Glossary of Terms
By understanding these common business terms, small business owners can better prepare themselves to handle business tasks, understand best practices and build a strong financial future for their company.
Accounts payable: The money that a company owes other people or businesses.
Accounts receivable: The money that other people or businesses owe to a company for goods or services the company delivered.
Accrual basis: An accounting method where a business records revenue and expenses when a bill is sent or received. By contrast, with the cash basis method, a business records revenue and expenses when the money physically enters or leaves the business’s account.
Advertising: A means of communicating with customers about a service or product. Advertising is one aspect of marketing and is usually a paid form of messaging designed to improve sales. Advertising can be short-term or ongoing, but usually requires a financial investment.
Angel investors: Individual investors who tend to focus on helping businesses that are just starting out with relatively small investments (less than $100,000). Angel investors may want to receive partial ownership in the company in return for their investment, but they tend to take a less active role in running the company than some other types of investors (such as venture capitalist funds).
Assets: Something of value that’s owned by an individual or business. A small business’s assets may include the money in its bank accounts, its inventory and equipment. If a business is owed money (i.e., has accounts receivable), those may also be considered assets.
Balance sheet: A snapshot of a business’s finances. The balance sheet shows the business’s total net worth (its assets minus liabilities with liability defined as a company's legal financial debts or obligations during the course of operating a business) at a specific point in time. The business’s net worth is also called equity or shareholders’ equity, which is the difference between total assets and total liabilities.
Bankruptcy: Bankruptcy is a legal process that can allow an individual or business to either clear its debt or negotiate a new repayment arrangement with its creditors. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor's assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.
There are three types of bankruptcy:
- Chapter 7 – Individuals or businesses with few or no assets can file Chapter 7 bankruptcy, which can lead to unsecured debts, such as credit cards and medical bills, being forgiven.
- Chapter 11 – Small businesses may be able to file Chapter 11 bankruptcy, which lets them negotiate new repayment terms while working to become profitable.
- Chapter 13 – Individuals, including sole proprietors, who make too much money to qualify for Chapter 7 bankruptcy may file under Chapter 13, which lets them negotiate new repayment terms.
Bootstrapping: Funding a business with personal savings or assets. Bootstrapping lets a business owner avoid paying financing fees or interest and retain complete control over the business.
Break-even point: The point when a business’s sales cover its costs. The break-even point can be calculated in terms of the number of products the business needs to sell, or the amount of money the business needs to make from the sales.
Budget: A budget is a financial plan used to track the income and expenses of a business.
Business costs or expenses: Business costs, also called business expenses, are all the costs associated with running a business. These could include fixed expenses, which stay the same from month to month, such as rent, salaries and insurance. Many businesses also have flexible expenses, which change from month to month, such as payroll or supplies.
Business credit: Credit that’s established in a business’s name. Building good business credit can help owners secure a loan or line of credit for the business with good terms, save the business money on insurance and can make it easier to negotiate with vendors.
Business credit report: Credit bureaus collect and organize information on different businesses, including the business’s history of paying bills. Companies can purchase another business’s credit report before deciding to lend the business money or work together.
Business credit score: There are various business credit scores that turn the information in a business credit report into an easy-to-understand score. Generally, a higher score means a business is more creditworthy. Having high credit scores could make it easier to get a loan or line of credit with good terms.
Business entity: An organization that one or several people create. A business entity can be legally separate from the people who created or run the business. As a result, the business entity can have its own assets and liabilities.
Business plan: A business plan is a written document that can act like a roadmap for a company. It will have an overview of the company, its finances, its products and services and an analysis of its industry and competitors. A business plan can help business owners plan for the future and may be a requirement when applying for a business loan.
Capital expenditure: Also known as a capital expense, or capex for short, a capital expenditure is the money a business spends to buy, maintain or upgrade assets that will help the business for more than a year. Buying or improving a building, furniture or office equipment are examples of capital expenditures.
Cash basis: An accounting method where a business records revenue and expenses when the money enters or leaves the business’s account. By contrast, with the accrual method, a business records revenue and expenses when a bill is sent or received.
