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This Credit Glossary is provided as a general source of information. In legal matters please do not rely on the interpretations or definitions as shown. It is always prudent to seek appropriate advice when undertaking specific legal action.
We aim to expand this section over time. Should you have any additions or suggested amendments or corrections to our interpretations we welcome your contribution and will acknowledge same..
A
ABN
The Australian Business Number is an identifier for businesses when dealing with the Australian Taxation Office, other government departments and agencies, and other businesses.
ACCC
The ACCC [Australian Competition and Consumer Commission] is a national consumer protection agency that promotes competition and fair trading in the market place to benefit consumers, businesses and the community. See Australian Competition and Consumer Commission.
Account
A record or statement of the financial transactions that take place between two economic entities. A unique number, known as 'account number', is assigned by the Account/Credit provider to each account holder for the proper identification of ownership and tracking performance of the account.
Account holder
The business/person responsible for payment of an account and maintaining it within agreed terms.
Accounts Placed for Collection
Accounts which have been placed in the hands of a third party, for example, a specialist debt collection agency or a solicitor, in order to obtain payment for amounts that are in breach of agreed Payment Terms.
Accounts Receivable [A/R]
Debts owed to the business, usually from sales on credit. Accounts Receivable is a business asset, the sum of unpaid amounts yet to be paid by debtors. .
Accrual-Based Accounting
Standard business accounting, which assumes there will be Accounts payable [Bills to be paid as part of the normal course of business] and/or sales on credit [Sales made on account; shipments against invoices to be paid later], as opposed to transactions on a Cash-Basis. For example, most businesses have regular bills such as rent, utilities, and often inventory purchases that are not paid for at the exact moment of purchase, but are invoiced for later payment. Most businesses will also not be able to collect on all of their sales immediately in cash, but must bill the debtor for later payment.
Accumulated Depreciation
Total accumulated depreciation reduces the formal accounting value [the so-called 'book value'] of assets based on a fixed percentage.
Acid Test
[Debtors + Cash] / Total Current Liabilities.
It is a commonly used ratio used to determine a company's liquidity.
It is also referred to as the 'Quick' ratio.
ACL
The Australian Consumer Law commencing 1 January 2011, replaces previous Commonwealth, State and Territory consumer protection legislation in fair trading acts and the Trade Practices Act 1974.
Affidavit
A written statement sworn on oath, or affirmed before a person with the appropriate authority, that the contents of the statement are true.
Agent
A person authorised expressly or by implication to act for another [referred to as "the principal"] who is, as a result of the authority delegated by them, bound by the acts of the agent.
Agreement
An agreement is a formal contract or written document regarding the terms and conditions on which credit is provided. A verbal contract or agreement is no less enforceable just because it is not written - just more difficult to prove. See also Contract.
Amount Past Due
Refers to the amount of debt that has not been paid at the scheduled time, i.e. it is past its due date for payment.
Annual return
By law, a limited company must each year draw up an annual summary of its capital and shares, together with an up-to-date list of directors and members [shareholders] with their names, addresses and number of shares held, occupation and other directorships of a director and statement of the indebtedness of the company in respect of secured charges.
Applicant
A business or person applying for credit or an account with other than a 'Cash' or immediate payment requirement.
Application
A request for credit by a business or a person. Applicants typically fill out a form and provide the information the creditor requires for evaluation as to the applicant's creditworthiness. This information may vary based on the type and amount of credit requested. Also known as a Credit Application.
Approval
It refers to the formal act of approving a request or application for a credit account or loan by the seller, provider or lender [Creditor].
ASIC
The Australian Securities and Investments Commission enforces company and financial services laws to protect consumers, investors and creditors.
Assets
Property that a business or individual owns, including cash and receivables, inventory, etc. Assets are any possessions that have value in an exchange. The more formal definition is the entire property of a person, association, corporation, or estate applicable or subject to the payment of debts. What most people understand as business assets are cash and investments, accounts receivable, inventory, office equipment, plant and equipment, etc.
Audit
An Audit is the examination inspection of a company's accounts/records by a qualified person to determine whether they reflect the true state of the company's affairs.
Auditors' Remuneration
The total amount of money paid to the auditors of the business to cover payment for their services for a particular period.
Auditors report
A statement from the company's Auditors confirming they have examined the records and accounts of the business to verify they have been properly kept and whether they represent a true and fair view of the company's financial position.
Australian Business Number
The Australian Business Number is an identifier for businesses when dealing with the Australian Taxation Office, other government departments, and agencies and other businesses. See ABN.
Australian Competition and Consumer Commission [ACCC]
The Australian Competition and Consumer Commission is a national consumer protection agency that promotes competition and fair trading in the market place to benefit consumers, businesses and the community. See ACCC.
