A

Acceleration

This is an expression that is usually used when a person chooses to pay a mortgage on a weekly or a bi-weekly basis although it can apply to any repayment program. All mortgages are drawn with a requirement that you make payments monthly, however, the bank will usually agree to administer one half of the required monthly payment each bi-weekly period, you are paying the equivalent to one extra monthly payment per year and therefore paying off your mortgage more quickly. If you chose to pay weekly and pay one quarter of a monthly payment each weekly period you get the same benefit. Be sure to arrange that your mortgage payment dates match your pay days!  

Agreement of Purchase and Sale

A legal agreement that offers a certain price for a home, which may be firm (no conditions attached), or conditional (certain conditions must be fulfilled before the deal can be closed).  

Amortization The period of time it takes to pay off your mortgage in full. Typically you would choose the longest amortization available which is currently 40 years.  

Appraisal A process which determines the market value of property. This will usually be performed by a professional appraiser who will prepare a comprehensive report complete with photographs of the home.  

Appraisal Value An estimate of the market value of the property.  

Assumable When a mortgage is assumable, a buyer may take over the responsibilities and benefits of the sellers' existing mortgage. This may be advantageous to a buyer if the interest rate on the mortgage is below the current market rates. Before assuming a mortgage, approval must be obtained from the lender.  

Assets

Anything owned by the company having a monetary value; eg, 'fixed' assets like buildings, plant and machinery, vehicles (these are not assets if rented and not owned) and potentially including intangibles like trademarks and brand names, and 'current' assets, such as stock, debtors and cash.

Asset Turnover

Measure of operational efficiency - shows how much revenue is produced per $ of assets available to the business. (sales revenue/total assets less current liabilities)

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B

Blended Payment A mortgage payment that includes both interest and principal repayment. The amount of interest taken from each payment reduces while the amount applied to principal reduction increases over time, but the payment remains constant.

Balance Sheet

The Balance Sheet is one of the three essential measurement reports for the performance and health of a company along with the Profit and Loss Account and the Cash flow Statement.

The Balance Sheet is a 'snapshot' in time of who owns what in the company, and what assets and debts represent the value of the company. (It can only ever be a snapshot because the picture is always changing.)

The Balance Sheet is where to look for information about short-term and long-term debts, gearing (the ratio of debt to equity), reserves, stock values (materials and finished goods), capital assets, cash on hand, along with the value of shareholders' funds.

The term 'balance sheet' is derived from the simple purpose of detailing where the money came from, and where it is now. The balance sheet equation is fundamentally: (where the money came from) Capital + Liabilities = Assets (where the money is now). Hence the term 'double entry' - for every change on one side of the balance sheet, so there must be a corresponding change on the other side - it must always balance.

The Balance Sheet does not show how much profit the company is making (the P&L does this), although previous years' retained profits will add to the company's reserves, which are shown in the balance sheet.

Budget

In a financial planning context the word 'budget' (as a noun) strictly speaking means an amount of money that is planned to spend on a particularly activity or resource, usually over a trading year, although budgets apply to shorter and longer periods.

An overall organizational plan therefore contains the budgets within it for all the different departments and costs held by them. The verb 'to budget' means to calculate and set a budget, although in a looser context it also means to be careful with money and find reductions (effectively by setting a lower budgeted level of expenditure).

The word budget is also more loosely used by many people to mean the whole plan. In which context a budget means the same as a plan. For example in the UK the Government's annual plan is called 'The Budget'. A 'forecast' in certain contexts means the same as a budget - a planned individual activity/resource cost, or a whole business/ corporate/organizational plan.

A 'forecast' more commonly (and precisely in my view) means a prediction of performance - costs and/or revenues, or other data such as headcount, % performance, etc., especially when the 'forecast' is made during the trading period, and normally after the plan or 'budget' has been approved. In simple terms: budget = plan or a cost element within a plan; forecast = updated budget or plan. The verb forms are also used, meaning the act of calculating the budget or forecast.

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C

Canada Mortgage and Housing Corporation (CMHC)

The National Housing Act (NHA) authorized Canada Mortgage and Housing Corporation (CMHC) to operate a Mortgage Insurance Fund which protects NHA Approved Lenders from losses resulting from borrower default.  

