Whether you are applying for financing, negotiating with suppliers or navigating your way through bureaucratic red tape, your chances of success are greatly enhanced if you talk the same language as those with whom you are dealing. You've got to able to "talk the talk," as well as "walk the walk," to put a new spin on an old saying.

The following are some important terms and definitions that will help you do just that:

 

Ability to Pay. When used in financial agreements, it refers to the borrower's ability to meet principal and interest payments on long-term obligations with money generated through the business' earnings.

 

Account. Although this term has several meanings specific to its usage (i.e., you have accounts at your bank, with a mutual fund company, with a stock broker, etc.), in business it generally refers to the contractual relationship between buyer and seller under which payment is made at some agreed upon date in the future. The record of the transactions made under that agreement is referred to as the "statement of account."

 

Accounts Payable. These are the amounts your business owes on open account to its creditors for the goods and services they have already supplied.

 

Accounts Receivable. This is the money owed to your business by its customers for the goods and services you have sold to them on open account. Some lenders will accept accounts receivable as collateral for short-term financing.

 

Ad Valorem. Latin for "according to value," this refers to a method of determining taxes on goods or property, such as duties on imported merchandise or real estate taxes on commercial properties.

 

Aging Schedule. We're all on one of these, whether we like it or not, but in business this refers to the age of your accounts receivable. Why is this important? Primarily because lenders say it is. The older your receivables, the less valuable they are in the eyes of a lender. An aging schedule can also help you spot patterns of late payment among customers and help you decide where to focus your collection efforts.

 

Asset. Anything your company owns that has commercial or exchange value is considered an asset. These can run the gamut from cash and inventory on hand to intellectual property and "goodwill" (see below).

 

Audit. Most people think in terms of an IRS examination of their income tax return when they hear this word, but it has a broader meaning as well. An audit is any professional examination and verification of a company's books, financial documents and supporting material. It may be required by a lender before granting a loan. It is usually conducted by an accounting firm.

 

Bad Debt. This is the kind you don't want to have. It refers to an open account balance or other funds owed your company that you have not been able to collect and are not likely to be able to collect in the future. It can be written off against profits on your tax return.

 

Balance Sheet. A financial report that shows the status of all a company's assets and liabilities and the equity of its owners on a given date, usually the last day of a month.

 

Bank Line. Many people, especially first-time entrepreneurs, misunderstand what this is. A bank line is a bank's MORAL commitment, not a CONTRACTUAL one, to make available to a customer loans up to a specified maximum during a set period of time. Most banks who extend these lines of credit require their customers to keep some funds on deposit at the bank, typically an amount equal to 10% of the line's maximum.

 

Bankruptcy. This is the state of insolvency you or your company are in when you are unable to pay your debts. There are two kinds: Chapter 11, which allows a company to reorganize and often to restructure or renegotiate its debts, and Chapter 7, which deals with liquidation.

 

Barter. An increasingly popular form of trade among small businesses where goods and services are swapped rather than bought and sold. Be aware that the IRS still views barter deals as taxable transactions.

 

Breakeven Point. The point at which your sales volume equals your expenses. All sales after this point translate to profits.

 

Budget. An estimate of your income and expenditures for a given period of time. Ideally, the first should always be equal to or greater than the second. If not, your company -- like this country -- is running a deficit.

 

Capital Gain. The difference between an asset's purchase price and selling price. If you later sell your business for more than you paid for it (less what you have invested in it, of course), you will have a capital gain that is subject to tax.

 

Casualty Loss. A financial loss caused by some damage or loss of property due to a sudden and unexpected event, such as a fire, earth-quake or robbery.

 

Collateral. Something of value pledged to a lender to secure a loan until it is repaid.

 

Delinquency. Failure to make a payment on a loan or other obligation when it comes due.

 

Depreciation. This refers to the wearing-out of machinery and equipment in a business, and to the amortization of the costs of fixed assets over time. Depreciation reduces a company's tax liability without reducing its cash.

 

Entrepreneur. Someone who takes on the risks of launching a new business. Most Business Opportunities Handbook readers are, or want to be, entrepreneurs.

 

Equity. The percentage of a company belonging to each of its owners.

 

Factors. These are financial firms that buy the accounts receivable of other companies at a discount to their face value. The seller gets immediate cash and is relieved of the responsibility of collecting on those accounts.

 

Fiscal Year. An accounting period covering 12 consecutive months, 52 consecutive weeks, 13 consecutive four-week periods or 365 consecutive days. A company's books are closed and its profit or loss is determined at the end of each fiscal year.

 

General Ledger. The formal ledger that includes all of a company's financial statement accounts.

 

Goodwill. Also known as "going-concern value," this refers to the value of your company as an operating business (especially to another company or individual interested in acquiring it) above and beyond the collective value of its inventory, property, assets and accounts receivable.

 

Grace Period. Most loans include a grace period during which the borrower will not be held in default even though payment is past due. Grace periods typically range from seven to 30 days.

 

Intangible Asset. Something other than a physical asset that is presumed to provide value to a company. Examples are copyrights, patents, trademarks, goodwill, leases, permits and licenses.

 

Invoice. A document prepared by the seller of goods or services that lists each item sold and its price and is presented to the purchaser of those goods or services.

 

Jobbers. These are common in many retail businesses. Basically, they are small wholesalers who buy product from manufacturers, importers or other wholesalers and supply it to retailers. Many jobbers provide additional services, such as stocking and merchandising the departments for which they are supplying products.

