Financial Terms Made Easy

For many of us financial terms can be complicated and difficult to understand. To alleviate this problem, Coolock Artane Credit Union has put together a dictionary of financial terms to assist and improve your understanding of financial terms and information....

Annual Equivalent Rate (AER)

The interest received on a savings account is referred to as the Annual Equivalent rate (AER). Any interest rate quoted as an Annual equivalent rate will only be accurate if you do not withdraw money from your account during the year in question. The reason for this is that the AER illustrates what the interest would be if the interest was paid and compounded (added to the interest from previous payouts). Therefore, any withdrawals that you make from the account can affect the rate you will receive at the end of the year.

APR Annual Percentage Rate (APR)

The APR is a measure of the cost of credit, expressed as a yearly rate. This reflects the annual cost of the loan over the repayment period. The Annual Percentage Rate includes specific costs of financing, both those paid at the time of borrowing and those paid over the term of the loan.

Assets

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

Assurance - Life

A specific type of life insurance policy that can be linked with a mortgage or loan. A percentage of the premium goes toward insuring your life, and would pay off the loan in the event of your death. The rest is invested and would pay you a lump sum at the end of the term.

Assurance - Level Term

Life assurance that pays out a lump sum if you should die during the term. This is suitable for interest only loans as the amount owed on the loan remains the same throughout the period of the loan.

AVC’S

Additional Voluntary Contributions (AVC’s): Schemes that allow individuals to try and enhance their pensions - they allow tax relief.

Balance sheet

The Balance Sheet is one of the three essential measurement reports for the performance and health of a Credit Union 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 Credit Union, and what assets and debts represent the value of the Credit Union. (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 surplus the Credit Union is making (the P&L does this), although pervious 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 particular 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, the Government’s annual plan is called ’The Budget’. A ’forecast’ in certain contexts means the same as a budget - either a planned individual activity/resource cost, or a whole business/ corporate/organizational plan. A ’forecast’ more commonly 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.

CAR Compound Annual Rate

Car is a measure of the rate of annual return on deposit or investment. You can use it to compare different accounts. If there is €110 in an account a year after €100 was lodged in it the return, or CAR, is 10%. Your account may have certain terms and conditions that can stop you from getting the full rate, for example you can’t make any withdrawals.

Cashflow

The movement of cash in and out of a Credit Union 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 Credit Union, 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 Credit Union over a given period, certainly for a trading year, and often also monthly and cumulatively. The availability of cash in a Credit Union that is necessary to meet payments to suppliers, staff and other creditors is essential for any Credit Union to survive, and so the reliable forecasting and reporting of cash movement and availability is crucial.

Cost of Credit

The cost of credit shows you the real cost of borrowing. It is the difference between the amount you borrow and the total you will repay by the end of the loan period.  

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 Credit Union, i.e. its ability to meet its short-term obligations, Also referred to as the Liquidity Ratio.

Current liabilities

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

Death Benefit Insurance

All eligible members of the Credit Union are covered under our Death Benefit Insurance Policy. This means in the event of your death, a lump sum of €1,500 will be paid to your family to help with the cost of funeral expenses, thereby easing the financial burden of bereavement.

Nobody enjoys talking or even thinking about their own mortality. However the simple fact is funerals are now extremely expensive and very few people realise the impact funeral bills will have on their lives. In recent years the average cost of a funeral has increased. Death Benefit Insurance won’t ease bereavement but it will go a long way towards easing the financial burden your death may place upon your family.

To qualify for death benefit insurance you must be a Credit Union member and must have joined the Credit Union before your 71st birthday.

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 cashflow statement would show all €10k being used to pay for it in year one.)

Dividend

A dividend is a payment made per share, to the Credit Union shareholders by the Credit Union, based on the surplus of the year,( but not necessarily all of the surplus), recommended by the directors and voted at the Credit Union’s Annual General Meeting (AGM). The annual dividend provides the shareholder with a return on the shareholding investment.

EAR Equivalent Annual Return

This is used to show the full price of interest on a savings account such as a deposit account. EAR takes into account the basic rate of interest charged or earned, when it is charged or earned, and any additional charges. Additional charges could include quarterly fees, set-up charges and so on. The EAR calculates the interest as if it was paid once a year, even if it is paid more than one a year. The higher the EAR, the more interest you will be charged or earn. EAR is similar to APR although APR only applies to lending products. EAR applies to deposit accounts.   

Fixed assets

Assets held for use by the Credit Union rather than for sale or conversion into cash, e.g., fixtures and fittings, equipment, buildings.

Fixed Rate Mortgage

A mortgage where the interest rate is set at a fixed level, typically for the first few years of the mortgage term. Advantageous for those who want to know exactly how much they’ll be paying each month, although the fixed rate will usually be set at a higher rate than a variable rate mortgage (at the start of the mortgage term). Unlike a variable rate mortgage, this type will not be susceptible to future interest rate fluctuations.

Income & Expenditure Account

One of the three principal Credit Union reporting and measuring tools (along with the balance sheet and cashflow statement). The Income & Expenditure Account is essentially a trading account for a period, usually a year, but also can be monthly and cumulative. It shows the performance of the Credit Union, 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 Income & Expenditure Account typically shows (as can be gleaned from its name) the income that the Credit Union has generated and the operating expenses of the Credit Union.

Interest Only Mortgage

A mortgage, where Mortgage payments are made up purely of interest. You then pay off the capital of the mortgage at the end of the term.

Liabilities

General term for what the Credit Union 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. 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 Credit Unions ability to pay its short term debts, by measuring the relationship between current assets (i.e. those which can be turned into cash) against the short-term debt value. (Current assets/current liabilities) Also referred to as the Current Ratio.

Loan Term

The period of a loan expressed in months or years.

Reserves

The accumulated and retained balances that the Credit Union has amassed, year on year since the Credit Union’s formation.