Accrual Basis: The accounting practice whereby income and expenses are recorded when they occur, although the cash may not be received or paid until later.  This is different than cash based accounting when income and expenses are recorded when the money actually changes hands.


Administrative Expenses: Expenses charged to the managerial aspect of running a business.


Aging of Accounts Receivable: An accounting report that ages each of the invoices from the date of invoice into a number of different time frames such as: current, over 30 days, over 60 days, over 90 days and over 120+ days.


Allowance for Depreciation: An accumulated expense that writes-off the cost of a fixed asset over its estimated useful life. The allowance is not necessarily an indicator of the asset’s real value.


Amortization: The gradual reduction of a debt by the making of equal periodic payments so the debt will be paid off by maturity. For example, a debt amortized over 20 years would be paid off at the end of 20 years.


Annual Percentage Rate: The finance charge on a loan over a one-year period expressed as a percentage.


Average Inventory: The approximate amount of merchandise on hand during a given period. (There are several ways to value inventory.)


Bad Debts: The amount of accounts receivable that are uncollectible. The inability to collect receivables is a common problem of companies with financial problems.


Balance Sheet- An itemized statement for an individual or business that lists the assets, liabilities, and difference between the two, which is called capital (net worth or equity).



Break-Even Point: The break-even point for a product is the point where total revenue received equals the total costs associated with the sale of the product (TR=TC). A break-even point is typically calculated in order for businesses to determine if it would be profitable to sell a proposed product, as opposed to attempting to modify an existing product instead so it can be made lucrative. Break-Even Analysis can also be used to analyze the potential profitability of an expenditure in a sales-based business.


Budget: An itemized listing of projected revenues, projected expenses, and projected profits to be generated over a specific time.


Business Consultant: A person who is in the practice of, helping organizations improve their performance, primarily through the thorough analysis of existing business problems and development of plans for improvement. Organizations hire the services of business consultants for a number of reasons, including, for example, to gain external and presumably more objective advice and recommendations, to gain access to the consultants’ specialized expertise, or simply as temporary help during a one-time project, where the hiring of permanent employees is not required. Because of their exposure to and relationships with numerous organizations, business consultants are also said to be aware of industry ‘best practices,’ although the transferability of such practices from one organization to another is the subject of debate. Consultants may also provide organizational change management assistance, development of coaching skills, technology implementation, strategy development, or operational improvement services. Business consultants generally bring their own, proprietary methodologies or frameworks to guide the identification of problems, and to serve as the basis for recommendations for more effective or efficient ways of performing business tasks.


Capital Budget: The amount available for the purchase of fixed assets during a given period of time.


Capital Stock: The ownership shares of a corporation authorized by its articles of incorporation.


Cash Basis: The practice of recording revenues and expenses only when cash is actually received or paid.


Cash Discount: A deduction from the selling price permitted by the seller to encourage earlier payment on an invoice. When possible, it is usually wise to take cash discounts; over time, the amount of savings can be considerable.


Cash Flow: The difference between cash receipts and disbursements over a given period of time.


Cash Flow Forecast:  Cash flow forecasting schedules the company’s cash receipts and disbursements. Receipts are primarily the collection of accounts receivable from recent sales, but also include sales of other assets, proceeds of financing, etc. Disbursements include, payroll, payment of accounts payable from recent purchases, operating expenses, dividends, debt service, etc.


Closely Held Business: This is a business that has a few owners and normally is under $50,000,000 in revenue.


Creditor:  A creditor is a party (e.g. person, organization, company, or government) that has a claim to the services of a second party. The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property or service. The second party is frequently called a debtor or borrower.


Collateral: An asset pledged to a creditor to ensure repayment of a debt. Should repayment not be made in a timely manner, the lender may repose and sell the collateral to retire the obligation.


Current Assets: Items owned by an individual or business that are easily converted into cash within a year. Cash, accounts receivable, and inventory are examples.


Current Liabilities: Items owned by an individual or business that are normally expected to be paid within a year. Accounts payable, notes payable, and the current portion of long-term debt are examples.


Current Ratio: A ratio that measures solvency. It can be determined by dividing current assets by current liabilities. IMPORTANT NOTE: All bankers look at a company’s current ratio when evaluating the condition of the business.


Debtor: A person or firm owing money, goods, or services to another.


Debt-to-Worth Ratio: A ratio that measures the amount of leverage used by the owners or stockholders of a company. It is defined as total liabilities divided by net worth. (The higher the debt-to-worth ratio, the higher the risk for both creditors and owners.).


