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Starting a Business

Business Plans

 

Glossary of Terms

Asset: These include everything of value that is owned, including tangible (physical) items, like cash, accounts receivable, inventory, land, buildings, equipment, etc., and intangible (non-physical) items, like trademarks, licences, and goodwill.

Blended Payment: A loan payment, consisting of principal and interest, that is the same each month. Because the total payment amount remains fixed, the amount applied against principal each month varies. An example is a mortgage payment.

Break-Even Point: The level of sales where revenue equals total costs. A break-even point may also be expressed in terms of units of product.

Cash Flow Statement: A financial statement that shows when cash flows into and out of a business.

Cost of Goods Sold (COGS): COGS is calculated by adding all of the expenses a business incurs as a result of producing its product or service. In a manufacturing business, cost of goods sold includes labour; in a retail or service business, labour is not part of COGS, but is an operating expense.

Current Assets: Cash, accounts receivable, inventory, all term deposits and prepaid expenses or any other asset which will be converted to cash within one year.

Current Liabilities: These include all operating loans, accounts payable and accrued charges including outstanding cheques, wages, long-term debt payments and taxes that are due within a year.

Current Ratio: This ratio tells you of how easily your business can meet its debts. To calculate the Current Ratio for your business, simply divide your current assets by your current liabilities (the higher the ratio, the better for your business!).

Debt/Equity Ratio: A measure of how much debt your business has in relation to the amount of equity invested in it. A high level of debt to equity can be of concern. To support your company, you can raise money either by borrowing it (incurring a debt) or by selling ownership in the company (equity). To calculate, divide total Liabilities by Equity.

Depreciation: A charge against a fixed asset that writes off the cost of that asset over its useful life. The depreciation amount is entered as an expense in your income statement and is a non-cash expense.

Equity Contribution (Capital Stock): The cash that the owner(s) or investor has invested in the business in return for a share of ownership.

Fixed Assets: A fixed asset generally includes the land, building, and equipment / machinery that are likely to have a useful life to the company for more than one year.

Fixed Costs: This is a cost your business pays that remains unchanged, whatever your level of sales, for example, the company's monthly rent.

Fixed Rate Loan: A type of loan in which the interest rate does not change during the term of the loan.

Goodwill: An amount that represents the excess paid for a company, its shares, or other assets over its net asset value.

Gross Profit (or Gross Margin): This is the profit your company makes before considering operating and administrative expenses. It is calculated by subtracting the Cost of Goods Sold from Sales. It can also be expressed as a percentage by dividing a company's gross profits by its sales.

Income Statement: Part of the financial statements, the Income Statement looks at all revenue that a company receives from selling products or services and then subtracts the total cost of operating the company. The income statement shows how much money a company has lost or made during a certain period of time (net profit).

Incorporation: This is a process that legally makes a business a separate entity from its owners. The business operates as a corporation.

Intangible Asset (or Soft Asset): This refers to the non-physical assets your company has, like incorporation costs, patents, trademarks or goodwill.

Interest Coverage Ratio: The ratio of net income (before extraordinary items and income tax) of the business, adjusted by adding back all amounts deducted in computing the net income on account of interest and income taxes divided by the interest payable.

Inventory Turnover: This is a ratio that shows how well your inventory is selling and is an important cash driver for your business. It shows the number of times you sell your inventory in one year. You can calculate your company's Inventory Turnover by dividing the value of your inventory by your sales, and multiplying that number by 365.

Leasehold Improvement: This is an improvement made on leased premises, for example, redecorating.

Letter of Credit: This is a guarantee of payment by a financial institution to a third party. Certain conditions have to be met first and expert advice is required when using these instruments.

Leverage: This describes the amount of debt in your business, in relation to your equity. The more you use debt to finance your company, the more leveraged you are (borrowing other people's money to make money).

Liquidation Value: The amount for which an asset can be sold.

Liquidity: This describes how readily your assets can be converted into cash.

Long-Term Liabilities: These are liabilities (like loans or debts) that are not payable within one year.

Net Worth: Indicates the owner's equity in a business, calculated by deducting total liabilities from total assets. Similarly, the net worth of an individual is calculated by deducting all personal liabilities from personal assets.

Operating Loan (or Revolving Loan): Short-term financing to supply cash flow support or cover day-to-day operating expenses - including, but not limited to, accounts receivable and inventory.

Overdraft: A negative account balance caused by withdrawing more money than is available in your account.

Partnership: A form of business ownership made up of two or more people. Partners share an agreed upon percentage in the responsibility, profits, and/or losses of their business.

Payment Terms: These are the conditions you negotiate for payment of your invoices, such as "net 30" (or payment due in 30 days).

Personal Guarantee: A guarantee to the lender that you will take personal responsibility for repaying the loan or any other debt obligation.

Profit Margin: The ratio of profits (generally pre-tax) to sales. To calculate, divide pre-tax profit by sales/revenues.

Quick Ratio: This ratio measures how easily a business can raise cash by selling its most liquid assets to meet its liabilities. It is sometimes called an acid test ratio. It is calculated by subtracting your inventory from your current assets, and then dividing by your current liabilities.

Ratio Analysis: The process of calculating financial ratios for your business in order to determine trends and to compare its performance with that of other businesses in the same industry. (See Current Ratio, Debt to Equity and Gross Profit Margin.)

Receivables: Represent invoices that you have billed but have not been paid. Also known as accounts receivable, they can be listed as current assets.

Receivables Turnover: This is a ratio that shows how well your receivables are being paid and is an important cash driver for your business. It shows the number of times you collect your receivables in one year. You can calculate your company's Receivables Turnover by dividing the value of your receivables by your sales and multiplying the number by 365.

Return on Investment (ROI): ROI is commonly used as a test of a company's profitability. Investors can compare this figure to other types of investments. To calculate your ROI divide the net profits by total assets.

Sales growth: The difference between current and previous year's sales divided by the previous year's sales gives an indication of whether the business is meeting goals. Usually expressed as a percentage.

Security (often called Collateral Security): Asset(s) belonging to the business or to you personally, which are pledged to a lender in support of a loan.

Sole Proprietorship: A form of business organization in which one person is the sole owner. In effect, there is no distinction between the owner's and the business' responsibility regarding the commitments made on behalf of the business.

Tangible Net Worth: Indicates the owner's equity in a business, calculated by deducting total liabilities from total assets, less (but not limited to) goodwill, incorporation/prepaid expenses, leasehold improvements and deferred costs.

Term Loan: A loan you obtain for a specified length of time (the term is usually not greater than the useful life of the asset being financed) to purchase fixed assets like machinery, equipment and buildings, or to renovate premises.

Trade Credit: Credit a supplier gives to customers by allowing them a certain period in which to pay. An important aspect in managing your company's cash flow.

Variable Costs: Costs that change depending on the level of sales or production. These could include commissions for salespeople, sales discounts, etc.

Working Capital: The money that you actually have to work with once you have considered your liabilities. Your net Working Capital is your company's current assets, less its current liabilities (the higher the amount, the better for your business!).

Jump to
Introduction
The Team
Business Environment
Marketing Plan
Operations
Finance
Risks & Conclusions
Glossary of Terms
Business Plan: Michael's Business Centre
Business Plan: Kamiko's Fine Food
Business Plan: Christine & Denis Landscapes

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08/23/2010 11:15:26