Cash flow: The total amount of cash and cash-equivalents flowing in and out of a business.
Cash flow statement: A financial statement that can show a business’s cash flow over a certain period of time. Creating and reviewing cash flow statements can help business owners manage the company’s money.
Cash in bank: The total amount of funds a company has in its bank accounts.
Cash on hand: The amount of money that is immediately available to the business.
Cash position: The amount of money that a business has in its accounts and other assets that could easily be sold for cash. A strong cash position allows a company to pay its expenses and have money left over to invest in business opportunities.
Chargeback: When a card transaction gets reversed after a customer disputes the transaction.
Collateral: Something offering as security when taking out a loan. A lender may be able to take the collateral if the borrower doesn’t repay a loan. For example, if you borrow money to purchase a vehicle, the lender may be able to take the vehicle if you don’t repay your auto loan.
Common stock: Owners of a corporation may receive common stock or shares in the company. These represent how much of the company the person owns. For example, if a company has 1,000 shares and a person owns 500 shares, then the person owns half of the company. Ownership is often electronically tracked today, but at one time companies printed physical stock certificates. Business owners may be able to sell stock in their company to raise money.
Company values: A list of key characteristics that describe a business. The values outline how the business owner wants the company to be seen, the employees to feel and be treated and how the company hopes to affect its community.
Competitive pricing: When a business sets its prices based on what the competition charges.
Contribution margin: The sale price of a product minus the cost of creating the product. If it costs $5 to make a product that a business sells for $13, the business’s contribution margin is $8.
Contribution margin ratio: To calculate a business’s contribution margin in terms of a percentage, divide the business’s contribution margin by the product’s price. If a company sells a product for $13 and its contribution margin is $8, the contribution margin ratio is 8/13, or 61.54 percent.
Corporation: A type of business entity that is legally separate from the business owners. In the U.S., corporations have similar rights as individuals. Like individuals, they can purchase land, commit crimes and be sued by others. Small business owners may want to create a corporation to separate their individual finances and responsibilities from the business’s finances and responsibilities.
C Corporation: C corporations are a type of corporation. C corps must pay corporate taxes on their profits each year and they’re required to have three official positions:
- The corporation’s owner(s), also called shareholder(s)
- The executives, such as the chief executive officer (CEO), who run the company
- The board of directors, appointed by the shareholders, who oversee the corporation
A small business owner who creates a corporation could take on all three roles.
Cost of goods sold: The cost of direct labor and direct materials used to create a product or complete a service.
Cost per action (CPA) advertising: Also known as cost per conversion, this type of advertising requires a business to pay only when someone takes a specific action, such as getting on your email list or buying one of your products.
Cost per mille (CPM) advertising: Also known as cost per impression (CPI) advertising, this type of advertising requires a business to pay a fee per thousand views an ad gets on websites or social media channels, whether or not the viewer clicks on the ad.
Cost-plus pricing: A pricing strategy that involves calculating a company’s expense to create a product and then adding a markup to determine the sale price.
Credit card: Plastic cards that connect to an account with a credit limit. You can make purchases with a credit card until your balance reaches your credit limit, and you can pay for those purchases later. If you don’t repay your balance in full when your bill is due, the remaining balance will be carried over to the next purchase period and start to accrue interest.
Credit limit: The maximum amount of money that can be borrowed on a credit card or line of credit at one time.
Crowdfunding: Some businesses are financed by crowdfunding, which involves collecting donations or investments from many people – usually online. There are three basic types of crowdfunding:
- Donation. When someone invests in a business without an expectation of receiving anything in return.
- Rewards. When someone receives a “reward” once the fundraising goal is reached, such as a free product sample.
- Equity. When someone receives equity (ownership) in a company or venture in exchange for their contribution.
Current liabilities: A business’s debts or obligations, which include wages, taxes and accounts payable. Current liabilities are usually due within one year.
Customer list: Some businesses may want to track their customers’ information so they can advertise deals or new products to those customers. The customer list could include customers names, products bought, phone numbers, emails and shipping addresses. The company should have a security plan in place to keep this sensitive information safe.
Debt load: The total of all the money a business owes other people or businesses.
