Business Terms Glossary

A
Accounts Receivable. Claims to cash on account that are expected to be paid within one year.

Agents. Middlemen that provide a risk-free procurement function by not taking title to the merchandise they buy or sell for their customers.

Amortize. Process of rationally and systematically allocating cost of an asset over the expected life of the asset.

Annual Percentage Rate. A credit arrangement term that applies to the relative cost of credit stated as an annual percentage, i.e. the annual cost of credit.

Assets. Probably future economic or income producing benefits of value that are owned or controlled by the business. Current assets are those that can be converted into cash within one year.

B
Balance Sheet. A statement of financial condition of the business that provides the owner with an estimate of the firm's worth on a given date.

Broker. An agent middleman or wholesaler who arranges title-free sales for his clients.

Buying Power Index (B.P.I.) A composite indicator of consumer demand in specific cities, counties, and metro areas. Published annually by Sales and Marketing Management magazine, the B.P.I. reflects disposable personal income, retail sales, and population in the area.

C
Capital. Account that represents real ownership and is the difference between the value of the assets and the liabilities. Includes owner's original investment, subsequent investments and profit derived from the business less losses incurred and withdrawals from the owner.

Carrying Costs. Expenses incurred from storage of inventory. Includes interest, insurance, taxes, deterioration, spoilage, obsolescence, handling and warehousing.

Cash Budget. An internal statement used by management to keep track of inflows and outflows of cash transactions over a period time.

Cash Discount. Price reduction or discount on bills paid early. Terms of "2/10, Net 30," for example, means that a 2% discount is granted if the bill is paid within 10 days. Otherwise, the entire amount is due within 30 days.

Collateral. Property that secures debt payment that the borrower pledges to the creditor. Collateral recovers all or part of a debt, if repayment of the loan is not forthcoming.

Cosigner. Any person that signs along with the maker of a loan or credit obligation, thus becoming responsible if the maker defaults.

Cost of Goods Sold. Determined for the period by counting the merchandise left at the end of the period (physical inventory) and subtracting its cost from the total cost of merchandise available for sale.

Current Assets. Includes cash and other resources that can be converted into cash or used within the normal operations of a business within a relatively short period of time, usually less than one year.

Current Liabilities. Debts and other amounts owed to creditors by the business entity due within one year. Includes wages payable, accounts payable, dividends payable, taxes payable, and so forth.

Current Ratio. A commonly used method of measuring a firm's short term solvency by indicating its ability to pay current debts from current assets. Current ratio is calculated by dividing current assets by current liabilities.

D
Debt/Equity Ratio. A measure of long-term financial solvency of a firm showing the relationship between borrowed capital and owner's equity. Debt/Equity ratio is calculated by taking long-term debt and dividing it by Total Equity. A high ratio might indicate room for capital expansion.

Debt Financing. Financing through borrowing capital that must be repaid. Discretionary Income. Disposable personal income less amount spent for necessities such as food, shelter, medical expenses, etc. Disposable Personal Income. Individual "after-tax" income.

Double-Entry Bookkeeping. An accounting system where every debit made to one account has a corresponding credit made to another account.

E
Economic Order Quantity (EOQ). The most economical quantity to purchase, balancing ordering costs with carrying costs.

Economies of Scale. Efficiencies associated with larger-scale operations. For example, it might cost a manufacturer $100 to manufacture one unit, $180 for two units, $240 for three units, and so on, such that the average cost per unit decreases as production volume increases.

Entrepreneur. An individual who organizes and owns a business for the purpose of creating long-term wealth. The responsibility and risk associated with the business are also the entrepreneur's.

Equity Financing. Selling partial ownership in the business to raise capital.

F
Fixed Assets. Business assets such as buildings and equipment that will be used over a long period of time-usually one year or longer.

Fixed Costs. Fixed amounts that do not vary with changes in the volume of sales or production, i.e. rent, depreciation, interest payments.

Franchisee. Affiliated dealers for distribution of products, services or methods in franchising obtained by franchiser.

Franchising. Form of licensing by which the owner (franchiser) of a product, service or method obtains distribution through affiliated dealers (franchisees).

Franchiser. The business entity which provides the franchisee the right and license to sell a product or service and possibly to use the business system developed by the company.

