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Coming to Terms with the Language of Business

Posted on June 11, 2014 at 9:31 AM
Tags: small businesses

Business TerminologyThe world of business and finance has a language all its own, hundreds and hundreds of terms, some of them so arcane that no small business owner would ever need to understand them. 

Case in point: "Accreting Principal Swap." Go on, look it up, if you dare. But pop a couple of Advil first. It's a headache in 100 words. 

Still, there are some definitions and concepts that every aspiring entrepreneur should understand. Don't know your P&L from your ROI? If it's all alphabet soup to you, here are some basic terms to get you started. In alphabetical order, of course.

Accounts Payable

These are the bills your company must pay to suppliers and service providers for goods and services purchased on credit. If you want them to keep extending credit (and you do), you'll need to keep your creditors happy by paying what you owe on time. Counted as a liability on your balance sheet. 

Accounts Receivable

This is the money that customers owe your company for goods or services you provide on credit. If you want to stay in business (and you do), you'll need to stay on top of billing and collecting what's due when it's due.

Assets

Something that your company owns that has economic value. That could be cash, equipment, a building, land. It can also be something like mineral rights or intellectual property. The value of your assets in part determines the value of your company. 

Balance Sheet

This is a fundamental financial statement that lists your company's assets, liabilities and equity. It's a snapshot in time. Subtract the liabilities from the assets and you get your company's net worth.

Bankruptcy

More than just being broke. This means your company is legally insolvent or unable to meet its financial obligations. Under Chapter 7 bankruptcy, your company liquidates. Under Chapter 11, it reorganizes.

Capital

Things of value -- financial assets -- that a company owns and uses to create wealth. Cash, equipment, intellectual property such as product formulas and processes, product lines, and land are all examples of capital.

Cash Flow

The way cash moves in and out of your business. It flows in through sales, through money you borrow, or through investing. It flows out when you spend it on operating expenses, make loan payments, or buy equipment or other business assets. Cash flow can be an important measure of a company's strength. Even profitable companies can suffer from poor cash flow.

Debt Financing

Money that your company borrows and promises to pay back, usually from a bank or some other lending institution. You'll have to bring more than your word to the table, though. In all but the rarest cases, you'll need some sort of collateral to back the loan. That can come in many forms, including equipment, inventory or some other company or personal asset worth a substantial portion of the debt.

Debt-to-Equity Ratio

Simply put, this measures how much of a company's capital comes from its owners or how much is borrowed. A high debt-to-equity ratio signals that a company is relying heavily on debt (borrowed money) instead of cash generated through normal business operations. This happens sometimes when companies grow faster than they can really afford. A high debt-to-equity ratio may also foreshadow that a company does not have the financial wherewithal to repay its debts. 

Financial Statements

Key reports that provide a picture of a company's financial condition. While there are others, the big three are the balance sheet, the income statement, and the cash flow statement.

Financial Projections

A forecast of your company's expected financial performance over a specific period of time, often done a year at a time.

Income Statement

Also called a profit-and-loss statement, this essential financial scorecard summarizes all your company's income and expenses. In short, it tells you whether you're making or losing money -- and how much. The statement can be compiled monthly, quarterly or annually.

Liabilities

These are the short-term and long-term debts or obligations your company incurs as it operates. For instance, you might owe suppliers money for inventory or you might owe some kind of service to another company. Both are liabilities. The money you owe for equipment repair is a short-term liability. The mortgage on your company's manufacturing plant is a long-term liability.

Net Worth

What you own minus what you owe. Take the value of all of your company assets, subtract all company liabilities. That's your net worth.

Undercapitalization

A long and fancy word for not having the money you need to do business. Basically, your company doesn't have the cash to pay its bills. Undercapitalization is a primary cause of failure in startups and newer companies, often because they started on a shoestring and did not realize (or accurately project) just how much time and money would be needed for the business to take off.

The End

The point at which we have no more definitions to discuss. Which is now.


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