Australian Consumer Law
Commenced 1 January 2011 and replaced previous Commonwealth, State and Territory consumer protection legislation in fair trading acts and the Trade Practices Act 1974.
Australian Securities and Investments Commission
The Australian Securities and Investments Commission enforces company and financial services laws to protect consumers, investors and creditors. See ASIC.
Authorised Capital
The total amount of Share Capital that a company is allowed to issue.
Automatic Payment
Automatic payment is the process that provides the facility to automatically transfer money from a cheque or credit card account to pay amounts due. There needs to be a prior approval for the automatic payment [either a fixed monthly or a variable amount] to take place.
B
Bad debt
Monies owed to a business which is considered irrecoverable and written off as a loss against the profits of the business.
Bad debt ratio
A comparison between total sales and those considered irrecoverable and written off as losses.
Balance
The total amount of money owed on an account. It is net of unpaid invoices, fees, interest, and credits. Also known as the outstanding balance.
Balance sheet
A financial statement showing the assets and liabilities of a business as at a certain date. The balance sheet forms part of the accounts of a company.
Balloon payment
A method of financing where a buyer makes small repayments for the term of the loan, with a large final repayment [balloon payment] that clears the debt.
Bank Account
A record of financial transactions that take place between business/customer and banking institutions.
Bankruptcy
Bankruptcy occurs when an individual is not only unable to pay debts as and when they become due but there appears little likelihood of the debt/s being repaid in full.
Benchmark
A benchmark is a standard or guideline used to compare some aspect of a business to some objective or external standard measure.
Bill
A statement that describes the list of charges for goods supplied and/or services provided, to the entity responsible for payment of their cost. Also see Billing Statement and Monthly Statement.
Bill of lading
A receipt, or document of carriage, from a carrier given to a shipper or consignor, undertaking to deliver the goods upon payment of the freight, to the person described in the bill.
Billing statement
The monthly bill sent by a creditor/account provider/lender to the debtor/account holder/borrower, summarising the status of their credit account. See also Bill or Monthly Statement.
Borrower
The person who owes money to a lender. The borrower is legally responsible for paying the loan [instalment or revolving]. Once a credit application is approved, the applicant becomes a borrower.
Borrowing Ratio
A solvency ratio which shows total debt as a percentage of shareholders' funds [Total Loans/Debt divided by Net Worth [i.e. Shareholders’ Funds minus Goodwill] expressed as a percentage. This ratio aims to measure to what extent the subject is financed by external funds.
Bottom Line
The 'Bottom Line' is a measure of the profitability of a business venture after accounting for all costs, including accruals. It is also referred to as the net profit, net income or net earnings.
Bounced Cheque
A cheque that is not paid/payable due to lack of sufficient funds in the debtor's bank account on which it was drawn. The bank returns the cheque without honouring it, it 'dishonours' the cheque.
Brand
A name, term, sign, symbol, design, or a combination of all of these and is used to uniquely identify a producer’s goods and services and differentiate them from competitors.
Break-Even Analysis
A measure commonly used to assess the expected profitability of a company, a single product or a specific process or project. The process determines at what point revenues equal costs, based on both fixed and variable costs.
Broker
An intermediary that serves as a go-between for the buyer or seller.
Bundling
The practice of marketing two or more products or services in a single package with one price.
Business credit
Credit extended to a business [as opposed to a consumer].
C
C.O.D
Payment is due immediately on delivery of the goods.
Cash
This includes Cash in hand or current bank accounts.
Cash Flow
Cash flow is an assessment and understanding of cash/receipts coming into the business and flowing out through payments/commitments over specific periods of time. The relationship between monies received and expended will determine the Liquidity of the business.
Cash Flow Budget
A report that provides a summary of cash inflows and outflows over a specific period of time.
Cash Flow Statement
This is one of the three main financial statements [together with the Income Statement and Balance Sheet]. Cash Flow shows actual cash inflows and outflows of the business over a specified period of time. The Cash Flow Statement reconciles the Income Statement [Profit and Loss] with the Balance Sheet.
Cash Sales
Sales made in cash, or with credit cards, or by cheque, as opposed to sales made on account to be paid later.
Closing Date
The last date on which transactions are posted on an account for a particular month or billing period. Also known as 'Cut Off'
Collateral security
Security in the form of stocks and shares, deeds of property or other acceptable substitutes which are deposited by a borrower as a guarantee that a loan or credit account will be repaid.
Collection
Collection is the attempt made by a Credit department to recover past-due credit obligation/s. In the absence of payment by the debtor the accounts may be transferred from routine debt to a collection agency, or specialist department, to recover bad debts. See also Collection Agency.
Collection agency
An organisation that specialises in collecting debt on amounts passed to them by businesses unable to collect the debt through their own processes. They either service [for a fee] or buy [at a discount] delinquent accounts from creditors. A collection agency must operate within strict guidelines as to their conduct.