Debt-to-income ratio (DTI): The debt-to-income (DTI) ratio is a personal finance measure that compares an individual’s or business’s debt payments to its overall income.
Deposits: A sum of money placed or kept in a bank account.
Depreciation: A lessening in the value of an asset over time.
Direct labor costs: The total labor costs associated with creating a specific product or services. Include business expenses for employee benefits, such as health insurance, and payroll taxes in direct labor costs.
Dividend: A payment made to shareholders (i.e., owners) of a corporation. With a small business, dividends are often paid from the business’s net profits.
Domain name: A website address, also known as a URL. A domain name is a human readable form of an IP address. In function it is the destination that can be typed into a web browser in order to visit a website, such as www.practicalbusinessskills.com.
Due diligence: Due diligence is an investigation or audit of a business by a prospective buyer or investor. The goal is to understand the business’s assets, liabilities and potential.
Emergency fund: Money that a business owner saves to help cover unexpected costs that come with running a business.
Employer identification number (EIN): An EIN is like a Social Security number for businesses. Government organizations and credit bureaus can use a business’s EIN to monitor tax payments and business credit.
Equity: In business, equity is a business’s value and someone who has equity in the company owns part of the company. Two business partners who own equal parts of a business both have an equal amount of equity in the company. If the business is a corporation, the owners’ equity is called shareholders’ equity and shareholders’ receive shares or stock. Someone who owns half of the corporation’s stocks owns half the company.
Estimated taxes: Self-employed people may have to make estimated tax payments at least four times a year if their income tax payments aren’t withheld and paid from their wages.
Executive summary: A portion of a business plan that provides an overview of a business, the industry it’s in and the business’s potential.
Excise taxes: Some businesses collect taxes from consumers and pass on the tax payments. For example, a business that sells fuel, cigarettes or liquor may add the cost of the tax to the product’s price and then distribute the tax payments to local, state and federal governments.
Expenses: Money that a business spends. Many businesses have a variety of one-time expenses, such as purchasing equipment, and ongoing expenses, like utility payments or rent.
FICA taxes: Businesses are responsible for withholding Social Security and Medicare taxes from wages and making payments to the IRS throughout the year. Combined, the Social Security and Medicare taxes are called Federal Insurance Contributions Act (FICA) taxes. There may be an additional Medicare withholding and payment requirements for high-income employees.
FIFO approach: With the first in, first out (FIFO) inventory approach, a business tries to sell its inventory in the same order it was purchased or created. Using this approach can help a company avoid selling old products that may be damaged or expired.
Financial projections: A prediction about a business’s future revenue and expenses.
Financial statements: A report, often presented in a spreadsheet, of a business’s financial activity. The three main business financial statements are the income statement, balance sheet and cash flow statement.
Fixed assets: Long-term assets that aren’t easily converted into cash. These could include property, physical infrastructure and equipment.
Flash sales: Short-term sales that create a sense of urgency among customers. Typically, flash sales target a wide range of potential customers, are marked by low prices and are backed by a large inventory to meet customer demand.
FUTA taxes: A business may have to pay a Federal Unemployment Tax Act (FUTA) tax based on how many employees it has, and how much it paid in wages, throughout the year. The money is used to fund unemployment programs for people who are out of work.
Gross income/profit: Sales (i.e., revenue) minus the costs of goods sold.
Gross wages: Total amount spent on employee wages before taxes or benefits.
Income: Also called net profit, or sometimes simply profit, this is the total amount of money a business earns after paying all its expenses.
Income statement: One of the three important financial statements used for reporting a company's financial performance over a specific accounting period, along with the balance sheet and the statement of cash flows. Also known as the profit and loss statement or the statement of revenue and expense, the income statement outlines a company’s revenues and expenses during a particular period.
Income taxes: A type of tax that’s based on a business’s profits. Businesses may need to pay local, state and federal income taxes.
Indirect costs: Business expenses, such as rent, that help the business run but aren’t directly tied to creating or offering a single product or service.
Insurance: Business insurance can help protect a business against a financial loss. In exchange for making regular insurance premium payments, the insurance company will pay the business during a covered incident. For example, some types of business insurance might help a business rebuild a store after a flood, cover the cost of the damaged products and pay for the lost income while the business is closed.
