Home business glossary

Understanding the jargon that comes with running a business
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What does sme stand for?

General terms

What does SME stand for?

SME means ‘small or medium enterprise’ or ‘small and medium enterprise’. Small and medium enterprises are those with fewer than 250 employees. Over 99% of companies in the UK are SMEs according to this definition.

How do you define a company?

A company is a legal entity which exists separately from the people who run it. Its finances are also separate from the personal finances of those who run it, even if that’s just one person. In the UK, a company must be registered with Companies House.

What is a micro business?

A micro business is one which has fewer than ten employees. 96% of businesses in the UK are micro businesses – many of them home-based.

What is a franchise?

A franchise is a contractual agreement which gives the franchisee the right to operate someone else’s business – usually in a particular geographical area and for a fixed period. In return for their investment, the franchisee benefits from the franchise’s established brand, marketing and other support, and systems. Franchises that are often run successfully as home-based business including oven-cleaning, children’s activities and weightloss clubs.

What does being self-employed mean?

In the UK you’re self-employed if you regularly sell goods or services with the aim of making a profit. Many people running home-based businesses choose to be self-employed rather than registering a company.  If you’re self-employed, you need to register this with HM Revenue and Customs (HMRC).

What is a sole trader?

Being a sole trader is another term for being self-employed.

What is a business plan?

A business plan is a document which sets out what you are trying to achieve, and how you aim to achieve it. It’s a good idea for any home-based business to draw one of these up – and keep it up to date – but it will be essential if you want to take out a bank loan to finance your business.

What is a company director?

Every incorporated company in the UK must have at least one director who is legally responsible for running the company and submitting key documents such as annual accounts to Companies House and HMRC.

Accounting and finance terms

What is gross profit?

Gross profit is your sales revenue minus the cost of goods sold.

What is the cost of goods sold?

The cost of goods sold is the total of all costs directly arising from producing a product or service such as raw materials, labour and power used to produce an item, and shipping. It does not, however, include marketing costs, office overheads or insurance.

How are revenue and profit different?

Revenue is another word for sales – it’s the total amount of money received from your customers or clients. Profit is what is left after your costs have been deducted from your sales.

What is my accounting date?

An accounting date is the date each year on which a company’s financial year ends. It’s up to you what date you choose, and you can also change your accounting date to make your financial year shorter or longer than a calendar year. 

What is accounting software?

Many home-based business owners use accounting software to log their transactions. For companies, accounting software can help you produce your balance sheet and profit and loss statement. Accounting software can either be installed on your computer or online.

What is a debtor?

A debtor is someone who owes your business money, such as a customer who has not yet paid an invoice which you have issued.

What is a creditor?

A creditor is someone to whom your business owes money. Your creditors might include suppliers or your bank.

What is depreciation?

Depreciation is an accounting method used to reduce the book value of a fixed asset over time so that its cost is spread over the period over which it is used so that your costs don’t take a huge ‘hit’ in the year it’s bought, and then not reflect its use in subsequent years.

What are assets?

Assets are simply things that belong to your company which have value. Assets include cash as well as stock and fixed assets.

What is a fixed asset?

Fixed assets are things that belong to your business that are used over the long term to provide your products or service. A sewing machine would be a fixed asset for a home-based business making wedding dresses. 

What is book value?

Book value is the current value of an asset as shown on your balance sheet. For fixed assets, this is usually the purchase price less depreciation. Book value is not necessarily the amount you would get for the asset if you sold it.

What is equity?

A business’s equity is the total of its assets minus its liabilities. Cash that a business owner has put into the business when it started is a liability to that person.

What are liabilities?

Financial liabilities are amounts of money that your business owes.

How do you define profit?

In accounting terms, profit is the amount of money that your business gains when income is greater than expenditure. This might relate to a given transaction or a period of time.

What are losses?

The inverse of profit, a loss is where expenditure is higher than income.

What are accruals and pre-payments?

Accruals and prepayments are accounting methods which spread costs evenly over the period for which they are incurred. Accruals relate to payments that you only make after you have received the benefit to which they relate (such as a quarterly electricity bill), while prepayments are for amounts that you pay up front, such as annual insurance.