Collection Days
"Collection days" is meant to represent the average number of days a business takes, on average, between preparing an invoice to a debtor and receiving payment from them. This can be calculated as follows: [Accounts Receivable Balance *360] / [Sales on Credit*12].
Commission
The amount of money that is payable to an agent or third party for their services.
Compound interest
This is Interest calculated on the principal sum of a debt, together with interest that has accrued in previous periods. Each time interest is added, the total becomes the new sum on which subsequent interest is calculated.
Conditions of sale
The contractual terms, usually in writing, upon which goods are sold and services supplied. Also known as Terms of Trade or Terms and Conditions.
Consortium
Usually a group of businesses working together on projects too large or complex for a business to undertake. It may also be several businesses forming a temporary joint venture to achieve a specific outcome.
Consumer
A person who uses credit for personal, family, or household purposes.
Consumer credit
Credit extended to a consumer/private individual.
Consumer Credit Code
The Credit Code Governs most credit that is provided, or intended to be provided, for personal, domestic or household purposes. The Code applies throughout Australia.
Consumer goods
These are generally goods intended for personal, domestic or household use or consumption.
Contract
A legally binding agreement between parties. See Agreement.
Controlling interest
A company is said to have a controlling interest in another company when it holds over 50% of the shares carrying voting rights.
Conveyancing
The legal work involved in preparing the sale contract, mortgage and other related documents during the sale of property or business.
Cooling off period
The period during which a contract for the purchase of goods, services or property may be cancelled. Cooling off periods and conditions vary, depending on the type of purchase.
Co-operatives
Entities owned, controlled and used by their members. They are distinguished from other forms of incorporation by their participative ownership, democratic structure and use of capital for mutual rather than individual benefit.
Cost Of Goods Sold [COGS]
The cost of goods sold is the costs of materials and production of the goods a business sells. [Typically materials, labour, and factory overhead.] In standard accounting, costs of sales or costs of goods sold are subtracted from sales to calculate gross margin. These costs are distinguished from operating expenses, because gross profit is gross margin minus operating expenses.
Credit
An entitlement provided by a creditor to an applicant to supply purchase goods and/or services [or access cash] now and pay over an agreed period of time. This entitlement ceases, or can be limited, should there be a non-performance on the part of the applicant.
Credit Account
It is a formal agreement where a customer can buy goods and/or services on credit and make payments later.
Credit Agreement
The contract that specifies the terms associated with a credit account.
Credit Applicant
See Applicant.
Credit Application
See Application.
Credit Availability
The amount of unused credit available on a credit account. This is calculated by subtracting the outstanding balance from the credit limit.
Credit Bureau
A company that records a businesses or consumer's credit history and sells it to prospective lenders to help them evaluate at credit applicant's creditworthiness. Credit bureaux provide critical information used by businesses and lenders to review credit applications.
The major credit reporting agencies in Australia are Veda Advantage and Dun & Bradstreet. They are also known as credit reporting agencies.
Credit insurance
Effectively an insurance against loss through Bad Debts. To qualify for Credit Insurance a list of pre-requisites must be complied with, including the demonstration of sound Credit practices, regular reporting and appropriate collection efforts by the insured.
Credit limit
This is the maximum dollar amount a debtor may charge on their credit account.
Credit reference
The information provided following an enquiry to a Credit Reference agency. This information can refer to businesses as well as individuals.
Credit terms
The Payment Terms applicable to a credit account, e.g. 15 days from date of invoice, 30 days from End of Month
Credit Union
A co-operative financial association owned by its members.
Creditor
An entity or a person to whom money is owed as a result of purchases and/or cash advances made to a debtor.
Creditworthiness
An assessment of the credit history or the past credit behaviour of an applicant that helps the account provider determine whether or not to extend credit to a business or individual.
Cut Off [date]
Generally the end of an accounting period. The date on which transactions for a particular period are considered closed. Any further transactions will be recorded in the subsequent Accounting period. See also Closing Date.
Current [Debtor/Customer Account]
An account with no 'Past Due' amount. Maintaining payments within the agreed payment terms ensures an account remain 'current'.
Current assets
Cash or near-cash: assets readily convertible into cash [e.g. stocks, debtors, short term investment].
Current liabilities
Amounts categorised to fall due for payment within 12 months of the Balance Sheet date and include creditors, bank overdrafts, current taxation and certain accruals.
Current ratio
A calculation made to indicate the liquidity of a business. The calculation is: Current Assets / Current Liabilities.
The higher the ratio, the greater the potential protection for creditors.
D
Days Sales Outstanding:
See DSO
Debt collection agency
A business providing debt recovery services for the recovery of overdue accounts, on behalf of its clients.
Default
A default arises as a result of the failure or unwillingness to repay a debt by its Due Date.
