Credit & cash flow lingo

Like any industry the credit and cash flow sectors have their own particular jargon.  Following are definitions for some of the most common terms used on our site and within the credit and collections industry.

Accounts payable: Unpaid bills. Accounts that are owed to suppliers (trade creditors) as distinguished from accrued interest, rent, salaries, taxes and other such accounts. Accounts payable are shown under current (short-term) liabilities on the balance sheet.

Accounts receivable: Money which is owed to a company by a customer for products and services provided on credit. This is treated as a current asset on a balance sheet.

Bad debt: Bad debt is accounts receivable that will likely remain uncollectible and will therefore need to be written off. Bad debts appear as an expense on the company's income statement.

Capital: The money, property and other valuables which collectively represent the wealth of a business.

Cash flow: Cash flow refers to the movement of cash into or out of a business. It is usually measured during a specified, finite period of time.

Corporate family tree: The linking together of associated businesses (both in Australia and overseas) so that firms can obtain a complete understanding of the connections between various entities.

Credit: A contractual agreement between two parties. The purchaser receives something of value and agrees to repay the supplier at a later date.

Creditworthy: A term used to describe whether a borrower (person / business) has an acceptable credit rating and can take out loans or obtain credit lines.

Credit check: The process of evaluating an applicant's loan request and / or creditworthiness.

Credit insurance: Protection against large losses from unpaid accounts receivable.

Credit management: Policies aimed at increasing sales revenue by extending credit to customers who are deemed a good credit risk and minimising risk of loss from bad debts by restricting or denying credit to customers who are not a good credit risk.

Credit policy: Clear, written guidelines that outline:
- the terms and conditions for supplying goods on credit
- customer qualification criteria
- procedure for making collections
- steps to be taken in case of customer delinquency.

Credit report: A report containing detailed information on an individual or company's credit history. This may include details such as identifying information, credit accounts and loans, bankruptcies and late payments and recent inquiries.

Credit reporting agency / bureau/ credit information provider: An agency which collects and sells information about the creditworthiness of individuals / businesses. A credit reporting agency does not make decisions about whether a person / business should be extended credit or not, it provides information to a prospective creditor who uses that data to decide whether to extend the applicant credit.

Credit risk: Also called credit exposure, credit risk is the probability of loss from a debtor's default.

Credit scores: A measure of credit risk calculated from a credit report using a standardised formula. Factors that can impact a credit score include late payments and company financials.

Dynamic Delinquency Score (DDS): The DDS is another of D&B's proprietary scores. It utilises a compilation of financial, credit and demographic factors to assess the probability of a firm paying its bills in a severely delinquent manner (90+ days past terms) over the next 12 months.

Dynamic Risk Score (DRS): The DRS is D&B's proprietary risk score. It uses statistical analysis (including the examination of past behaviours) to evaluate business stability and the probability that a business will experience severe financial distress in the coming 12 months.

Identity verification: verifying that an individual is who they say they are by cross-checking a variety of different data sets and personal characteristics.

Letters of credit: A binding document that a buyer can request from a bank to guarantee the payment for goods will be transferred to the seller. A letter of credit gives the seller reassurance that he will receive the payment for the goods.

Payment terms: Conditions under which a seller will make a sale. Typically these terms specify the period within which the buyer must pay off the amount due.

Payment guarantee: Commitment (usually backed by an asset) to pay a debt according to the terms of the debt agreement.

Profitability: The ability of a firm to generate net income on a consistent basis. Profitability is often measured by the price to earnings ratio.

Risk appetite: a determination regarding an acceptable level of risk within an organisation.

Risk assessment: Risk assessment involves the identification, evaluation and estimation of the level of risks involved in a situation. It also compares this level of risk to relevant benchmarks or standards to determine an acceptable level of risk.

Remittance: To make a payment by any non-credit means. Examples of remittance include cash, check and electronic transfer.

Risk mitigation: Systematic reduction in the exposure to a risk and/or the likelihood of its occurrence.

Solvency: A company's ability to meet its long-term obligations. A company's solvency is determined by dividing net worth by total assets.

Trade credit: When a supplier of goods or services provides credit to a customer, allowing the customer to pay for the goods or services at a later date.

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