What are business expenses?

Business expenses are allowable expenses which can be included in your company accounts. They reduce the amount of profit on which you have to pay tax. Home-based business owners need to be particularly aware of what expenses are ‘allowable’. For example, if you buy a computer to run your business, but also use it for personal purposes, you cannot claim its entire cost as a business expense.

What are fixed costs?

Fixed costs are those which you have to pay no matter how many sales you make, such as insurance or fixed asset depreciation.

What are variable costs?

Variable costs are directly related to sales such as the cost of laundry and of providing breakfast for a B&B owner.


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What is a profit and loss account?

A profit and loss account or P&L account summarises all of the income received and expenditure incurred by a business in a particular period, usually a year. Along with the balance sheet, a P&L account is one of any business’s most important financial reports.

What is a balance sheet?

A balance sheet is a financial document which shows your business’s assets and liabilities at a single point in time. Along with the P&L account, a balance sheet is one of any business’s most important financial reports.

What is a cash flow statement?

A cash flow statement is a forecast of when cash will come in and go out of your business. This will show you whether you need a temporary overdraft or bank loan, and if so, how large it needs to be.

What is bad debt?

Bad debt is an amount of money which you are unable to collect from a debtor.

What is a break-even point?

The break-even point is the number of sales you need to make to cover both your fixed and variable costs. For example, if you are a dog groomer and your business has fixed costs of £500 a year (marketing and insurance), you charge £25 per dog groomed, and the variable costs per grooming are £5. Your gross profit per sale is £20, so you will need to groom 25 dogs before you break even.

What is a budget?

A budget is a financial plan which estimates your income and expenditure for a particular period in the future.

What is capital?

Capital is money invested in a business. If you’re a sole trader running a home businesses, your business’s capital will probably be your own money or come from a bank loan.

Marketing

What is PPC (pay per click) advertising?

PPC advertising is a popular form of internet advertising in which advertisers only pay when their advert is clicked. It’s ideal for many small, home-based business, particularly those providing niche products and services. One of the most-used PPC advertising services is Google Adwords.

What is the marketing mix?

The marketing mix is the combination of the five key elements that make up your total offering:

  • Place.
  • Price.
  • Product.
  • Promotion.
  • Timing.

What is a target market?

Your target market is the particular group of customers for whom your marketing mix is designed. Being clear about what your target market is will help you focus your sales efforts. Decide what geography, demographic and sales channels you want to serve.

What does brand mean for a home business?

For most home businesses, your overall brand is a combination of your trading name, logo and other visual elements such as your website, your credibility, and your pricing. All of these should be consistent!

What is brochureware?

Brochureware is a term used for websites which describe your product or service but don’t deliver it. A mobile hairdresser, say, is likely to have a brochureware website which shows examples of her clients haircuts, and gives the hours and area within which she works.

Insurance

What is public liability insurance?

Public liability insurance protects you against claims from people outside your business for injury or damage directly resulting from your business activities. HomeProtect home insurance policies include up to £5 million public liability as standard for business visitors to your home.

What is employers’ liability insurance?

All UK companies that have employees must have employers’ liability insurance by law. This protects your business against claims from your staff should they be injured or become ill as a result of their work for you.

What is professional indemnity insurance?

Professional indemnity insurance is designed for those who provide services or advice and it protects them against claims for damages from clients who believe your work was inadequate.

What is product liability insurance?

Product liability insurance protects your home business against claims from customers relating to injury or damage sustained by your products.

Tax and legal terms

What is self assessment?

Self assessment is the system used by HMRC to collect income tax and National Insurance from the self-employed.

What is a tax return?

Your tax return is a document that you filled out (generally online) during self-assessment to tell HMRC about your self-employed earnings.

What is corporation tax?

Corporation tax is the tax companies pay on their profits.

What is VAT?

Companies which have a turnover exceeding a certain threshold, or which choose to do so, must charge VAT or value-added tax on sales of a wide range of products and services. They then pass this on to HMRC, but less the amount of VAT they have paid themselves in buying business items. Many home businesses don’t charge VAT as their turnover is too small.

What is Companies House?

Companies House is the official registrar for companies in England and Wales. 

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