Certificate of Location or Survey

A document specifying the exact location of the building on the property and describing the type and size of the building including additions, if any.  

Certificate of Search or Abstract of Title

A document setting out instruments registered against the title to the property, e.g. deed, mortgages, etc.  

Closed Mortgage

A mortgage may be an open or closed mortgage. An open mortgage usually charges a higher interest rate but may be paid off at any time without penalty while a closed mortgage may not be paid off during the term without penalty. Be careful as some mortgages may not be paid off even with a penalty before the maturity date. See also Prepayment Penalty and Maturity Date.  

Closing Costs

Expenses, in addition to the purchase price of the home, that are payable on completion date.  

CMHC or GEMICO Insurance Premium

Mortgage insurance insures the lender against loss in case of default by the borrower. Mortgage insurance is provided to the lender by CMHC or GEMICO and the premium is paid by the borrower.  

Commitment Letter

Written notification from the lender to the borrower that approves the mortgage request and which should include the amount of the mortgage, interest rate, payment and all terms and conditions.  

Completion Date

The date on which your purchase will complete and money will change hands between you and the sellers.  

Conditional Offer

An offer to purchase subject to conditions. These conditions may relate to financing, or the sale of an existing home. Usually a time limit in which the specified conditions must be satisfied is stipulated.  

Conventional Mortgage

A mortgage loan up to a maximum of 75% of the purchase price is referred to as a conventional mortgage. Any mortgage in excess of 75% must be insured against default. See High Ratio Mortgage.  

Capital Employed

The value of all resources available to the company, typically comprising share capital, retained profits and reserves, long-term loans and deferred taxation. Viewed from the other side of the balance sheet, capital employed comprises fixed assets, investments and the net investment in working capital (current assets less current liabilities). In other words: the total long-term funds invested in or lent to the business and used by it in carrying out its operations.

CashFlow 

The movement of cash in and out of a business from day-to-day direct trading and other non-trading or indirect effects, such as capital expenditure, tax and dividend payments.

CashFlow Statement

One of the three essential reporting and measurement systems for any company. The cashflow statement provides a third perspective alongside the Profit and Loss account and Balance Sheet. The Cashflow statement shows the movement and availability of cash through and to the business over a given period, certainly for a trading year, and often also monthly and cumulatively. The availability of cash in a company that is necessary to meet payments to suppliers, staff and other creditors is essential for any business to survive, and so the reliable forecasting and reporting of cash movement and availability is crucial

Cost of Debt Ratio (average cost of debt ratio)

Despite the different variations used for this term (cost of debt, cost of debt ratio, average cost of debt ratio, etc) the term normally and simply refers to the interest expense over a given period as a percentage of the average outstanding debt over the same period, ie., cost of interest divided by average outstanding debt.

Cost of Goods Sold

The directly attributable costs of products or services sold, (usually materials, labour, and direct production costs). Sales less COGS = gross profit. Effectively the same as cost of sales (COS) see below for fuller explanation.

Cost of Sales

Commonly arrived at via the formula: opening stock + stock purchased - closing stock.

Cost of sales is the value, at cost, of the goods or services sold during the period in question, usually the financial year, as shown in a Profit and Loss Account (P&L). In all accounts, particularly the P&L (trading account) it's important that costs are attributed reliably to the relevant revenues, or the report is distorted and potentially meaningless. To use simply the total value of stock purchases during the period in question would not produce the correct and relevant figure, as some product sold was already held in stock before the period began, and some product bought during the period remains unsold at the end of it. Some stock held before the period often remains unsold at the end of it too. The formula is the most logical way of calculating the value at cost of all goods sold, irrespective of when the stock was purchased. The value of the stock attributable to the sales in the period (cost of sales) is the total of what we started with in stock (opening stock), and what we purchased (stock purchases), minus what stock we have left over at the end of the period (closing stock).

Current Assets

Cash and anything that is expected to be converted into cash within twelve months of the balance sheet date.

Current Ratio

The relationship between current assets and current liabilities, indicating the liquidity of a business, i.e. its ability to meet its short-term obligations. Also referred to as the Liquidity Ratio.

