The A-Z of accounting – top tips for great financial management

Having a keen grasp of accounting is vital if you’re going to stay in control of your small business finances. For many business owners, however, accounting can sometimes seem like a foreign language – something that only your accountant can get their heads around.

But in the digital age, with tools like online accounting, automated bookkeeping and cloud-based forecasting at your disposal, it’s never been easier to understand your numbers.

Our A-Z of accounting is a glossary of accounting terms to help you understand the important terms, tips and tools so you can quickly start getting more from your business accounts.

A is for Automation

Automated bookkeeping, automated debtor chasing and automated cashflow forecasts are key software tools that can help lighten your financial admin workload – freeing up time for you to focus on running the business and bringing in new customers.

B is for Bookkeeping

Bookkeeping is the starting point for all accounting, and is the process of keying in all the different financial transactions you’ve carried out as a business. That means recording every expense you’ve paid, and every payment you’ve received, so there’s a clear record to refer to.

C is for Cashflow

Cashflow is the lifeblood of any business, and cashflow management is the process of measuring and balancing your cash inflows (sales revenues and other payments) against your cash outflows (overheads, expenses and costs). Ideally, you want to be in a positive cashflow position – where your inflows are greater than your outflows.

D is for Debt

Debt (or liabilities) is any money that you owe to other people, or that they owe to you. Debtor tracking and credit control are important elements of your cashflow management, allowing you to see who owes you money and giving you the information to chase up this debt.

E is for Expenses

Expenses are the costs you incur while running the business and aiming to generate revenue. For example, Cost of Goods Sold (COGS) is the money spent manufacturing a product. As a rule, the lower you keep your expenses, the better your overall profitability will be.

F is for Forecasting

Forecasting takes your historical financial data and projects your position forward in time, so you can see what your cashflow position may be next month, or your debt position could be next quarter. As such, forecasting is an important tool for scenario-planning, strategic decision making and good financial governance.

G is Gross Profit

Gross profit (or gross margin) is a measure of your profitability as a business, calculated by taking your revenue (income you’ve generated) and deducted the Cost of Goods Sold (COGS), before any other deductions have been made. So, it’s your profit number before you deduct other costs like tax, overheads and payroll etc.

H is for Historical Actuals

Actuals are the historic data recorded in your accounting system. In a nutshell, these actuals show all your past transactions and record the financial path of the business. This data is then pulled into reports to show you your historic financial performance over time.

I is for Invoicing

Invoicing is the process of sending a bill to your customer. Your invoice will include details of the work done/products delivered, the amount due and the date payment must be made. Modern online accounting platforms allow you to send electronic invoices straight to customers via email, and also then reconcile incoming payments with the right invoice.

J is for Journal

Journal entries are a key part of the bookkeeping process, and involve listing the date of a transaction, the account name and amount to be debited, and the account name and amount to be credited. This list of journal entries then forms a journal in your accounts. Examples include a sales journal or a cash journal etc.

K is for KPIs

Key performance indicators (KPIs) are financial metrics used to measure the performance of the business. By tracking your historical actuals and measuring the variance between your target number and your actual number, you can quickly see how well you’re hitting key financial goals around areas like cashflow, sales revenue or aged debt.

L is for Ledgers

A ledger is a ‘book’ that contains accounts, although in these digital times this is no longer a physical paper book or folder. Ledgers make up the company’s overall accounts, so the general ledger will include things like the balance sheet and your income statement.

M is for Management Accounts

Management accounts are the monthly reports, dashboards and KPIs an accountant or finance director will produce for your board. Management accounts show the company’s financial performance over time and can be used to aid decision-making, scenario-planning and future strategic planning for the business.

N is for Net Profit

Net profit (commonly referred to as ‘the bottom line’) is a measure of your profit once all deductions have been made. In short, it’s the amount of money that’s left from your revenue once every element of your overheads and expenses has been accounted for.

O is for Online Accounting

Online accounting (or cloud accounting) is business accounting software that you use in the cloud. These Software as a Service (SaaS) solutions have replaced old-fashioned desktop-based accounting, providing an effective way for your business to keep records, manage your finances and integrate with a growing ecosystem of other software apps.

P is for Profit & Loss

A profit and loss report (or ‘P&L’) provides a snapshot of what the business is earning and what you’re spending, over a given time period. This gives you an overview of what income you’re generating, what costs you’re incurring and how you’re performing as a business.

Q is for Quarterly

Quarterly reporting breaks your company’s financial year down into four equal periods. Traditionally, this quarterly structure is used to plan budgets, decide on strategic activity and review the company’s financial performance (both in the past and through future projections).

R is for Reconciliation

Reconciliation is the process of matching incoming and outgoing bank transactions against the relevant receipt or invoice. So, for example, when money is received from a customer, you must match this incoming transaction against the related invoice. Many modern online accounting platforms will automate the bank reconciliation process for you.

S is for Spend Management

Spend management is a key element in keeping your business profitable. By managing your supply chain effectively, negotiating the best prices and proactively keeping your costs low, you can increase your margin and deliver an improved net profit.

T is for Tax Planning

Tax planning is an important part of your overall budgeting and planning. By identifying the business taxes you’re liable for, you can plan effectively for these costs each quarter and prior to year-end – while also looking for any reliefs or tax breaks you can claim against.

U is for Utilisation

Utilisation is a metric that measures what percentage of your maximum potential production or delivery was actually achieved. By dividing the actual production number by the maximum possible production figure, and multiplying by 100, you get a utilisation percentage to measure how well you’re using your people, resources and production capability.

V is for Variance

A variance, in accounting terms, is the difference between the actual number and the target, or standard, number. So if you’re aim was first quarter sales of £1.5M, and your actual sales figure was £1.25M, that’s a negative variance of £250,000. Variance analysis helps to spot where the company is performing well, or missing it’s targets.

W is for Wages

If you have employees, then wages and payroll can be one of your biggest expenses. Ensuring that you have sufficient cashflow to cover your weekly or monthly payroll costs is a challenge for many businesses, a task that can be helped with regular cashflow forecasts.

X is for Xero, QuickBooks and Sage

XeroQuickbooks and Sage two of the main online accounting providers for small business. They offer cloud accounting, online invoicing and a host of third-party apps, as well as giving you compatibility with the latest digital tax and accounting requirements.

Y is for Year-end

Your company year-end is the date on which your financial year closes. This is the point at which all journals, ledgers and accounts must be up to date, and the date at which all your profits, debts and tax liabilities will be calculated from.

Z is for Zero-based Budgeting

Zero-based budgeting is an approach where every item in your budget must be justified. Rather than using last year’s budget as a standard starting point, every budget item has to be agreed from scratch, giving you the opportunity to do so some serious spend management to boost overall profitability (and, yes, we’re amazed there was a term for ‘Z’ too!)

We hope this accounting glossary has helped you get to grips with the key accounting terms.

If you’d like to take a deep dive into some more helpful tips on financial management, there are lots more useful posts available via the Fluidly blog.