Glossary of Business Terms

CONTENTS

LAST UPDATE: 2/8/2013

Glossary

This listing of terms that relate to small businesses is by no means all-inclusive but we're adding to it continuously. In those cases where additional information is available within our site, the word or phrase is hyperlinked. Click on the link for more information.

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ACCOUNTING PERIOD: A period of time, (month, quarter, year), for which a financial statement is produced.
ACCOUNTS PAYABLE: This represents what a business owes to its suppliers and other creditors at a given point in time.
ACCOUNTS RECEIVABLE: This represents the amount due to a business by its customers at a given point in time.
ACCRUAL ACCOUNTING: A method of bookkeeping in which income and expenses are allocated to periods to which they apply, regardless of when actually received or paid. For example, when an invoice is rendered, its value is added to income immediately, even though it has not been paid. (Also see CASH ACCOUNTING)
AUDIT: Verification of financial records and accounting procedures generally conducted by a CPA or accounting firm or if you're really unlucky, the IRS.
BALANCE SHEET: Financial statement showing assets and liabilities at a specific time.
BOND
BREAK-EVEN POINT: The point at which sales equal total costs.
CAPITAL ASSET: An asset that is purchased for long-term use such as machinery and equipment.
CASH ACCOUNTING: The simplest form of accounting in which income is considered earned when received and expenses are not taken into account until paid.
CAVEAT EMPTOR: "Let the buyer beware"
CERTIFIED LENDERS: Banks that participate in the SBA's guaranteed loan program.
COLLATERAL: An asset that can be sold for cash and which has been pledged to a creditor to secure a future obligation. (For example, if you finance a car it is the collateral for the loan).
COMPOUND INTEREST: Interest earned on previously accumulated interest plus the original principal. Most spread sheets can calculate this easily for you but for the curious, the formula is C = P(1 + r/n)ⁿ, where C=compound amount, P=original principal, r=annual interest rate, n=total number of periods over which interest is compounded.
CONTRACT: An agreement between two (or more) parties in which each promises to perform in some way. Contracts can be complex and should always be reviewed by an attorney. A contract may not be binding if not correctly drafted and executed .
CREDIT REPORT: A listing of an individual or company's history of repaying past loans and other liabilities.
DEBT FINANCING: This is financing in which you get a loan from someone or somewhere and go into debt! You are obligated to repay the money at some predetermined interest rate.
DEPRECIATION: Decrease in the value of equipment over time. Depreciation of equipment used for business is a tax-deductible expense.
DROP SHIPMENT: A shipment directly from the manufacturer to the end user.
DUNS (Data Universal Numbering System): A database maintained by Dun and Bradstreet that is used by the Government to identify each contractor and their location(s). This number is required to register with the Central Contractor Register (CCR) that is used by the government's electronic commerce/electronic data interchange (EC/EDI) system called FACNET. You can obtain a DUNS number at no cost by calling Dun and Bradstreet at 800-333-0505.
EMPLOYER IDENTIFICATION NUMBER (EIN): A number obtained by a business from the IRS by filing form SS-4. If you are a sole proprietorship, your EIN is your social security number.
ENTREPRENEUR: Someone who is willing to assume the responsibility, risk and rewards of starting and operating a business.
EQUITY FINANCING: This involves "selling" a portion of your company to an outside investor. You have no obligation to repay the funds. In general, venture capital firms provide this type of funding.
ESCROW: Temporary monetary deposit with an independent third party by agreement between two parties. The escrow money is released when certain agreed conditions have been met.
ESOP: (Employee Stock Ownership Plan). A plan where employees have a vested interest (stock ownership) in the company
FACTORING
FIDUCIARY: A person or company entrusted with assets owned by another party (beneficiary), and responsible for investing the assets until they are turned over to the beneficiary.
FISCAL YEAR: Any 12-month period used by a company or government as an accounting period.
FIXED COST: A production cost which does not vary significantly with the volume of output. An example would be administrative costs. (Also see VARIABLE COST).
FRANCHISE: A franchise is a form of licensing. The franchiser provides his services through a series of franchisees. Before investing in any franchise, check with the International Franchise Association at 1 800 543 1038 to see if the franchise is a member in good standing.
FREE ON BOARD (FOB): Commercial term in which the seller's obligations are fulfilled when the goods reach a point specified in the contract.
GRACE PERIOD: Time allowed a debtor in which legal action will not be undertaken by the creditor when payment is late.
GUARANTEE: Pledge by a third party to repay a loan in the event that the borrower cannot. A special case is a PERSONAL guarantee in which you personally guarantee an obligation.
GUARANTEED/INSURED LOANS: Programs in which the federal government makes an arrangement to indemnify a lender against part or all of any defaults by those responsible for repayment of loans. An example is a small business loan guaranteed by the SBA.