Delinquent/delinquency
This is the status of an account with amounts remaining unpaid beyond its Due Date.
Depreciation
The sum of funds set aside from annual profits to cover the reduction in the value of company assets through normal wear-and-tear and/or obsolescence.
Different rates of depreciation apply to different categories of assets.
Those estimated to have a shorter useful life generally have a higher depreciation rate.
Director
A person acting on behalf of the Shareholders. In many smaller companies the Directors and Shareholders may be the same people. Every company must have at least one Director.
Dividends
The amount paid to shareholders in return for their investment in the shares of the company. This is frequently in the form of a payment every six months and is expressed as x cents per share held.
Dividends [Balance Sheet]
Funds set aside at Balance Sheet date to provide for upcoming Dividend payments.
Dormant [Company]
A company that may never have traded or has ceased its trading activities but has not been wound up. There will still be Annual returns filed, but records show the company did not trade in its own right during a particular period.
DSO
Days Sales Outstanding is a rough estimate of the time taken to receive payment for goods and/or services sold. The average value of sales on credit in a date range [one month or many months averaged] is divided into the Total Debtors and expressed as a number of days.
This metric has some value within the organisation but comparisons across businesses are fraught due to different accounting periods and cut off, different payment terms [and the mix thereof]. Comparing a business with a majority of 15 day payment terms and a 4/4/5 accounting period with a business that has a majority of 30 day payment term accounts, is highly seasonal and closes on the last day of the calendar month is not really practical.
Due date
The date a payment must be received by the creditor. If late payment persists the account may be suspended as 'delinquent'.
E
EBIT
Earnings before interest and taxes.
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization.
This is equivalent to the Gross Margin [Sales Revenue minus Total Direct Cost of Sales] minus [Total Operating Expenses, i.e. Tax-deductible expenses incurred in conducting normal business operations, including wages and salaries, rent, etc.] + [Depreciation, i.e. the loss of value of assets over time, + Amortisation].
This is similar to EBIT [see above] except that EBIT subtracts all expenses, including depreciation, whereas EBITDA does not subtract depreciation and amortization.
Economies Of Scale
The benefits of larger production volumes allowing fixed costs to be spread over more units thereby lowering the average unit costs, thereby providing a cost advantage.
EFT - Electronic Funds Transfer
The transfer of funds from /to financial institutions or businesses via the electronic media.
Enforcement
Once a judgement for a debt has been entered by a court against a debtor there are various ways recovering the amount of that judgement. This recovery is referred to as 'enforcement'. Examples of enforcement include the seizing goods through a Writ of Execution and the attachment of earnings. See Garnishee.
EOM [End of month]
In a Credit environment this refers to a payment term or time agreed for deferred payment. As an example, a debtor on '30 days EOM' payment terms requires payment of that invoice on or before the end of the month following the month of original invoice. [e.g. invoice dated 12 May is due for payment on or before 30 June]. Similarly '60 EOM' invoices require payments on or before the 60th day after the month of original invoice. See 30 Days EOM/60 Days EOM
F
Factoring
Factoring occurs when an external party buys outright the debts of a creditor, relieving the creditor of further responsibility for the collection of amounts falling due and any liability that may arise from Bad Debts. This depends on the agreement between the parties, i.e. whether there is recourse to the creditor selling the debtor to the factoring firm.
Fiscal Year
A fiscal year or financial year is a period used for calculating annual financial statements of businesses. Fiscal years vary between businesses and may not necessarily coincide with the January to December calendar.
The 'fiscal year' may also refer to the year used for income tax reporting.
Some companies choose to end their fiscal year on the same day of the week, such day being the one closest to a particular date [for example, the Friday closest to 31 December]. Under such a system, some fiscal years will have 52 weeks and others 53 weeks.
Fixed assets
Tangible and intangible assets with a relatively long life, acquired to produce goods or services and not intended for resale.
Fixed charge
A charge, or claim, over a specific asset or type of asset, e.g. machinery, property, book debts, etc. See PPSA.
Flagging an Account
Usually the temporary suspension of the credit facilities of a debtors account pending resolution of the specific issues triggering the suspension.
G
Garnishee
A court-ordered procedure by which a creditor receives funds from a debtor's salary or wage as payment of amounts due.
Gearing
The level of borrowings as a percentage of Shareholders Funds [sometimes called Net Assets].
Goodwill
A company purchasing another company for more than the value of its assets records the difference as an asset, "Goodwill", in its Balance Sheet.
Gross Margin
Total sales revenue minus Total cost of goods sold, or Total Cost of Sales. Gross margin can be expressed in dollar or percentage terms.
Gross profit/loss
Net total of Sales minus costs.
Guarantee
A promise by one person or a business to carry out the contractual commitments of another in the event of default.
