Glossary of Terms

Writing a business plan requires you to know and understand a large number of technical terms that might still be unfamiliar to you but are very important.

A listing of the most commonly used terms is provided below for your convenience, better understanding and easy reference. The listing is by all means not complete but should get you started.

ItemDescription
A/PSee "Accounts Payable".
A/RSee "Accounts Receivable".
Accounts Payable Amount owed to creditors for goods and services received on an open account.
Accounts Receivable Amount due from customers for merchandise or services purchased on an open account.
Asset Anything owned by a business or individual that has commercial or exchange value.
Balance SheetFinancial statement that presents a “snapshot” of what the business owns, what it owes, and what equity it has on a given date.
CapitalSee "Equity".
Capital ExpendituresPurchases of long-term assets, such as equipment, used in manufacturing a product.
Cash FlowIncoming cash to the business less the outgoing cash during a given period. Also used to refer to the figure derived from the net income plus non-cash items charged off in the accrual accounting process.
CollateralAssets pledged to secure a loan.
Compensating BalanceMoney a bank requires a company to leave in a deposit account as part of a loan agreement.
CorporationForm of business ownership that is a legal entity on its own and puts stockholders and the board of directors in control. Owners have limited liability for the corporation’s actions. A corporation has unlimited life and in most cases is taxed as an entity on its own.
Cost of Goods SoldFigure representing the cost of buying raw materials and producing finished goods.
Current AssetsCash or other assets you expect to use in the operation of the firm within one year.
Current LiabilitiesDebts you expect to pay within one year.
DepreciationAmortization of the cost of a fixed asset, such as plant and equipment, over several years, or the “depreciable life.”
EquityThe ownership interest in a business remaining after its liabilities are deducted. Also known as common stock plus retained earnings, or capital.
Extraordinary ItemsUnusual or nonrecurring event that must be explained to shareholders or investors, such as a manufacturer’s sale of a building.
Finance CompanyCompetitors of commercial banks in providing credit to households and firms. Unlike banks, they do not accept deposits.
Financial ProjectionsEstimates of the future financial performance of a firm.
Financial StatementsWritten record of the financial status of an individual or organization. Commonly include profit and loss, or income, statement; the balance sheet, which includes a statement of the company’s retained earnings; and the cash flow statement.
Fixed Assets Long-term assets such as buildings, equipment, or property that are not expected to be converted to cash in the near term.
Gross ProfitIndicates the revenues of the firm before consideration of its operating expenses. New sales less cost of goods sold.
Gross Profit Margin Measures a firm’s profitability.
Installment Loan Loan type that is paid in periodic payments, such as an automobile loan.
Investor An individual who takes an ownership position in a company, thus assuming risk of loss in exchange for anticipated returns.
LLCSee "Limited Liability Company".
Leverage Measures the firm’s use of borrowed funds versus those funds provided by the shareholders or owners (equity).
Liabilities Anything owed by a business or individual that has commercial or exchange value.
Limited Liability Company Provides benefits of a corporation, but less complicated to set up and maintain. Abbreviation: LLC.
Line of Credit Although not a contract, a bank’s promise to lend to a specific borrower up to a pre-agreed amount during a specific time frame. Usually reviewed annually and subject to cancellation without notice.
Liquid AssetsThose assets that can be readily turned into cash.
Liquidity Gauges firm’s ability to quickly turn assets into cash.
Marketable Securities Securities that can be sold easily.
Net Income The sum remaining after all expenses have been met or deducted. Also called profit.
Net Sales Gross sales minus returns and allowances.
Net Worth Excess of assets over debt.
NicheParticular specialty in which a firm has gained a large market share.
Operating Expenses Those costs associated with the day-to-day activities of the business.
Operating Profit (Loss) Income or loss before taxes and extraordinary items resulting from transactions other than those in the normal course of business.
Operating Profit Margin Measures a firms profitability by examining the pre-tax profit generated from primary operations (versus extraordinary items) in relation to net sales: operating-profit divided by net sales.
PADDSee "Purchase Area Development District".
Partnership Can be general or limited, but in either case the general partners are in control. The tax burden is shared by all the partners at their personal rate, and the general partners have unlimited liability. Limited partners have limited liability.
Principal The currently unpaid balance of a loan, not including interest owed. Also can refer to a primary owner or investor.
Profit Compensation an entrepreneur receives for the assumption of risk in a business venture. Also called net income.
Profit and Loss Statement Summary of the revenues, costs, and expenses for a business over a period of time. Also called the income statement.
Pro Forma Financial Statements Financial statements for a business where certain amounts are shown hypothetical, or estimated, for the period projected.
Purchase Area Development District Local agency that coordinates a pool of federal, state, and local funding sources to compliment existing lenders, in order to provide gap financing to new and expanding businesses. Abbreviation: PADD.
RDSee "Rural Development".
Retained Earnings Net profits accumulated in a business after dividends are paid.
Rural DevelopmentFederal agency created to support essential public facilities and services such as water and sewer systems, housing, health clinics, emergency service facilities and electric and telephone service; and to promote economic development by supporting loans to businesses through banks and community-managed lending pools. Abbreviation: RD.
SBASee "Small Business Administration".
Seasonal Loan A loan made for the purpose of meeting predictable and periodic funding needs, such as funding of camping gear inventory before summer purchases.
Small Business Administration Federal agency (SBA) created in 1953 to provide management and financial assistance to small businesses. Mainly, the SBA guarantees loans through financial institutions. The loans may be used for working capital, machinery and equipment acquisition of real estate, and expansion.
Sole Proprietorship A type of business where the owner has full control and unlimited liability. A sole proprietorship is taxed at the personal income tax rate.
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