Current Liabilities

Money owed by the business that is generally due for payment within 12 months of balance sheet date. Examples: creditors, bank overdraft, taxation.

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D

Deed (Certificate of Ownership) The document signed by the seller transferring ownership of the home to the purchaser. This document is then registered against the title to the property as evidence of the purchaser's ownership of the property.   Deposit A sum of money deposited in trust by the purchaser when making an offer to be held in trust by the vendor's agent, broker, lawyer or notary until the closing of the transaction.  

Depreciation

The apportionment of cost of a (usually large) capital item over an agreed period, (based on life expectancy or obsolescence), for example, a piece of equipment costing $10k having a life of five years might be depreciated over five years at a cost of $2k per year. (In which case the P&L would show a depreciation cost of $2k per year; the balance sheet would show an asset value of £8k at the end of year one, reducing by $2k per year; and the cash flow statement would show all £10k being used to pay for it in year one.)

Dividend

A dividend is a payment made per share, to a company's shareholders by a company, based on the profits of the year, but not necessarily all of the profits, arrived at by the directors and voted at the company's annual general meeting. A company can choose to pay a dividend from reserves following a loss-making year, and conversely a company can choose to pay no dividend after a profit-making year, depending on what is believed to be in the best interests of the company. Keeping shareholders happy and committed to their investment is always an issue in deciding dividend payments. Along with the increase in value of a stock or share, the annual dividend provides the shareholder with a return on the shareholding investment.

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E

Equity The interest of the owner in a property over and above all claims against the property. It is usually the difference between the market value of the property and any outstanding encumbrances.  

Earnings Before

There are several 'Earnings Before' ratios and acronyms: EBT = Earnings Before Taxes; EBIT = Earnings Before Interest and Taxes; EBIAT = Earnings Before Interest after Taxes; EBITD = Earnings Before Interest, Taxes and Depreciation; and EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization. (Earnings = operating and non-operating profits (eg interest, dividends received from other investments). Depreciation is the non-cash charge to the balance sheet which is made in writing off an asset over a period. Amortization is the payment of a loan in installments.

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F

Fire Insurance

Before a mortgage can be advanced, the purchaser must have arranged fire insurance. A certificate or binder from the insurance company may be required on closing.  

Firm Offer

An offer to buy the property as outlined in the offer to purchase with no conditions attached.   Fixed-Rate

Mortgage

A mortgage for which the rate of interest is fixed for a specific period of time (the term).  

Foreclosure

A legal procedure whereby the lender eventually obtains ownership of the property after the borrower has defaulted on payments.  

Fixed Assets

Assets held for use by the business rather than for sale or conversion into cash, eg, fixtures and fittings, equipment, buildings.

Fixed Cost

A cost which does not vary with changing sales or production volumes, eg, building lease costs, permanent staff wages, rates, depreciation of capital items.

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G

Gross Debt Service Ratio (GDS)

The percentage of your gross income which you will be using to pay for the mortgage payment including property taxes. See also Total Debt Service Ratio. (TDS).  

Gearing

The ratio of debt to equity, usually the relationship between long-term borrowings and shareholders' funds.

Goodwill

Any surplus money paid to acquire a company that exceeds its net tangible assets value.

Gross Profit

Sales less cost of goods or services sold. Also referred to as gross profit margin, or gross profit, and often abbreviated to simply 'margin'. See also 'net profit'.

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H

High Ratio Mortgage

A mortgage where you have a down payment of less that 25% of the purchase price. This type of mortgage must be insured against default. See also Conventional Mortgages.  

Holdback

An amount of money required to be withheld by the lender during the construction or renovation of a house to ensure that construction is satisfactorily completed at every stage.  

Home Equity

The difference between the price for which a home could be sold (market value) and the total debts registered against it.

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I

Inspection

The examination of the house by a building inspector selected by the purchaser.  

Interest Adjustment Date

The date that the lender will start collecting interest. Your regular payments will commence one payment period after this date. For example, if you have chosen to make bi-weekly payments, your first payment will come due two weeks after the Interest Adjustment Date. When you sign your mortgage papers the bank will collect from you an "Interest Adjustment" which is a calculation of interest from the Completion Date to the Adjustment Date.  

