Useful Small Business Terminology

Accounts Payable: Credit extended by suppliers of raw materials or finished products. In an accounting statement, trade credit is referred to as "accounts payable".

Accounts Receivable: Money that is payable to you.

Asset: Anything of value owned by an individual or business.

Average Cost: Total production costs divided by the quantity produced.

Balance Sheet: A financial statement listing the total assets and liabilities (debts) of a company at a given time.

Bankruptcy: The condition in which a business cannot meet its debt obligations and petitions a federal court either for reorganization of its debts or liquidation of its assets. (This action has a negative impact on a credit rating.)

Business License: A legal authorization in document form issued by municipal and/or state governments and required for business operations.

Business Plan: A document that spells out a company's expected course of action for a specified period, usually including a detailed listing and analysis of risks and uncertainties. For the small business, it should examine the proposed products, the market, the industry, the management policies, the marketing policies, production needs and financial needs. Frequently, it is used as a prospectus for potential investors and lenders.

Cash Disbursement Journal: Sometimes referred to as operating expense records or accounts payable.

Cash Receipts Journal: Cash receipts accounts for all monies generated through cash sales and the collection of accounts receivable.

Cash Flow: The timing of cash receipts and cash disbursements.

Capital: Assets less liabilities, representing the ownership interest in a business. A stock of accumulated goods, especially at a specified time and in contrast to income received during a specified time period. Accumulated goods devoted to production. Accumulated possessions calculated to bring income.

Collateral: Securities, evidence of deposit, or other property pledged by a borrower to secure repayment of a loan.

Copyright: A legal form of protection available to creators and authors to safeguard their works from unlawful use or claim of ownership by others. Copyright may be acquired for works of art, sculpture, music, and published or unpublished manuscripts. (See Business Resource Section.)

Corporation: A legal entity formed for a business purpose. Major advantages: limited liability and transferable ownership. Major disadvantages: extensive record keeping and double taxation (on net income and on dividends).

Credit Rating: A letter or number calculated by an organization (such as Dun &Bradstreet) to represent the ability and disposition of a business to meet its financial obligations.

Debt: Something owed by one person to another. Financing in which a company receives capital that must be repaid; no ownership is transferred.

Deduction: Any expense directly related to the cost of doing business. Your tax attorney can give you specifics for your business. Good documentation (receipts, etc.) is essential.

Depreciation: The expensing of a fixed asset over time (usually 5 or 7 years).

Employer Identification Number: The business equivalent of a social security number. Assigned by the U.S Internal Revenue Service.

Entrepreneur: A person who takes the risk of organizing and operating a new business venture. (This is an attitude that can be of value in more traditional employment as well.)

Equity: The ownership interest. Financing in which partial or total ownership of a company is surrendered in exchange for capital. An investor's financial return comes from divided payments and from growth in the net worth of the business.

Feasibility Study: A study to determine the likelihood that a proposed product/ service development will fulfill the objectives of a particular investor.

Financial Analysis: The techniques used to determine money needs in a business. Techniques include ratio analysis, calculation of return on investment, guides for measuring profitability, and break-even analysis to determine ultimate success.

Fixed Costs: Business costs that do not change as sales activity goes up or down (e.g., rent, equipment payments, insurance).

Franchise: According to industry statistics, a new franchise opens somewhere in the U.S. every 17 minutes. Some of the major advantages: reduces risk of failure, turnkey operation, pretested a standardized product/service. Some of the major disadvantages: loss of control, binding contract, and the franchises problems are your problems.

Gross Profit Income: The difference between net sales and cost products/services sold. Money or its equivalent, earned or accrued, resulting from the sale of products/services.

Income Statement: A financial statement that lists the profits and losses of a company at a given time.

Inventory: Finished product in a service business this refers to supplies only.

Joint Venture: Venture in which two or more people combine efforts in a particular business enterprise, usually a single transaction or a limited activity, and agree to share the profits and losses jointly or in proportion to their contributions.

License: A legal agreement granting another the right to use a technological innovation.

Long Term Debt: An obligation that matures in a period that exceeds five Years.

Margin: Is the difference between total sales and the cost of those sales.

Market Evaluation: The use of market information to determine the sales potential of specific product/service.

Market Research: A systematic collection, analysis, and reporting of data about the market and its preferences, opinions, trends, and plans, used for corporate decision making.

Overhead: All non-labor expenses required to run business, either fixed, expenses that do not change regardless of volume of business (rent for example), or variable, those that do change according to the amount of business (travel and repairs and maintenance for example).

Net Expense: Total of all fixed and all variable expenses.

Net Income: Final bottom-line profit cleared by the business from all sources. (Gross profit less net expenses.)

Net Profit: Gross profit, less selling costs and administrative overhead.

Net Sales: Total sales, less returns, discounts, and allowances.

Net Worth: The difference between a company's total assets and its total liabilities.

Partnership: Two or more parties who enter into a legal relationship to conduct business for profit. A good partnership agreement is very complex. Equity and division of properties are both essential and difficult.

Pricing a Service: Requires three considerations: (rather than a product)

1. Labor plus material costs.
2. Overhead (both fixed and variable)
3. Profit (amount earned when # I and #2 have been met)

Pricing Methods: There are basically four methods.

1. Cost plus pricing: Used mainly to assure that all costs, both fixed and variable, are covered and the desired profit percentage is attained.
2. Demand pricing: Used by companies that sell their products through a variety of sources at differing prices based on demand.
3. Competitive pricing: Used by companies that are entering a market where there is already an established price and it is difficult to differentiate one product from another.
4. Markup pricing: Used mainly be retailers, markup pricing is calculated by adding your desired profit to the cost of the product.

Profit & Loss Statement: The summary of the incomes (total revenues) and costs of a company's operation during a specific period of time. Also known as income and expense statement. (A projected profit and loss shows anticipated revenues and costs.)

Proprietorship: The most common legal form of business ownership; about 85% of all small businesses are proprietorships.

Sales Records (receipts): Include all income generated through cash sales and the collection of accounts receivable.

Short Term Debt: An obligation that matures in one year.

Sole Proprietorship: An unincorporated, one owner business, farm or professional practice. Advantage: greatest freedom from regulations. Disadvantage: difficulty of raising capital.

Start-Up Financial: An unincorporated, one owner business, farm or professional practice. Advantage: greatest freedom from regulations. Disadvantage: difficulty of raising capital.

Target Market: The clients or customers sought for a business' product/service.

Tax Number: A number assigned to a business by a state revenue department that enables the business to buy goods wholesale without paying sales tax

Terms of a Note: The conditions or limits of a note; includes the interest rate per annum, the due date, and transferability and convertibility features, if any.

Trade Name: The name under which a company conducts business, or by which its business, product/service are identified. It may or may not be registered as a trademark.

Variable Costs: Business costs that go up or down as sales activity goes up or down (e.g., phone calls, packaging, supplies).

Withholding: Federal, state, social security, and unemployment taxes withheld by the employer from employees' wages; employers are liable for these taxes.