Unfamiliar with some of the financial terms FAME uses? This glossary of terms will help.
A
Accrued Expenses
Expenses due at the end of a period that are not paid, such as wages, interest, or property taxes.
Amortization
The process of paying off a debt over a period of time.
A mortgage is amortized by periodically paying off part of the initial amount.
Assets (Liquid)
A liquid asset is cash, or any asset that can be quickly converted to cash without impacting the price. The most common liquid assets include most stocks, money market instruments, and government bonds. Inventory and accounts receivable are also considered liquid assets.
Assets (Capital)
Equipment used to manufacture a product, provide a service, or used to sell, store or deliver merchandise. Such equipment will not be sold in the normal course of business, but will be used and worn out. Land and buildings are also capital assets.
B
Break-Even Analysis
A method used to determine the point at which the business will neither make a profit nor incur a loss. The break-even point is expressed in one of two ways: either the total dollars of revenue exactly offset by total expenses (fixed or variable), or in total units of production. When it is expressed in units of production, the cost of production exactly equals the income from the sale of those units.
Business Plan
An objective written review of your business to identify areas of weakness and strength, pinpoint needs, and begin planning how you can best achieve your business goals.
C
Cash Flow
The actual movement of cash within a business: cash inflow minus cash outflow.
Cash flow is used to designate the reported net income of a corporation plus bookkeeping deductions that are not actually paid out in cash. Those deductions include: amounts charged off for depreciation, depletion, amortization, and extraordinary charges to reserves. Cash flow offers a better indication of the ability of a firm to meet its obligations and pay dividends than net income.
Cash Management
A service designed to help you get the most out of your business’s cash resources. Beginning with a plan of your cash needs, it can help you manage collection, disbursement, control, and investment of your cash.
Corporation
An artificial legal entity created by government grant and endowed with certain powers. A corporation is a voluntary organization of individuals or legal entities legally bound together to form a business enterprise.
Current Assets
Cash or other items that will normally be turned into cash within one year, and assets that will be used up in the operations of a firm within one year. Examples of current assets include cash, accounts receivable, and inventory.
Current Liabilities
Amounts owed that will ordinarily be paid by a firm within one year. Current liabilities include accounts payable, wages payable, taxes payable, the current portion of long-term debt, other short-term bank debt, and interest and dividends payable.
Current Ratio
Current Ratio = Current Assets divided by Current Liabilities.
Current ratio is also called “liquidity ratio.” It is used to determine a company’s ability to pay short-term obligations.
D
Debt Capital Financing
Money borrowed with the intention of paying it back plus interest. Banks provide only this type of financing.
Debt Service Coverage Ratio
Debt Service Coverage Ratio = Net Profit plus Depreciation plus Amortization plus Interest Expense divided by Current Portion of Existing plus Proposed Debt.
Lenders use debt service coverage ratio to get a picture of the borrower’s financial situation.
Debt-to-Worth Ratio
A ratio of your business’s total liabilities to its net worth. This tells the creditor how much debt your firm has in relation to your equity in the business. The higher this number gets, the more debt is in your business.
Deferred Prepaid Expenses
Expenses that are paid in advance, then expend over a period of time, including insurance premiums, interest expense, promotional materials, and office supplies.
Depreciation
A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes. The most important causes of depreciation are wear and tear, the effect of the elements, and gradual obsolescence, which makes it unprofitable to continue using some assets until they have been exhausted.
Dividend
A disbursement of profits to the owners of your business, usually in the form of cash. This is an after-tax expense of the business.
E
Entrepreneur
An individual who assumes the risk and reward of a new business venture. Entrepreneurs raise the necessary money, assemble the factors of production, and organize an operation to exploit opportunity. Entrepreneurs are often seen as innovators who recognize opportunities to introduce a new product, process, or an improved organization.
Equity
The monetary value of a property or business which exceeds the claims and/or liens against it.
Equity Capital Financing
Money given to your business in return for part ownership of your business. Banks do not ordinarily provide this type of financing. Equity capital financing is not paid back.
