indicates a Profit or Loss for that period.
Pseudo Equity - Equity which is borrowed by the business by using the security of the shareholder/owner which can be treated as Equity, but has a commitment to pay interest.
R
Regional Venture Capital Funds - Regional Venture Capital Funds (RVCFs) are an England wide programme to provide finance of up to £500,000 to early stage businesses
Revolving facility - A loan (such an overdraft) that is technically ‘rolled over’ by the lender at frequent intervals
Risk - For financiers, this is the appraisal of the probability that an event that will be adverse to achievement of the forecast will happen. The reverse of confidence.
Risk Capital - Money invested in high-risk enterprises
S
SME - Small and medium enterprises are defined as employing fewer than 250 employees, an annual turnover of less than €50 million and a balance sheet total of less than €43 million.
Security - An asset which is offered by a borrower to a lender to safeguard a loan.
Small Firms Loan Guarantee Scheme - The BERR's Small Firms Loan Guarantee Scheme provides a government guarantee for loans by approved lenders. Loans are made to firms or individuals unable to obtain conventional finance because of a lack of track record or security. The guarantee generally covers 70% of the outstanding loan.
Shareholders Agreement - An arrangement between shareholders of a company containing their agreement on the regulation of their relationship and on the administration of the company. There will be an overlap with the Articles of Association but it is not, unlike the Articles of Association, subject to public scrutiny.
Social Enterprise - A business whose primary aim is not to maximise profits, but instead operate for the good of a supplier and/or customer group and/or society in general.
Soft Loan - A soft loan is a loan with a below-market rate of interest. This is also known as soft financing. Sometimes soft loans provide other concessions to borrowers, such as long repayment periods or interest holidays.
T
Trade Finance/Investment - Companies involved with trade finance include importers and exporters, financiers, insurers, and other service providers. Funds may be advanced against confirmed orders.
V
Valuation - The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective. Judging the expertise of a company's management would be more of a subjective valuation technique, while calculating intrinsic value based on future earnings would be an objective technique.
Venture Capital - Money made available for investment in innovative enterprises or research, especially in high technology, in which both the risk of loss and the potential for profit may be considerable.
Viability - The practicality and feasibility of a project which shows a sensible and sound business model
W
Warranty - An assurance, promise, or guarantee by one party that a particular statement of fact is true and may be relied upon by the other party.
Work in progress - The value attached to products and services of a business that are under manufacture, but have not yet been invoiced. By its nature, valuation can be subject to controversy
Working capital - The funds needed to allow a business to operate on a day to day basis. It is the Stocks (Raw materials, work-in-progress and finished goods), Debtors less Trading Creditors. Typically 5% - 15% of turnover in a distribution business
