Glossary: Terms Relevant to Starting a Business
Accrual basis accounting. An accounting method that records sales, expenses or other events at the time they occur, rather than when cash changes hands.
Amortization. The gradual payment of a debt through a schedule of payments or the writing off of an intangible asset against expenses over the period of its useful life.
Articles of Incorporation. A document filed with the secretary of state of a state which sets forth certain required information about the corporation.
Balance sheet. A listing of a company's assets, liabilities and net worth as of a fixed point in time.
Board of Directors. A group of individuals, elected by the shareholders of a company, who oversee the management of the company.
Break-even analysis. The method of determining the exact point at which a company makes neither a profit nor a loss.
Business plan. A written document that describes a business, its objectives, strategies, market and financial forecast.
Capital. Monies invested in a business enterprise.
Cash basis accounting. An accounting method that records sales and expenses when the transfer of cash occurs.
Cash flow statement. A charting of sources and uses of cash of a business.
Certificate of Incorporation. A certificate issued by the secretary of state of a state indicating that a company's articles of incorporation have been accepted for filing and that the company is incorporated.
Collateral. Business or personal property that a borrower pledges to a lender as security to ensure repayment of a loan.
Corporation. An organization formed under state law for the purpose of carrying on a business enterprise is such a manner as to make the enterprise distinct from its owners.
Current assets. Assets of a business that can be liquidated within a relatively short period of time.
Current liabilities. Debts that must be paid within a relatively short period of time, usually within one year.
Current ratio. A ratio of a business' current assets to its current liabilities.
Debt financing. The use of borrowed money to finance a business.
Depreciation. The process of expensing the value of a business asset over its useful life.
Equity. The net value of assets minus liabilities.
Equity financing. The securing of a monetary investment from an investor in which the investor becomes a part owner of the business.
Fiscal year. The twelve-month period established by a business for accounting, planning and tax purposes.
Financial reports. Reports that show the financial status of a company at a given time.
Financial statement. A presentation of financial information derived from the accounting records. Financial statements include a Balance Sheet, Income Statement (or Profit and Loss Statement), and Cash Flow Statement.
Fixed costs. Business costs that do not vary with sales volume.
Forecasting. The calculation of reasonable probabilities about a business' financial future.
Goodwill. An intangible asset of a business derived from the perceived value of the business' assets.
Gross profit. Net sales minus the cost of goods sold.
Guaranty. A promise by a third party to repay a loan in the event the primary borrower fails to do so.
Income statement. A presentation of the sales, expenses, and profit or loss of a business on a periodic basis.
Intangible asset. An asset that does not have a physical presence, such as goodwill, a patent or a trademark.
Inventory financing. The process of obtaining capital for a business by borrowing money with inventory used as collateral.
Joint venture. An agreement between two or more businesses to mutually accomplish a business objective.
Leverage. The use of borrowing to increase the ability of a business to conduct its operations.
Limited liability company. An organization, distinct from a corporation, formed under state law for the purpose of carrying on a business enterprise is such a manner as to make the enterprise distinct from its owners.
Line of credit. A commitment by a lender to lend up to a certain amount of money to a business.
Net profit after taxes. A company's net profit before taxes, minus federal, state or local income or franchise taxes.
Net profit before taxes. Net sales or total receipts of a business minus all expenses except taxes.
Net sales. Total sales of a business minus discounts, returns and pricing adjustments.
Net worth. The net value of assets minus liabilities.
Operating expenses. The expenses of a business not directly associated with the making of a product or providing of a service, such as administrative, technical or selling expenses.
Partnership. An association of two or more persons to carry on as co-owners of a business for profit.
Public offering. The sale by a company of shares of its stock to the public in the financial market.
Sole proprietorship. A business that is owned and operated by an individual owner without incorporation or partners. The owner is liable for the business' debts to the full extent of his or her personal property.
Subchapter S corporation. A corporation that has elected under Subchapter S of the Internal Revenue Code not to pay any corporate taxes on its earnings, and instead to have its shareholders pay taxes on it.
Retained earnings. Net profit after taxes that is retained in the business as working capital.
Securities and Exchange Commission. The federal governmental agency that maintains order of the stock and securities exchanges.
Small Business Administration. The federal governmental agency that guarantees loans made by banks to small businesses.
Unsecured loan. A loan made with no collateral posted to ensure repayment.
Variable cost. A cost that varies directly with sales, such as raw materials, labor and sales commissions.
Working capital. Current assets minus current liabilities.