Interim Financing

Short-term financing to help a buyer bridge the gap between the closing date on the purchase of a new home and the closing date on the sale of the current home.  

IPO (initial public offering)

An Initial Public Offering (IPO being the Stock Exchange and corporate acronym) is the first sale of privately owned equity (stock or shares) in a company via the issue of shares to the public and other investing institutions. In other words an IPO is the first sale of stock by a private company to the public. IPOs typically involve small, young companies raising capital to finance growth. For investors IPO's can risky as it is difficult to predict the value of the stock (shares) when they open for trading. An IPO is effectively 'going public' or 'taking a company public'.

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J

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K

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L

Loan to Value Ratio

The amount of the mortgage expressed as a percentage of the value of the home. For example, if you wish to borrow $190,000 on a home you are buying for $200,000, the Loan to Value Ratio is

95%.

Letters of Credit

These mechanisms are used by exporters and importers, and usually provided by the importing company's bank to the exporter to safeguard the contractual expectations and particularly financial exposure of the exporter of the goods or services. (Also called 'export letters of credit, and 'import letters of credit'.)

When an exporter agrees to supply a customer in another country, the exporter needs to know that the goods will be paid for.

The common system, which has been in use for many years, is for the customer's bank to issue a 'letter of credit' at the request of the buyer, to the seller. The letter of credit essentially guarantees that the bank will pay the seller's invoice (using the customer's money of course) provided the goods or services are supplied in accordance with the terms stipulated in the letter, which should obviously reflect the agreement between the seller and buyer. This gives the supplier an assurance that their invoice will be paid, beyond any other assurances or contracts made with the customer. Letters of credit are often complex documents that require careful drafting to protect the interests of buyer and seller. The customer's bank charges a fee to issue a letter of credit, and the customer pays this cost.

The seller should also approve the wording of the buyer's letter of credit, and often should seek professional advice and guarantees to this effect from their own financial services provider.

In short, a letter of credit is a guarantee from the issuing bank to the seller that if compliant documents are presented by the seller to the buyer's bank, then the buyer's bank will pay the seller the amount due. The 'compliance' of the seller's documentation covers not only the goods or services supplied, but also the timescales involved, method for, format of and place at which the documents are presented. It is common for exporters to experience delays in obtaining payment against letters of credit because they have either failed to understand the terms within the letter of credit, failed to meet the terms, or both. It is important therefore for sellers to understand all aspects of letters of credit and to ensure letters of credit are properly drafted, checked, approved and their conditions met. It is also important for sellers to use appropriate professional services to validate the authenticity of any unknown bank issuing a letter of credit.

Letters of Guarantee

There are many types of letters of guarantee. These types of letters of guarantee are concerned with providing safeguards to buyers that suppliers will meet their obligations or vice-versa, and are issued by the supplier's or customer's bank depending on which party seeks the guarantee. While a letter of credit essentially guarantees payment to the exporter, a letter of guarantee provides safeguard that other aspects of the supplier's or customer's obligations will be met. The supplier's or customer's bank is effectively giving a direct guarantee on behalf of the supplier or customer that the supplier's or customer's obligations will be met, and in the event of the supplier's or customer's failure to meet obligations to the other party then the bank undertakes the responsibility for those obligations.

Typical obligations covered by letters of guarantee are concerned with:

• Tender Guarantees (Bid Bonds) - whereby the bank assures the buyer that the supplier will not refuse a contract if awarded.
• Performance Guarantee - This guarantees that the goods or services are delivered in accordance with contract terms and timescales.
• Advance Payment Guarantee - This guarantees that any advance payment received by the supplier will be used by the supplier in accordance with the terms of contract between seller and buyer.

There are other types of letters of guarantee, including obligations concerning customs and tax, etc, and as with letters of credit, these are complex documents with extremely serious implications. For this reasons suppliers and customers alike must check and obtain necessary validation of any issued letters of guarantee.