 

Kickback. An illegal payment made in secret by a seller to someone who helped the seller win a contract or make a sale.

 

Lease. A contract granting the use of property or equipment for a set period of time in exchange for an agreed upon payment.

 

Legal Entity. This is a person or organization, such as a company, that has the legal standing to enter into a contract or other binding agreement with another party. Interestingly, the law views a corporation as a person, in that the corporation has rights, can own property and can sue and be sued.

 

Letter of Credit. An instrument or document that a bank issues to guarantee payment on behalf of a customer up to the amount detailed in the letter of credit. These are most often used in international trade.

 

Lien. A creditor's claim against property that allows the creditor to seize that property if the terms of an agreement are not met in a timely fashion.

 

Long-Term Debt or Financing. These are debts or liabilities that do not come due for a year or longer.

 

Marketing. Basically, a catchall word to describe everything involved in the process of getting your company's goods or services to their ultimate consumers. It encompasses design and development, distribution, advertising, promotion, pricing, market research and more.

 

Merger. A combination of two or more companies; like a marriage between businesses.

 

Net. A term that describes everything left after all relevant deductions have been made. It can be applied to sales, earnings, expenses and worth.

 

Nonrecurring Charge. A one-time expense or write-off that appears on your company's financial statement, such as a loss related to a fire or theft or expenses entailed in selling or shutting down part of your operation.

 

Ordinary Income. The money earned from the normal activities of a person or business, such as salary or profits, as opposed to capital gains from the sale of assets.

 

Organization Chart. A "who's who" for a company or business. The chart shows the relationship of individuals and positions within a company in terms of the authority and responsibilities of each.

 

Outstanding. "Wonderful" in everyday talk, "not so wonderful" in business. Outstanding refers to unpaid balances, items that have not yet been presented for payment and accounts receivable with balances due.

 

Overhead. Also known as "indirect costs and expenses", overhead refers to business expenses that are not directly related to the production or sale of a company's goods or services.

 

Partnership. An agreement between two or more people to share their funds and/or talents in a business venture and to split the profits or losses resulting from that venture.

 

Prime Rate. The interest rate banks charge to their most credit worthy customers, as determined by the bank's own cost of securing funds.

 

Profit. What a business has left from selling its goods or services after paying all its expenses and outstanding obligations.

 

Profit and Loss Statement. Often referred to with the shorthand "P&L," this is a summary of all a company's income, costs and expenses during a given period. A P&L and a balance sheet together comprise a company's financial statement.

 

Profit-Sharing Plan. An agreement that allows the employees of a company to share in any profits it generates.

 

Pro Forma. A Latin phrase that literally means "as a matter of form," it refers to any document containing some hypothetical information. A business plan for a start-up company generally includes a pro forma financial statement.

 

Proprietorship (or Sole Proprietorship). An unincorporated business owned by a single individual, this is the simplest form of business ownership and the one chosen by many self-employed people.

 

Rescind. To cancel a contract agreement. The Truth in Lending Law grants all borrowers the right of rescission, which means you can change your mind and nullify any contract without penalty as long as you do it within three days of signing.

 

Return on Sales. A company's profits before taxes expressed as a percentage of its net sales. Companies use this figure to compare their own operational efficiency from one period to another.

 

Secured Debt. This is debt that is guaranteed by a pledge of assets (collateral) with some corresponding value to the loan.

 

Seed Money. The first money invested in a new start-up business. It can come from the entrepreneur's own pocket, a venture capitalist or other sources.

 

Shell Corporation. A company that is incorporated but has no real assets or operations. Shell corporations are sometimes formed to raise money before starting up a legitimate operation, but more often they are created for fraudulent purposes such as tax evasion.

 

Short-Term Debt or Financing. All of a company's debt obligations coming due within one year.

 

Small Business Administration. A federal bureau created in 1953 specifically to provide financial assistance to small businesses through direct loans and loan guarantees, and to offer management assistance to start-up companies.

 

Straight-Line Depreciation. A simple method of determining a fixed asset's annual depreciation over its useful life. The asset's total cost less its estimated value at the end of its useful life is divided by its useful life to determine the uniform annual depreciation expense that can be charged against income before taxes.

 

Subchapter S. The section of the Internal Revenue Service Code that allows the formation of so-called "S corporations," which must have 35 or fewer shareholders and meet certain other requirements. S corporations are taxed as if they were partnerships, which allows them to distribute income directly to shareholders and avoid the corporate income tax, while still benefitting from the other advantages incorporation offers.

 

Tangible Asset. Anything of value other than an intangible asset owned by a company or individual.

 

Term. The period of time during which the conditions of a contract are to be carried out, i.e., the time allowed for the repayment of a loan.

 

Trademark. A distinctive name, symbol, design, emblem, motto, etc. that identifies a specific company or the products or services offered by a company.

 

Undercapitalized. The condition of a company not having enough money to carry out its normal business functions. Undercapitalization is one of the leading causes of failure among new start-up businesses.

 

Unencumbered. This refers to property and assets that are free and clear of all liens.

 

Variable Cost. A cost of doing business that changes in direct relation to the amount of goods or services produced. Labor and material represent variable costs for many companies. Energy can also be a variable cost.

 

Vendor. A term generally applied to any supplier of goods or services on a commercial basis. For example, the company that supplies the raw material for a manufacturing operation and the janitorial firm that cleans the offices there would both be considered vendors.

 

Wholesaler. A vendor or distributor who sells primarily to retailers, jobbers, manufacturers and other commercial entities as opposed to consumers.