Guarantor
A person signing a guarantee with a creditor undertaking to repay a debt if the debtor is unable to do so.
H, I
Holding Company
A company that controls another as its majority Shareholder. Also called a Parent Company.
In default
See Delinquent.
Inactive Account
An account with no activity over a specific period. Also known as a 'dormant account'.
Income Statement
It is also known as an Earnings report, an Earnings statement, an Operating statement, or a Profit and Loss statement. An Income Statement is a financial document that shows sales, cost of sales, gross margin, operating expenses, and profits or losses.
Gross margin is sales minus cost of sales, and profit [or loss] is gross margin minus operating expenses and taxes.
Initial Public Offering [IPOs]
A corporation’s initial capital raising efforts through the sale of securities on the Stock Market.
Insolvency
An inability to pay debts as they fall due, or where a debtor's total assets are exceeded by their liabilities.
Insolvency and Trustee Service Australia
The Insolvency and Trustee Service Australia [ITSA] is the Australian Government agency responsible for administering the Personal Property Securities Register [PPSR].
Intangible assets
These include Patents, Trademarks and Goodwill.
Interest
The cost of borrowing or lending, expressed as an annual percentage of the principal or the total amount borrowed. This is also referred to as the 'interest rate' and 'interest charge', and is influenced by credit risk and the inflation rate.
Interest Cover
This indicates the 'level of comfort' in terms of the profitability of an entity to cover short-term interest due on any borrowings.
If the level of cover is marginal or less than 100%, then either an increase in interest rates or a reduction in profitability could be significant. The calculation is: Pre-tax Profits / by Interest Payable.
Invoice Cycle [or 'Run']
The frequency of invoice production. This can vary from 'Invoice with Goods', 'end of day', daily, weekly or periodically. Obviously the longer the gap between invoice runs the greater the time taken for the debtor to receive their invoice and initiate payment to the creditor.
Issued Share Capital
The value of the Share Capital on issue at Balance Sheet date.
ITSA
ITSA [Insolvency and Trustee Service Australia] is the Australian Government agency responsible for administering the Personal Property Securities Register [PPSR].
J
Joint account
A credit account for which two or more people are responsible. All account holders assume legal responsibility to repay any debt accumulated on the account. They become 'jointly and severally liable'. See Joint and Several
Joint and Several
When two or more persons declare themselves jointly and severally liable they make themselves liable to a separate and individual action for the entire debt as well as joint action in the event of default. See Partnership.
Joint venture
A partnership set up between two or more businesses, usually joining specific areas of their activities together, to improve their capabilities and competitiveness in particular areas or markets or to undertake a specific project.
Judgment
A court decision following legal action or a lawsuit related to money or debts.
K
L
Late Payment
A payment not made on its due date, i.e. it is a 'delinquent payment'.
Lease
A document recording the terms and conditions under which the owner gives the possession and use of their property to another, for a specific period of time, for a defined payment and use.
Lender
The person or business [creditor] to whom a borrower [debtor] owes money.
Liability
A liability is an obligation or responsibility to pay money to another party.
LIBOR
This is the acronym for London Interbank Offered Rate and is regarded as a 'benchmark rate' for calculating interest rates for adjustable rate loans.
This rate, LIBOR, is based on the interest rate at which banks carry out borrowing and lending of unsecured funds with other banks in the money market.
Lien
The legal claim on property of another business or person, as a security for a debt, so that if the borrower fails to fulfill their repayment obligation, the creditor can claim and dispose of the particular property to satisfy the debt.
Limited Company
A Limited Company is one where the right to transfer shares and the number of members is not limited.
The company may invite the public to subscribe for its shares.
Limited liability
The liability of shareholders in a limited liability company, private or public, is limited to the face value of the shares they hold. If the shares held are fully paid the shareholder has no liability for the debts of the company. If the shares are partly paid, the liability is limited to the unpaid face value of the shares.
Liquidation
This involves the disposal of the assets of a business to realise cash, usually to pay off Creditors when a business has failed.
Liquidator
The insolvency practitioner appointed to wind up and settle the affairs of a company.
Liquidity
The excess of liquid assets over liquid liabilities.
Liquidity Ratio
See Current Ratio
Long Term Assets
Assets, including plant and equipment, furniture and fittings, that usually have an extended life and are depreciated over longer periods.
M
Margin
"Margin" refers to the number of percentage points added to the index or prime rate to estimate the variable interest rate.
Merchant Agreement
This is a formal written agreement between a business [merchant] and a card processing organisation. A Merchant agreement covers all terms and conditions, as well as rights, duties and warranties, related to the acceptance of a credit card and credit card activities.
Mission Statement
A statement that captures an organisation’s purpose, customer orientation and business philosophy.
Monthly Statement
An account statement containing a detailed list of transactions that have taken place in a month. It is sent, either by post or electronically, to customers every month.