Interest: The cost of borrowing money. Businesses may have to pay interest on a loan or line of credit.
Inventory: The amount of products a business has in its stores and warehouses. This may include finished goods, works in progress and raw materials. Keeping track of stock levels is an important way to manage costs, keep a business running smoothly and detect theft.
Invoice: A bill businesses send to customers upon selling a product or service. It may also be a bill received from a supplier after buying products or services.
Invoice financing: Taking out a loan based on a business’s outstanding invoices.
Invoice factoring: A type of invoice financing in which a business sells its accounts receivable, or invoices, to an outside company at a discount. Businesses may use this method to meet immediate cash needs.
Key performance indicator (KPI): A performance measurement to understand how a company, service or product is performing.
Liabilities: Unpaid debts that the business owes an individual or business. Examples could include unpaid taxes, loans, interests or wages to employees who have already earned the pay. An early payment for a product or service could also be a liability because you could have to return the money if the order is canceled or you’re unable to supply the product or service.
Line of credit: A business line of credit gives the business the option to borrow money up to the pre-approved credit limit. Having a credit line available could make it easy to quickly borrow money during an emergency.
Limited liability company (LLC): A type of business entity that can separate the business owner’s personal liability (i.e., responsibility) from the business’s liability. Creating an LLC could help protect a business owner’s personal assets in case of financial trouble for the business.
Loan: An amount of money a business borrows and agrees to repay. Business may be able to take out loans from banks, credit unions, online lenders and microlenders.
Loan principal: The initial amount of money borrowed when taking out a loan. However, the amount of money received could depend on fees.
Loan principal payment: Total amount applied to a principal balance from a loan payment.
Long-term debt: Debts that a business expects to take longer than one year to pay off. Debt may mean the amount owed on a loan or line of credit. Or, some businesses use debt when discussing every type of financial obligation, including benefits owed to employees and product warranties.
Loss leader: A product that a business sells at a competitively low price, sometimes for less than the cost to make the product, to attract customers who may also buy more profitable products.
Market segment: A group of customers who share one or more characteristics. This term is often used when a business plans its marketing and advertising strategies.
Merchant cash advance: An amount of money provided upfront in exchange for a percentage of the business’s future sales. Merchant cash advances are often repaid on a daily or weekly basis, with the payment amount depending on how much debit and credit card sales the business had. A merchant cash advance is generally an expensive form of borrowing.
Mission statement: A statement that explains what a business offers, how it does this and who it helps. The mission statement captures the overall value of a company’s product or service.
Negative cash flow: When more cash leaves a business than comes into a business. Having negative cash flow could be a sign that a business will have trouble paying for future expenses.
Net profit: Also known as income, profit and net profit after taxes. The net profit is the total amount of money a business earns after paying all its expenses.
Net profit before taxes: A business’s profit minus operating expenses before paying federal, state and local income taxes. Sometimes called profit before tax or PBT.
Odd value pricing: When a business sells products with an odd value at the end, such as for $.99 instead of $1.00. Some customers view odd value prices as being more attractive.
Operating expenses: The ongoing costs of running a business. Operating expenses could include salaries, rent and utilities.
Organization chart: An organization chart offers an outline of a business’s structure and records each employee’s role and who they report to in the company.
Outside services: The amount of money paid for work done by subcontractors or other contractors.
Owner’s draw: Payments to the owners of a small business (that’s not a corporation) taken from the business’s net profits.
Owner’s equity: For small businesses that aren’t corporations, the owner’s equity or “net assets” is the business’s total assets minus liabilities. For corporations, this may be called stockholders’ equity.
Partnership: If two or more people start a business, they can create a partnership. There are different types of partnerships, including general partnerships (GPs), limited partnerships (LPs) and limited liability partnerships (LLPs). Each may offer different amounts of legal and financial separation for the business owners or investors.
Pay per click (PPC advertising): Advertising on internet search engines or other websites where a business pays a PPC service to display an ad when users search a related keyword, or alongside related content. The business is charged each time someone clicks the ad.