Demand Note:  A demand promissory notes are notes that do not carry a specific maturity date, but are due on demand of the lender. Usually the lender will only give the borrower a few days notice before the payment is due.


Depreciation: An adjustment to the bookkeeping value of an asset that theoretically reflects its declining value.


Dividend: That portion of a corporation’s earnings paid to stockholders. This is reflected under the capital section on a financial statement.


Finance Charges: The cost of a loan in actual dollars and cents, as required by the federal Truth-in-Lending Act of 1968.


Fixed Assets: Assets that normally will not be converted into cash during the coming year. A building and equipment are examples.


Fixed Cost: Costs that remain relatively constant in the operation of a business and do not vary with fluctuations in sales. Rent, insurance, and utilities are examples.


Goodwill:  Goodwill as a term was originally used to reflect the fact that an ongoing business had some “intrinsic value” beyond its assets, such as the reputation the firm enjoyed with its clients. Likewise, a buyer may agree to “overpay” because he sees potential synergy with his own business. The accounting sense of goodwill followed as a plausible explanation of why a firm sells for more than the value of its net assets.


Gross Margin Ratio: A ratio that shows the percentage of sales dollars left after deducting the cost of goods sold. It can be found by dividing the gross profit by total sales.


Gross Profit on Sales: The amount by which the net sales exceed the cost of goods sold.


Guarantor: A person legally obligated to pay back a loan if the borrower defaults. Bankers commonly ask major stockholders to guarantee loans made to corporations.


Income Statement: An accounting document that expresses revenue and all the costs associated with obtaining that revenue in the business over a defined period of time, normally a month.  Income Statement and profit and loss statement are one in the same.


Intangible Assets: Items of a non-physical nature that are of value to a business. Examples are good will, patents, copyrights, and trademarks.


Leverage: Borrowing money from others to acquire assets. (As the leverage of a firm increases, so does the risk to both creditors and owner.)


Liabilities: Debts of a person or a business. Accounts payable, notes payable, and mortgages are examples.


Lien: A creditor’s legal right to confiscate and sell assigned collateral to pay off the debtor’s obligation.


Line of Credit: An agreement between a bank and a customer whereby the bank agrees to lend the customer an amount of money with a specific upper-limit (such as $100,000). A line of credit may be secured or unsecured. It is usually established when the borrower has frequent borrowing need.


Liquidity: A term used to describe the solvency of a person or business. The ease with which assets can be converted into cash is an indication of liquidity.


Long-Term Debt: An obligation not due within the next year.


Net Income: The excess of revenues over expenses for a specific period.


Net Profit Margin Ratio: A ratio that reflects the percentage of sales dollars left after deducting all expenses except income taxes. It can be determined by dividing total sales into the net profit before taxes.  GIVE


Net Sales: The amount of sales during a period after making adjustments for returns and sales discounts.


Net worth: The difference between total assets and total liabilities. Sometimes referred to as equity, capital, or owner’s equity.


Notes Payable: A written promise to pay a certain amount by a given date.


Notes Receivable: A written promise by another party to pay a certain amount by a given date.


Outstanding Balance: The remaining amount to pay on a loan as of a specific date. Sometimes referred to as principal balance owing.


Overdraft: A negative balance in the checking account that occurs when more money is taken out than is in the account.  IMPORTANT NOTE: Bankers don’t like overdrafts; it’s an unwritten rule of banking.


Partnership: A legal arrangement of two or more people for the purpose of operating a business. Legally, the owners are personally liable for the risks of the business venture.


Prime Rate:  The rate of interest the bank charges the most credit-worthy customers.


Principal: The amount of a loan, excluding any finance charges. Sometimes the principal amount owing is referred to as the outstanding balance.


Pro Forma: A projection or estimate of future business which includes forecasted income statement, forecasted cash flow, and pro forma balance sheet.


Promissory Note: A written document that is legal evidence of a debt. The debtor promises to pay a specific amount of money plus finance charges by a certain date or on demand. Frequently referred to as a note.


Quick Ratio: A ratio that measures liquidity. It is defined as cash plus accounts receivable divided by current liabilities.


Secured Loan: A loan with an asset pledged as collateral. (Almost all term loans are made on a secured basis.)


Term Loan: A loan with a repayment period extending beyond one year. (Almost all term loans require that the borrower pledge collateral.)


Unsecured Loan: A loan made to a person or company that does not require collateral.



Working Capital: The difference between current assets and current liabilities. (A negative working capital position probably indicates a company is having severe problems paying its obligations.)


Working Capital Ratio: Current assets divided by current liabilities. This is frequently called the current ratio.