Liabilities General term for what the business owes. Liabilities are long-term loans of the type used to finance the business and short-term debts or money owing as a result of trading activities to date . Long term liabilities, along with Share Capital and Reserves make up one side of the balance sheet equation showing where the money came from. The other side of the balance sheet will show Current Liabilities along with various Assets, showing where the money is now.   Liquidity Ratio Indicates the company's ability to pay its short term debts, by measuring the relationship between current assets (ie those which can be turned into cash) against the short-term debt value. (current assets/current liabilities) Also referred to as the Current Ratio.

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M

Maturity Date

The last day of the term of your mortgage agreement. On the Maturity Date the mortgage must be paid in full, renewed with the same lender or transferred to a new lender.  

Mortgage

A mortgage is actually a document which is registered in Land Titles Office and provides evidence that you have given your home as collateral to a lender to secure a loan. In practice, the loan itself is usually referred to as a mortgage.  

Mortgage Life Insurance

A form of reducing term insurance recommended for all mortgagors. If you die, have a terminal illness, or suffer an accident, the insurance can pay the balance owing on the mortgage. The intent is to protect survivors from the loss of their homes.  

Mortgage Term The number of years or months over which you pay a specified interest rate. Terms usually range from six months to 10 years.  

Mortgagee

The lender who provides a loan secured by a mortgage.  

Mortgagor

A person who takes out a loan which is secured by a mortgage.

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N

Net Worth

The difference between what you own (assets) and what you owe (liabilities) is called your net worth.  

Net Assets (total net assets)

Total assets (fixed and current) less current liabilities and long-term liabilities that have not been capitalized (e.g., short-term loans).  

Net Current Assets

Current Assets less Current Liabilities.  

Net profit

Net profit can mean different things so it always needs clarifying. Net strictly means 'after all deductions' (as opposed to just certain deductions used to arrive at a gross profit or margin). Net profit normally refers to profit after deduction of all operating expenses, notably after deduction of fixed costs or fixed overheads. This contrasts with the term 'gross profit' which normally refers to the difference between sales and direct cost of product or service sold (also referred to as gross margin or gross profit margin) and certainly before the deduction of operating costs or overheads. Net profit normally refers to the profit figure before deduction of corporation tax, in which case the term is often extended to 'net profit before tax' or PBT.

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O

Open Mortgage

A mortgage which can be prepaid at any time, without penalty.  

Overhead

An expense that cannot be attributed to any one single part of the company's activities.

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P

Principal, Interest, Taxes (P.I.T.)

Principal, interest and taxes. Together, these make up the regular payment on a mortgage if you elect to include property taxes in your mortgage payments.  

Portable

A portable mortgage is a mortgage that can be transferred from one property to another. This is particularly useful if you sell one home and buy another.  

Porting

This allows you to move to another property without having to lose your existing interest rate. You can keep your existing mortgage balance, term and interest rate plus save money by avoiding early discharge penalties.  

Prepayment Option

The ability to prepay all or a portion of the principal balance. Prepayment charges may be incurred on the exercise of prepayment options.  

Prepayment Penalty

Unless it is open, the mortgage may not be paid off before the Maturity Date without paying a Prepayment Penalty. Be very careful when negotiating a mortgage as some mortgages cannot be paid off at all before the Maturity Date. See also Closed Mortgages and Maturity Date.  

Prepayment Privilege

When you negotiate a closed mortgage, you are entering into an agreement with the lender that you will not pay off the mortgage during the term. In return, the lender agrees to maintain the same interest rate throughout the term. However, most mortgages allow certain prepayment privileges such as an annual prepayment of a certain percentage of the mortgage amount or an annual increase in the mortgage amount. An open mortgage will usually cost more but allows you to repay the mortgage in full or in part at any time without penalty.  

Principal

The amount of money actually borrowed.  

Profit and Loss Statement

One of the three principal business reporting and measuring tools (along with the balance sheet and cashflow statement). The P&L is essentially a trading account for a period, usually a year, but also can be monthly and cumulative. It shows profit performance, which often has little to do with cash, stocks and assets (which must be viewed from a separate perspective using balance sheet and cashflow statement).