Mortgage
A mortgage is a secured loan for which the lender has provided property as security.
N
National Credit Code
Governs most credit that is provided, or intended to be provided, wholly or predominantly for personal, domestic or household purposes. The Code applies throughout Australia.
Net 7, Net 14, Net 30, Net 60 etc.
All relate to Payment Terms that require the amount shown on an invoice be paid in full on or before 7, 15, 30 or 60 days after the date of that invoice.
Net Assets
[Total Fixed Assets + Total Current Assets] minus [Total Current Liabilities + Total Long Term Liabilities]. The excess/surplus or deficit which remains when all liabilities are subtracted from all assets. Also referred to as Shareholders Funds.
Net Cash Flow
A projected flow of cash into and from the business over a specified period of time, indicating an increase or decrease in cash balance.
Net Current Assets
Current Assets minus Current Liabilities. This indicates the ability of the business to meet its short term obligations. Also referred to as Working Capital.
Net income [or Loss]/Net Income/Net earnings
Net Income is a measure of the profitability of a business venture after accounting for all costs, including accruals. It is also referred to as the net profit, bottom line or net earnings.
Net Present Value [NPV]
The method of discounting future streams of income by introducing an expected rate of return. This calculates future value [e.g. of projects/returns] in today’s dollars. NPV may be used to determine the current value of a business being offered for sale or to be capitalised.
Net Profit
Net profit [or Loss] is a measure of the profitability of a business venture after accounting for all costs, including accruals. It is also referred to as the bottom line, net income, or net earnings.
Net Worth
Net Assets minus Intangible Assets
Ninety [90] days Overdue
A payment status indicating that a business or person has missed three consecutive payments on a credit-based account.
Number of Weeks [Accounting Period]
Normally businesses report year end trading for a 52 week period. Occasionally, where a change in year end occurs the trading period may vary. There are also a variety of accounting dates and can occur on a variety of dates, e.g. the last day of the month; the last Friday of the month; on a 4/4/5 week cycle to provide for 13 weeks per quarter.
O
On-Costs
Labour costs after allowing for salaries and wages; i.e. payroll tax, workers’ compensation and other liability insurance, the cost of subsidized services to employees, training costs, etc.
One hundred and eighty [180] days [Overdue]
An account status indicating that a debtor has missed six consecutive payments on an account.
One hundred and twenty [120] days [Overdue]
An account status indicating that a debtor has missed four consecutive payments on an account.
Online Bill Presentment and Payment
A process through which a debtor can view, receive and pay bills online at a site hosted by the creditor or contracted through a third party.
Operating Expenses
Expenses incurred in the conduct of normal business operations. These operating expenses include wages, salaries, administrative and research and development costs, but exclude interest, depreciation and taxes.
Operating Profit [Loss]
The amount of profit [or loss] generated after deducting Depreciation and other expenses from the Gross Profit/Loss figure.
Other Income
Income received by the business that is derived from sources outside the scope of normal business activities and not directly related to its day-to-day operations. This may include bank interest, Investments and dividend receipts.
Outsourcing
Contracting an external party to provide normal day-to-day services normally conducted by the business. This may be a co-location arrangement or separate premises in Australia or overseas [also known as ‘Offshoring].
Benefits associated with outsourcing generally include the economies of scale achieved by the contracting organisation and the passing on of the benefits of reduced wages and operating costs.
Overdue
Amounts of debt past their due date for payment, i.e. not paid on their agreed due date.
P
Parent company
A company that owns or controls other companies by holding all or the majority of shares in that company. A company has a controlling interest in another [a subsidiary] when it has acquired over 50% of its issued shares which have voting rights. Where a parent company does not operate in its own right, it is called a holding company.
Partnership
A legally binding agreement between two or more parties to work together as joint principals in a business. Notwithstanding the share or contribution of capital or responsibilities within the business the partners remain jointly and severally liable for all/any debt incurred and remaining unpaid.
Past Due
An amount to be paid by the debtor to the creditor passing its agreed due date for payment and remaining unpaid.
Payment Terms
The agreed conditions under which a seller [creditor/supplier] provides credit terms to a purchaser [debtor/customer]. Typically, these terms specify the period allowed to a buyer to pay the amount of the sale. Terms include cash in advance, cash on delivery, or a deferred payment period of 7/14/30/60 etc.
Personal Property Securities Act
The Personal Property Securities Act [PPSA] was enacted in Australia on 30 January, 2012. This affects the way security is taken over personal property [non-land assets] and extends the scope of personal security and insolvency laws to not only cover traditional personal security [e.g. mortgages, charges and bills of sale] but other interests like retention of title, finance leases, operating leases, hire purchase agreements, assignment of debt, consignments and security trust deeds.