INDEMNITY: Obligation of one party to reimburse another party for losses which have occurred or which may occur.
JOB SHARING: Arrangement in which the responsibilities and hours of one job position are carried out by two people.
LIEN: Legal right to hold property of another party or to have it sold or applied in payment of a claim.
LIQUIDATION: Sale of the assets of a business to pay off debts.
MARGINAL COST: Additional cost associated with producing one more unit of output.
MINORITY BUSINESSES: The Small Business Administration defines minorities as those who are "socially and economically disadvantaged." The U.S. Code of Federal Regulations (CFR) contains the specific requirements.
MLM (Multi Level Marketing): Multilevel marketing (MLM) plans, are a way of selling goods or services through distributors. These plans promise that if you sign up as a distributor, you will receive commissions -- for both your sales of the plan's goods or services and those of other people you recruit to join the distributors. Be careful of plans that offer to pay commissions for recruiting new distributors. This is called "pyramiding" and is illegeal in most states.
OSDBU (Office of Small and Disadvantaged Business Utilization): These offices offer small business information on procurement opportunities, guidance on procurement procedures, and identification of both prime and subcontracting opportunities with the United States Government.
OVERHEAD: Business expenses not directly related to a particular good or service produced. An example would be utilities.
PASS: This is the Procurement Automated Source System managed by the Small Business Administration. Registering with this central referral system of small businesses interested in selling to the government can bring you business with almost no effort. Registration is free. Call 1 800 231 7277.
POWER OF ATTORNEY
An agreement authorizing someone (generally an attorney) to act as your agent. This agreement may be general (complete authority) or special (limited authority).
PREFERRED LENDERS: Banks which have a special written agreement with the SBA which allows them to make a guaranteed SBA loan without prior SBA approval.
PROFIT & LOSS (P & L) STATEMENT
PROMPT PAYMENT ACT: A federal law that requires federal agencies to pay interest to companies on bills not paid within 30 days of invoice or completion of work.
SBC (Small Business Centers): These 12 GSA centers located throughout the United States can help you tap the multi-billion-dollar GSA "market" for goods and services. Contact a center nearest you.
SBDC: Small Business Development Centers are are located throughout the United States and are administered by the SBA. They provide management assistance to entrepreneurs and new business owners.
SBIC (Small Business Investment Corporation): SBICs are licensed by the SBA as federally funded private venture capital firms. Money is available to small businesses under a variety of agreements.
SCORE: The Service Corps of Retired Executives is a volunteer management assistance program of the SBA. SCORE volunteers provide one-on-one counseling and workshops and seminars for small businesses. There are hundreds of SCORE offices throughout the United States.
SIC (Standard Industrial Classification Code): A four-digit number assigned to identify a business based on the type of business or trade involved. The first two digits correspond to major groups such as construction and manufacturing, while the last two digits correspond to subgroups such as constructing homes versus constructing highways. A business can determine its SIC number by looking it up in a directory published by the Department of Commerce, or by checking in the SIC book in the reference section of a local library. SBA size standards are based on SIC codes.
SIMPLE INTEREST: Interest paid only on the principal of a loan.
SOLE PROPRIETORSHIP: The simpliest (and most popular) form of business organization. The individual is personally liable for all debts of the business to the full extent of his or her property. On the other hand, the owner has complete control of the business.
SURETY BONDS: Surety bonds provide reimbursement to an individual, company or the government if a firm fails to complete a contract. SBA guarantees surety bonds in a program much like SBA's guaranteed loan program.
SWEAT EQUITY: A common form of "investment." This refers to the investment in time owners make, with no salary, to a new business.

SWEEP ACCOUNT: A brokerage or bank account whose cash balance is automatically transferred into an interest-bearing investment, such as a money market fund. Use sweep accounts to earn interest on surplus cash. At the end of each business day, a sweep account would transfer excess funds into an interest-bearing account, earn overnight interest, and make the funds available the next day.
TAX NUMBER: A number assigned to a business that enables the business to buy wholesale without paying sales tax on goods and products. Contact your local court house for additional information.
TRIPLE NET: Rental type in which the tenant pays rent to the landlord and additionally assumes all costs regarding the operation, taxes and maintenance of the premises and building.
VARIABLE COST: Any costs which change significantly with the level of output. The obvious example is cost of materials.
VENTURE CAPITAL: Money used to support new or unusual undertakings; equity, risk or speculative investment capital. This funding is provided to new or existing firms which exhibit potential for above-average growth.

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