Payroll taxes: Taxes that employers and employees must pay, which are often based on an employee’s wages. Payroll taxes include Social Security and Medicare taxes.
Penetration pricing: When a business sets a low price to enter a competitive market with a plan to raise prices later.
Personal guarantee: A contract that a business owner may need to sign when borrowing money for a business. The personal guarantee will make the business owner personally responsible for the debt if the business can’t afford to repay the loan.
Positive cash flow: When a business has more money coming in (revenue) than going out (expenses).
Prepaid expenses: A product or service a business has paid for but hasn’t completely used yet. For example, a business might prepay for insurance or legal services.
Price skimming: When a business sets a high price and lowers the price as the market changes.
Product-market fit: When a business finds a good product-market fit, it means that the business’s target customers want and can afford the product being sold.
Profit and loss (P&L) projections: A forecast of how much money a business expects to bring in by selling its products or services, and how much profit it expects to make from these sales.
Purchase order: The official confirmation of an order by a buyer committing to pay the seller for the sale of a specific product or service in the future.
Raw materials: The materials a company uses to create a product. In a break-even analysis, the raw materials may refer to the cost of the raw materials that are needed to create a specific product.
Retained earnings: The amount of net income a corporation keeps to invest in future projects. A corporation may be able to distribute its income by issuing a dividend to shareholders rather than retaining its earning.
Return on investment (ROI): The percentage that a business gains or loses on an investment. The basic ROI formula is (Return/Cost) * 100 = ROI.
Revenue: Revenue is the amount of money that a company earns during a specific period. It is the gross income/profit figure from which costs are subtracted to determine net income. You can calculate revenue by multiplying the price of the product or service you're selling by the number of units you sold. Revenue is also known as sales on an income statement.
S corporation: A corporation with an S corp election is taxed differently than a C corporation. S corporations don’t pay corporate income tax, instead the corporation’s profits are passed on to the owners each year.
Salary: An amount of money or compensation paid to an employee by an employer in return for work performed.
Sales: The income earned from products or services. This is also referred to as revenue.
Sales log: This log should include how much you sell per day, per week and per month, including the date, type of product or service and the amount of each sale.
Search engine optimization (SEO): The marketing technique of fine-tuning a website so that customers will find a particular business when searching online. Search engines index and rank websites according to the website’s content and the number of clicks the website gets. Using specific SEO techniques can help ensure customers find a business and interact with the business’s content or sales page.
Self-employment tax: Business owners who run a sole proprietorship, partnership or LLC may have to pay a self-employment tax when filing their individual tax return. The self-employment tax covers both the employer and employee portion of FICA taxes.
Seller financing: With seller financing, a buyer puts a down payment on the purchase of an existing business, and then repays the seller the remainder of the money plus interest over time.
SMART goals: To create a SMART goal, make sure the goal is specific, measurable, attainable, relevant and time-bound.
Sole proprietorship: The default option for someone who runs a business without creating a business entity. With a sole proprietorship, there’s no legal separation between the business owner and the business. As a result, the business owner could be personally liable (i.e., responsible) for every business expense, debt or lawsuit.
Start-up capital: The initial investment required to start a business. This includes funds to buy equipment, purchase supplies, hire employees, rent a space, pay for licenses and cover any other business expenses.
Taxes payable: The total amount of unpaid taxes that a business will have to pay within the year.
Terms agreement: An agreement about how long a business has to pay a supplier after an invoice is received. Net-30 terms means the business has 30 days, net-60 terms means 60 days, etc.
Value proposition: A statement about how a business’s product or service is better than what the competition offers. The value proposition describes the business’s uniqueness, the value it offers to customers and helps explain why customers should buy from one business over another.
Venture capitalist: Venture capitalists typically offer larger loans to somewhat established businesses in exchange for an ownership share and active role in the company. Venture capitalists tend to invest in companies that are expected to quickly grow and have the potential of becoming multi-million dollar businesses.
Vision statement: A vision statement describes what a business wants to achieve and what it wants to offer its customers. The statement should be brief, easy to remember, inspirational, based on the company’s values and focused on the future. It can also help attract and motivate future employees.