Personal Property Securities Register
The Personal Property Securities Register is a register where details of security interests in personal property can be registered and searched. The Insolvency and Trustee Service Australia [ITSA] is the Australian Government agency responsible for administering the PPSR.
Phishing
A collective term used to categorise internet fraud, where personal details like names, passwords and other financial information related to credit card or bank accounts are acquired. Various methods are used, including emails purportedly from financial institutions and the creation of fake websites.
PPSA
The PPSA [Personal Property Securities Act] was enacted in Australia on 30 January, 2012. This affects the way security is taken over personal property [non-land assets] and extends the scope of personal security and insolvency laws to not only cover traditional personal security [e.g. mortgages, charges and bills of sale] but other interests like retention of title, finance leases, operating leases, hire purchase agreements, assignment of debt, consignments and security trust deeds.
PPSR
The PPSR [Personal Property Securities Register] is a register where details of security interests in personal property can be registered and searched.
The Insolvency and Trustee Service Australia [ITSA] is the Australian Government agency responsible for administering the PPSR.
Proprietary Limited Company – [Pty Ltd]
A Proprietary Limited Company is a private company, in which the right to transfer shares is restricted and the number of members is limited.
The company is prohibited from inviting the public to subscribe for its shares and from inviting the public to deposit money with the company.
Proprietor
The simplest business form is the sole proprietorship. If an individual doesn't create a separate legal entity for their business then they operate as a sole trader. This is so whether operated under an individual’s name or a trading name.
Sole proprietors remain personally liable for debts incurred by the business. See Sole Proprietor
Q, R
Quick Ratio
Current Assets minus [Stocks and work in progress] / Current Liabilities. This ratio is used to measure the short-term ability of a business to meet its obligations. It is also known as the Acid test ratio.
Quick Test
Those assets held in cash, or 'near-cash’, i.e. those assets readily turned into cash. These include funds bank current account and trade debts.
The ratio of these assets to current liabilities provides an assessment of an organisation's liquidity or solvency. See also Acid Test.
Ratios [Financial]
A range of Ratios used to obtain a general picture of a business’s situation and providing a method for objectively analysing its performance.
Retained Earnings
Earnings that have been reinvested back into the company and/or paid out as dividends to the shareholders.
Negative Retained Earnings means the company has accumulated losses.
Return on Assets
Pre-tax Profits [annualised where necessary] divided by Total Assets expressed as a percentage.
S
Secured creditor
A creditor holding title to an asset of their debtor as security for a debt. This can be sold to recover the debt. IMPORTANT - See also Personal Property Security Act [PPSA]
Secured loan
A loan guaranteed by assets. The creditor/lender may take possession of these assets [collateral] in default by the debtor. IMPORTANT - See also Personal Property Security Act [PPSA]
Set-off
A claim or form of defence whereby a debtor tries to establish their own claim against the plaintiff in order to mitigate or extinguish the plaintiff's original claim, either in full or in part.
Shareholders
Individuals or entities owning shares of stock in a company, whether listed or unlisted.
Shareholders’ Funds
Total Assets [Total Fixed Assets + Total Current Assets] minus Total Liabilities [Total Current Liabilities + Total Long-Term Liabilities]. Also called Net Assets, it is the surplus or deficit which remains after the preceding calculation.
SIC Code
The Standard Industrial Classification is used to classify and categorise the nature of a business’s activities for certain statistical reporting purposes.
Simple Interest
It is the rate of interest calculated on the principal amount only, as opposed to Compound Interest that also calculates interest on unpaid interest.
60 Days EOM/30 Days EOM
In a Credit environment this refers to a payment term or time agreed for deferred payment. As an example, a debtor on '60 days EOM' payment terms requires payment on or before two months after the end of the month following the month of original invoice. Similarly '30 days EOM' payments are expected on or before the 30th day after the month of original invoice. See EOM [End of month].
Sixty [60] days Overdue
This indicates that a debtor has missed two consecutive payments on a 30 day credit term account.
Smart Cards
Electronic prepaid cash cards containing stored value information.
Sole Proprietorship/Trader
The simplest business form is the sole proprietorship. If an individual doesn't create a separate legal entity for their business then they are a sole trader. This is so whether operated under an individual’s name or a trading name. Sole proprietors remain personally liable for debts incurred by the business. See Proprietor
Statement
A periodic document or bill issued by the creditor, and addressed to the debtor/customer, recording the activities or transactions that have taken place within a specified period. The period end date for which the statement was created [usually a monthly period] is known as the 'statement date'.
Statutory declaration
A statement declaring particular facts, as represented therein, to be true by its signing in the presence of an authorised witness.
Stock
Inventory or Goods on hand [either finished goods or materials to be used to manufacture goods].
'Stock' can also refer to privately held or publicly traded shares or securities representing investment in, or partial ownership of, a company.