G
Goodwill. An intangible asset that attaches to the successful operation of a business. Favorable factors such as location, product superiority, service reputation, and quality personnel often generate goodwill.

Gross Profit. Also known as gross margin, determined by subtracting cost of goods from net sales.

I
Inventory Control. The process of maintaining sufficient inventory measures to meet customer needs, weighed against the cost of carrying inventory to determine an appropriate inventory level.

Inventory Turnover (or Turn). Measures the movement of how rapidly inventory can be converted into cash within a period. Turn is calculated by dividing the cost of goods sold by an average inventory amount.

L
Liabilities. Debts and other amounts owed by the business to creditors.

Lien. A legal claim by a creditor on another's property as security for payment of a just debt. May also appear as the result of judgment.

Line of Credit. A revolving form of credit where a bank loans a business up to a specified amount as needed by the firm.

Liquidity. Ability of a business to meet its short-term financial obligations.

Long-Term Financing. Loans not to be repaid within one year.

M
Manufacturer. Business that produces goods for individuals and/or businesses.

Manufacturer's Representative. Middleman agent who markets related, but non-competing products for several manufacturers or vendors.

Market. A specific group of people who have needs to satisfy and the ability to pay (purchasing power).

Market Potential. The maximum achievable combined sales volume for all sellers of a specific product during a specific time period, in a specific market.

Market Segmentation. The process of dividing a heterogeneous market into several homogeneous sub-markets.

Marketing Mix. The four sets of tools the entrepreneur may combine to shape market demand and facilitate transactions: Product, Price, Promotion, Distribution.

Marketing Research. The process of systematically gathering, analyzing and interpreting data pertaining to the company's market, customers and competitors, with the goal of improving marketing decisions.

N
Net Sales. Dollar sales amount remaining when reduced by sales tax and any returns or allowances.

Net Working Capital. The difference between current assets and current liabilities.

O
Occupational Safety and Health Act (OSHA) of 1970. Legislation that led to the government regulatory agency charged with the responsibility of creating, establishing, administering, and enforcing job safety and health standards in the workplace.

Operating Expenses. Expenses incurred directly with the sale of merchandise (selling expenses) and/or those expenses incurred in the general operation of a business (general or administrative expenses).

Organization. The sum total of the activities, processes, and people that define a business.

Organizational Chart. A graphic description of a firm which identifies key positions, personnel occupying those positions, and reporting relationships.

P
Production. The continuous process of converting raw materials into finished goods.

Prospecting. First step in the selling process, developing a list of potential customers who have a need for the product, resources to acquire the product, and the authority to purchase.

Purchasing. The business activity of securing goods or merchandise from an outside source.

Q
Quality Control. Ensuring and effectively regulating the production of the number and type of goods manufactured to quality specifications.

S
Sales Forecast. Projection of estimation of sales, in dollars or physical units, for a given time period.

Secondary Data. Information that has already been assembled, having been collected for some other purpose. Sources include census reports, trade publications, and subscription services.

Service Corps of Retired Executives (SCORE). Consulting service composed of retired business executives that volunteer their management expertise to small businesses. S.C.O.R.E. chapters work with Small Business Institute programs in many colleges and universities.

Short-Term Financing. Repayment of loans within one year. Small Business Administration (S.B.A.). A federal agency established in 1953 to assist prospective entrepreneurs in obtaining funds, and to preserve competitive enterprise in the economy.

Small Business Institute (S.B.I.). A cooperative venture between business colleges and the Small Business Administration that offers management assistance to small businesses.

Sole Proprietorship. Business entity owned and operated by one person.

Subchapter S Corporation. A form of business structure that limits each shareholder's liability (like a corporation), but profits and losses are reported by shareholders (like a partnership). Subchapter S corporations are limited to 25 or fewer shareholders.

T
Target Market. A specific group of customers at which a company aims its products and services.

Terms. The conditions or requirements set forth in a credit contract or agreement, such as a promissory note or installment contract.

Trade Discount. Reductions in price expressed as a percentage from list or catalog prices given to a certain class of buyers such as wholesalers or retailers.

U
Unsecured Loan. A loan obtained without pledging any security. That is, no collateral, no co-makers, no guarantors. etc. back the loan.

V
Variable Costs. Are variable expenses that vary directly with the changes in the volume of sales or production, e.g., raw material costs and sales commissions.

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