This is a Business Dictionary of the most commonly used “Business Terms”.
Asset: Everything owned that has value, including tangible items like cash, accounts receivable, inventory, land, buildings, and equipment.
Blended payment: A loan payment, consisting of principal and interest, that is the same amount each and every month; a good example is a mortgage payment.
Break-even point: The level of sales where revenue equals total costs; a break-even point may also be expressed in terms of units of product.
Break-even sales revenue: The dollar amount a business needs each week or month to pay for both direct product costs and fixed costs; it will not include profit.
Cash flow statement: A financial statement that shows when cash flows are received and disbursed by a business.
Cost of goods sold (COGS): Calculated by adding all of the expenses a business incurs as a result of producting its product or service.
Current assets: Cash, accounts receivable, inventory, all term deposits and prepaid expenses which will be converted to cash within one year.
Current liabilities: Operating loans, accounts payable and accrued charges, including outstanding checks, wages, long-term debt payments and taxes due within a year.
Current ratio: Points out how easily a business can meet its debts; to calculate, divide Current Assets by Current Liabilities; the higher the ratio, the more easily a business can pay its debts.
Debt/equity ratio: How much debt a business has in relation to the amount of equity invested; a high level of Debt to Equity (D÷E) can be of concern; to support the company, money can be raised one of two ways, by borrowing it (incurring a debt) or by selling ownership in the company (eqity); to calculate the D÷E ratio, divide Total Liabilities/Equity (TL÷E).
Depreciation: A charge against a fixed asset that writes off the cost of that asset over its useful life,; the amount of depreciation is entered as a non-cash expense on the income statement.
Equity contribution (capital stock): Cash that the owner(s) or invertor(s) have invested in the business in return for a share of ownership.
Fixed assets: Include land, building, and quipment/machinery that are likely to have a useful life to the company.
Fixed costs: Costs that remain unchanged, regardless of the level of sales; a goo example is the company’s monthly rent and insurance.
Goodwill: An amount representing the excess paid for a company, its shares, or other assets above and beyond its net asset value.
Gross profit: (or gross margin): The profit earned before determining operating and administrative expenses; it is calculated by subtracting the Cost of Goods Sold from Sales.
Income statement: Look at all revenue received from selling products/services and then subtracts the total cost of operating the company; the income statement reflects exactly how much money a company has lost or made during a certain period of time (Net Profit).
Incorporation: The legal process that makes a business a separate entity from its owner.
Intangible asset (soft asset): The non-physical assets, such as incorporation costs, patents, goodwill or trademarks.
Interest coverage ratio: The ratio of net income (before extraordinary items and income tax) of the business.
Inventory turnover: A ratio that points out how well inventory is selling; an important cash driver showing the number of times inventory is sold through in one year.
Leasehold improvement: Improvement(s) made on leased premises; a prime example would be redecorating.
Letter of Credit: A guarantee of payment by a financial institution to a third party.
Leverage: Describes the amount of debt in relaiton to equity; the more debt used to finance the company, the more leverage it is.
Liquidation value: The amount of money for which an asset can be sold.
Liquidity: Describes how readily assets can be converted into cash.
Long-term liabilities: Liabilities, such as debts or loans, not payable within one year.
Net worth: The owner’s equity in a business; this is calculated by deducting Total Liabilities from Total Assets.
Operating (revolving) loan: Short-term financing to supply cash flow support or cover day-to-day operating expenses.
Overdraft: A negative account balance caused by withdrawing more money than is available in an account.
Partnership: A form of business ownership made up of two or more people; the partners share an agreed-upon percentage in the responsibility, profits and/or losses.
Payment terms: The negotiated conditions for payment of invoices.
Personal guarantee: A guarantee made to the lender that an owner will take personal responsibility for repaying a business loan or any other debt obligation.
Profit margin: The ratio of profits (generally pre-tax) to sales; to calculate, divide Pre-tax Profit by Sales/revenues.
Quick ratio: Measures how easily a business can raise cash by selling its most liquid assets; referred to as the acid test ratio; it is calculated by subtracting Inventory from Current Assets, and then dividing by Current Liabilities.
Ratio analysis: Calculating financial ratios to determine trends and to compare business performance.
Receivables: Goods representing invoices that have been billed, but have not been paid; also known as Accounts Receivable.
Receivables turnover: A ratio that shows hw well receivables are being paid; an important cas driver showing the number of times receivables are collected in one year; calculate by dividing the Value of Receivables by Sales and muliplying by 365.
Retail sales revenue: Identify the annual sales revenue per square foot multiply that dollar figure by estimated floor space to derive an estimate of annual sales revenue.
Return on investment (ROI): commonly used as a test of profitability; to calculate ROI, divide Net Profits by Total Assets.
Sales growth: The difference between current and previous year’s sales divided by the previous year’s sales.
Sales revenue: The total dollars from sales activity brought into a business each week, month or year.
Security: Assets belonging to the business (or its owner) pledged to a lender in support of a loan.
Sole proprietorship: A for of business organization in which one person is the only owner; there is no distinction between the owner’s and business’ responsibility regarding the commitments made on behalf of the business.
Tangible net worth: Shows the owner’s equity, calculated by deducting Total Liabilities from Total Assets, less (but not limited to) Goodwill, Incorporation/prepaid Expenses, Leasehold Improvements and Deferred Costs.
Term loan: A loan obtained for a specified length of time usually not longer than the useful life of the asset purchased with the proceeds.
Trade credit: Credit a supplier gives to customers by allowing them a certain period in which to pay; an integral aspect of managing cash flow.
Variable costs: Costs that change depending on the level of sales or production; could include sales discounts and sales commissions.
Working Capital: Monies left to work with once all liabilities have been considered; Net Working copital is a company’s current assets less its current liabilities.
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