Stop Payment
An instruction given by the drawer of a cheque to their bank to not pay a particular cheque they may have issued.
Subpoena
A document issued by a court, summonsing [or compelling] the person named in the document to attend court and provide evidence in a particular matter.
Subsidiary
A company controlled by another company where the controlling company holds greater than 50% of the issued voting shares of the subsidiary company.
SWOT Analysis
An acronym for Strengths, Weaknesses, Opportunities and Threats. It is a method for identifying and categorising issues facing businesses.
T
Tactics
Activities and processes to implement strategies.
Terms of Trade/ Terms and Conditions
The contractual terms, usually in writing, upon which goods are sold and services supplied. See also Conditions of Sale.
Third line forcing
A form of exclusive dealing and is an illegal practice. It involves the supply of goods or services on condition that the buyer purchases goods or services from a particular third party, or a refusal to supply because the buyer will not agree to that condition.
Thirty [30] days overdue
Indicates a debtor has missed one payment due date on a 30 day term account.
30 Days EOM/60 Days EOM
In a Credit environment this refers to a payment term or time agreed for deferred payment. As an example, a debtor on '30 days EOM' payment terms requires payment on or before the end of the month following the month of original invoice.
Similarly '60 days EOM' payments are expected to be received on or before the 60th day after the month of original invoice. See EOM [End of month].
Three C's
Character, Capacity and Capital are the basic criteria that should be examined prior to providing a credit-based account or granting a loan.
Total Assets
Total Fixed Assets + Total Current Assets.
Total Current Assets
The sum of all Current Assets in the year end Balance Sheet. It includes Stock and Work in Progress, Debtors, Cash and any other asset of a liquid nature.
Total Current Liabilities
The sum of all Current Liabilities in a Balance Sheet.
Total Debtors
The aggregate of all short-term debts owing to the company at a particular time.
Total Fixed Assets
The value of all Fixed Assets, including Tangible and Intangible Assets. Depreciation is netted off and net values used where depreciation is applicable.
Total Long-Term Liabilities
The sum of all long-term loans, accruals and deferred income and other long term liabilities.
Total Net Assets
The net total of Fixed Assets and Current Assets minus Current Liabilities and Long-Term Liabilities. This equates to Shareholders Funds.
Total Provisions
The amounts set aside periodically to meet specific future requirements or anticipated costs. These can include deferred taxation, pension provisions and Bad Debts.
Total Shareholders’ Funds
The net value of share capital + reserves recorded at the Balance Sheet date. Net Worth is calculated by deducting any goodwill recorded.
Total Turnover
The value of all sales generated by the business during a nominated period.
Trade Creditors
The accrued amount owed to suppliers for goods and or services purchased.
Trade Debtors
The total amount owed to the business at a nominated date, by its customers, for goods and/or services provided.
Trading address
The address of the business where normal trading is usually carried out. It is different from the registered office and where the businesses assets are most likely to be found.
Transaction date
The date that goods or services were provided to the debtor.
Tribunal
A body set up by the government to adjudicate and resolve particular matters.
U
Unconscionable conduct
A statement or action so unreasonable it defies good conscience. A business must not act unconscionably when selling or supplying goods and services to a customer or supplying or acquiring goods and services to, or from, a business
Unsecured creditor
A creditor without a registered security for their debt and ranking with other unsecured creditors on an equal basis and with no preference in the event of a liquidation or bankruptcy.
Unsecured loan
A loan solely based on a consumer's perceived ability to repay a loan, without collateral as a guarantee.
V
Voluntary Bankruptcy
Bankruptcy petition filed by the debtor.
W, X, Y
Waiver
The abandonment of a right or entitlement to future claims.
Warranty
Promise or guarantee provided by a seller to a buyer to describe the goods or services offered.
Winding up order
An order made by the Court for a company to be wound-up and a liquidator appointed to wind up its affairs.
Winding up petition
A petition submitted to the Courts by a business or person wanting a company to be wound-up and placed into compulsory liquidation.
Working capital
Current assets minus Current liabilities. This Indicates funds available for the day-to-day running of the business. See Net Current Assets.
Year-end
A fiscal year or financial year is a period used for calculating annual financial statements in businesses. Fiscal years vary between businesses and not necessarily coincide with the January to December calendar year.
The 'fiscal year' may also refer to the period end date used for income tax reporting. Some companies choose to end their fiscal year on the same day of the week, such as the one closest to a particular date [for example, the Friday closest to 31 December]. Under such a system, some fiscal years will have 52 weeks and others 53 weeks.
Z
Zero Balance
Refers to an account with no outstanding balance at a particular point. There is no unpaid amount yet to be paid.
Z-scoring
This is a model developed by Professor Edward Altman, of New York University, and is a technique for forecasting corporate failure based on the calculation of a business’s financial ratios.