G
Guarantee
A written commitment by an individual or authorized legal entity to pay back a loan in the event the borrower is unable to do so. Guarantees can be unlimited (the full amount of the loan) or limited to a specific amount.
H
Hypothecation
The practice of a borrower pledging an asset as collateral for a loan, while retaining ownership of the asset and enjoying the benefits of it. A common example is a mortgage. The borrower lives in the home while the bank retains the right to seize the home if the borrower is unable to service the debt.
L
Leasing
A way to finance equipment, fixtures, or buildings. It is a type of financing for the full amount of the financed asset and eliminates the need for a business to put a large sum of cash into the purchase. There is no standard way to lease. You can lease with or without maintenance, by the month, year, or several years, and with or without the option to purchase.
Leverage
The relationship of other people’s money (debt) in relation to your own investment (equity) in your business. This is measured by the debt-to-worth ratio.
Liquidity
A term used to describe the solvency of a business. Liquidity has special reference to how quickly assets can be converted into cash without a loss. Also called “cash position.” If a firm’s current assets cannot be converted into cash to meet current liabilities, the firm is said to be illiquid.
Long-Term Liabilities
These are liabilities (expenses) which will not mature (come due) within the next year.
M
Management
The overall responsibility for planning your business’s goals and objectives and assuring that these plans are carried out.
Market
The number of people and their total spending (actual or potential) for your product line within the geographic limits of your distribution ability.
Market Share
The percentage of your sales compared to the total amount of sales for all your competitors for a particular product line.
N
Net Worth
The total assets of a business less the total amounts owed to creditors (total liabilities) at a given moment of time. Net worth is shown on the balance sheet as owner’s equity.
The net worth of an individual is determined by deducting the amount of all of their personal liabilities from the total value of their personal assets.
P
Partnership
A legal relationship created by the voluntary association of two or more persons to carry on as co-owners of a business for profit.
A type of business organization in which two or more persons agree on the amount of their contributions (capital and effort) and on the distribution of profits.
Pro Forma
A projection or estimate of future results from present actions. A pro-forma financial statement shows how the actual operations of the business will turn out if certain assumptions are realized.
Profit
Profit = Total revenue – Total expenses.
Profit is the financial benefit realized when the selling price exceeds the costs and expenses incurred in making the sale. Also, the reward to the entrepreneur for the risks assumed in the establishment, operation, and management of a given enterprise or undertaking.
R
Receivables
Short-term credit extended by your business to customers for goods or services purchased. When businesses allow their customers to be invoiced, the invoices due are receivables. As a business asset, receivables usually rank second only to cash in liquid value. When sales are on a cash basis only, a business would not have receivables as an asset on its balance sheet.
Banks may frequently request an Aging of Receivables, which is simply a list of accounts receivable according to the length of time they have been outstanding. This shows which accounts are being paid in a timely manner, and may reveal any difficulty in collecting long-overdue receivables. It is an important indication of potential cash flow problems.
S
Sole Proprietorship or Proprietorship
A type of business organization in which one individual owns the business. Legally, the owner is the business and personal assets are typically exposed to liabilities of the business.
S-Corporation (Subchapter S)
A corporation which has elected (by unanimous consent of its shareholders), under Subchapter S of the IRS code, not to pay any corporate tax on its income. The corporation retains the benefits of incorporation but is taxed as a partnership. Shareholders pay taxes on the income through their personal tax returns, even though it is not distributed. They are also entitled to deduct operating losses in some instances.
T
Takeover
The acquisition of one company by another company.
Target Market
The most likely potential customers for a product or service. Target markets are determined by socioeconomic, demographic, and/or interest characteristics.
Trade Payable
Credit extended by a supplier to you for goods purchased. It is the most used form of short-term credit, especially among small businesses. Your suppliers give you terms (30 days, 90 days, etc.), and if you pay within this specified period, you get the use of their money at no-interest cost. Some suppliers offer discounts to pay early.
W
Working Capital, Net
Current assets less current liabilities. When current assets are in excess of current liabilities, the assets are available for carrying on business operations.