The P&L typically shows sales revenues, cost of sales/cost of goods sold, generally a gross profit margin (sometimes called 'contribution'), fixed overheads and or operating expenses, and then a profit before tax figure (PBT). A fully detailed P&L can be highly complex, but only because of all the weird and wonderful policies and conventions that the company employs. Basically the P&L shows how well the company has performed in its trading activities.

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Q

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R

Refinancing

Renegotiating your existing mortgage agreement. May include increasing the principal or paying out the mortgage in full.  

Renewal

At the end of a mortgage term, the mortgage may "roll over" on new terms and conditions acceptable to both the lender and the borrower. This is known as renewing a mortgage. Otherwise, the lender is entitled to be repaid in full. In this case, the borrower may seek alternative financing.  

Reserves

The accumulated and retained difference between profits and losses year on year since the company's formation.  

Restricted Funds

These are funds used by an organization that are restricted or earmarked by a donor for a specific purpose, which can be extremely specific or quite broad, eg., endowment or pensions investment; research (in the case of donations to a charity or research organization); or a particular project with agreed terms of reference and outputs such as to meet the criteria or terms of the donation or award or grant. The source of restricted funds can be from government, foundations and trusts, grant-awarding bodies, philanthropic organizations, private donations, bequests from wills, etc.

The practical implication is that restricted funds are ring-fenced and must not be used for any other than their designated purpose, which may also entail specific reporting and timescales, with which the organization using the funds must comply. A glaring example of misuse of restricted funds would be when Maxwell spent Mirror Group pension funds on Mirror Group development.  

Return on Capital Employed (ROCE)

A fundamental financial performance measure. A percentage figure representing profit before interest against the money that is invested in the business. (profit before interest and tax/capital employed x 100)

Return on Investment (ROI)

Another fundamental financial and business performance measure. This term means different things to different people (often depending on perspective and what is actually being judged) so it's important to clarify understanding if interpretation has serious implications. Many business managers and owners use the term in a general sense as a means of assessing the merit of an investment or business decision. 'Return' generally means profit before tax, but clarify this with the person using the term - profit depends on various circumstances, not least the accounting conventions used in the business. In this sense most CEO's and business owners regard ROI as the ultimate measure of any business or any business proposition, after all it's what most business is aimed at producing - maximum return on investment, otherwise you might as well put your money in a bank savings account. Strictly speaking Return On Investment is defined as:   Profits derived as a proportion of and directly attributable to cost or 'book value' of an asset, liability or activity, net of depreciation.  

In simple terms this the profit made from an investment. The 'investment' could be the value of a whole business (in which case the value is generally regarded as the company's total assets minus intangible assets, such as goodwill, trademarks, etc and liabilities, such as debt. N.B. A company's book value might be higher or lower than its market value); or the investment could relate to a part of a business, a new product, a new factory, a new piece of plant, or any activity or asset with a cost attached to it.   The main point is that the term seeks to define the profit made from a business investment or business decision. Bear in mind that costs and profits can be ongoing and accumulating for several years, which needs to be taken into account when arriving at the correct figures.

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S

Security

In the case of mortgages, real estate offered as collateral for the loan.  

Survey

A certificate showing the home and other buildings relative to the property boundary.  

Share Capital

The balance sheet nominal value paid into the company by shareholders at the time(s) shares were issued.  

Shareholders Equity

A measure of the shareholders' total interest in the company represented by the total share capital plus reserves.

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T

Term

The length of time that the lender guarantees the interest rate. At the end of the term, the mortgage comes up for re-negotiation. See also Maturity Date.  

Total Debt Service Ratio

The percentage of your gross income which you will be using to pay for the mortgage payment including property taxes and all other debt payment such as credit cards and bank loans. See also Gross Debt Service Ratio (GDS).

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V

Variable Rate Mortgage

A mortgage for which the rate of interest may change if other market conditions change. This is sometimes referred to as a floating rate mortgage.  

Variable Cost

A cost which varies with sales or operational volumes, eg materials, fuel, commission payments.

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W

Working Capital

Current assets less current liabilities, representing the required investment, continually circulating, to finance stock, debtors, and work in progress.

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X

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Y

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Z

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