Small Business Glossary

505 Loan Program

This is a loan that has a private sector lender senior lien on it, which covers at least 50% of the cost of a project. Alternatively, it is secured with a Certified Development Company’s junior lien that has a 100% Small Business Administration (SBA) guarantee debenture and that covers no more than 40% of the project cost, as well as including a contribution from the business that requires the loan of at least 10% in equity.

7(a) Loan Guaranty Program

One of the primary lending programs from the SBA. Small businesses that cannot get reasonable finance through regular channels can apply for it. Private sector lenders are signed up to the program and the SBA guarantees them. As such, the SBA itself does not actually lend any money, as they don’t have any for funds or grants.

A

Agency Guarantee

A commercial type of loan that has a municipal or private agency guaranty on it, which means the loan will get paid back to the lending institution.

Appraised Value

How much a product, item or business is worth according to a registered appraiser in a specific field.

Asset

All of a person’s, corporation’s, estate’s or association’s belongings after their debts have been paid.

B

Break-Even Analysis

A method used to determine what the expected profitability of a product or company is. The process works out where and when the revenues and expenditures are equal, based on variable and fixed figures. The break-even point tends to be expressed in either total revenue or number of units sold. The analysis itself measures how much risk a company is in, showing how many sales they need in order to cover all their costs. That is what is known as the ‘break-even point’, which can be expressed in dollar sales or in volume sales. Three assumptions are used in the analysis, being unit price, variable cost and fixed cost. It is important to understand that the break-even point is not the same as the payback period. The payback period describes the moment the initial investment is paid back. The payback period is what some people would usually mean when they talk about ‘breaking even’, but in financial terms, it is actually something very different.

Break-Even Point

The output that comes from performing the break-even analysis. It shows how many products a company has to sell during a certain month in order to neither lose nor make money. If sales exceeds this point, the company makes profit.

C

C Corporation

C corporations are separate legal entities at the moment they are formed. This means it is responsible for its own dealings and has to file its own taxes. An unlimited number of shareholders can be included in a C corporation and they can be any type of legal entity. However, C corporation shareholders are double taxed, as they have their own taxable income as well as the corporation’s taxable income.

Cash Flow Statement

A presentation used in accounting that shows how much of the money a business generates remains within the business after expenses, interest and finance repayments.

Certified Development Company

A non-profit company that is designed to help support the community’s economic development.

Collateral

Things of value, such as property or security, that are pledged towards the repayment of a financial obligation.

Commercial Mortgage

A loan that is issued specifically for business buildings.

Commercial Paper

A type of unsecured promissory note used by larger corporations.

Credit

Money provided to a business under the understanding that they will pay it back, with interest, over a set period of time. Often, credit is issued for specific services or goods.

Creditor

The entity that provides a small business with credit, usually a loan.

D

Debt and Equity

The sum of capital and liabilities. This addition should always equal the total assets of the business.

Depreciation

A concept used in tax and accounting that is used in order to estimate the loss of value over time in certain assets. A lot of people have a basic understanding of depreciation of vehicles, which lose a lot of their value over time.

Differentiated Target Marketing

The process that happens when a business pursues more than one market segment at the same time, generally by employing a unique strategy for each of those segments.

Differentiation

A method used in order to create a competitive edge over other businesses by increasing the value difference in the hopes that customers will appreciate it and therefore be willing to pay more for it. In so doing, their loyalty will usually also increase.

Direct Cost of Sales

A shortcut to arrive at the cost of sold goods. These usually are the cost of production and materials for the products that are sold by a business, or the calculated cost of actually fulfilling a certain service if the business does not create physical products.

E

Equity

A term used in accounting that describes how much owners or stockholders invested in a business, while looking at net worth. Additionally, it is an accounting calculation that deducts liabilities from assets, thereby showing the dollar value of a company.

Earnings Before Interest Taxes Depreciation and Amortization (EBITDA)

This is a calculation that is gross margin minus total operating expenses. Gross margin is calculated by deducting the total direct cost of sales from the total sales revenue and then adding depreciation and amortization. Total operating expenses are the taxable expenses that have been incurred through regular business operations, which includes wages, rent and so on. EBITDA is very similar to Earnings Before Interest and Taxes (EBIT), but all expenses are deducted from EBIT, including amortization and depreciation.

Economies of Scale

Lowering the average cost of a single unit by creating larger production volumes, which means fixed costs are spread over multiple units. This allows business to gain a margin advantage by offering a more competitive price. When businesses produce large volumes, they tend to generate economies of sale. This is because the cost per unit of whatever they produce drops if the volume goes up, because most vendors will charge less if the orders contain many units. Additionally, facilities and production techniques cost less if the volume of units goes up. Fixed costs are also spread over a much larger volume.

F

Fatal 2% Rule

The idea that a business has to grab at least 2% of the full market share in order to be able to be successful. It may be impossible to reach this percentage because of limited resources, poor approaches or an unfriendly industry structure.

Fighting Brand Strategy

When a new brand is added to the market in order to confront the more competitive brands in a product category that is already well-established.

First Mover

When a company tries to gain a position on the market that is privileged and unchallengeable. This is achieved by being the very first to get into a specific market.

First Mover Advantage

The advantages that a business has by being a first mover. These are generally three-fold, being reputation effect, experience curve and loyalty and commitment from customers.

First Mover Disadvantage

First mover advantages can quickly turn to disadvantages if the business is not careful. The factors most likely to cause that are resolution of technical uncertainty or of strategic uncertainty; the free-rider effect, where other businesses duplicate the success that the first rider has; or when complementary assets are used to exploit the business’ core technological expertise.

Fiscal Year

An accounting practice standard that allows the year to start in any chosen month. The years are numbered depending on the year in which it actually ends. As such, if it is decided that the fiscal year ends in March 2003, it is Fiscal Year 2003, even though the majority of the year was in 2002.

G

General Partnerships

A type of business entity whereby there are at least two co-owners who run the business for profit. Generally, they own the assets of the business together and are both liable for the debt of the business as well.

Goodwill

When a business is purchased for a value that is higher than its assets, which happens quite often. The difference is recorded as ‘goodwill’, which is a type of asset. It is not, however, a term that expresses the value of a brand in itself, but rather a term used specifically within accounting.

Gross Margin

The difference calculated by deducting the total cost of sold goods (also known as ‘total cost of sales’) from the total sales revenue. This is sometimes expressed on a per unit basis, as the difference between the selling price of a unit and the cost of sold goods. Gross margin can be recorded in percentage terms or in dollar value.

Gross Margin Percent

This is a calculation in which the gross margin is divided by sales, which is expressed in percent. The acceptable level of gross margin percent depends on the type of business. Some providers are able to deliver standard gross margins for a range of different industries, basing this on SIC (Standard Industry Classification) codes that are used in those industries.

H

Harvesting

This term is used when a product line or a business is sold. It can also refer to the sales of a product line or individual product when its life cycle has completed.

I

Income Statement

Some refer to this as the ‘profit and loss statement’. It is essentially a financial statement on which sales, cost of sales, operating expenses, gross margin, losses and profits have been recorded. As a calculation, the cost of sales are deducted from the sales. Profit (or loss) is a calculation in which the expenses and taxes are deducted from the gross margin. If that number is positive, it is a profit, but if it is negative, it is a loss.

Initial Public Offering (IPO)

These are the initial efforts made by a corporation to try and raise capital by selling securities on the stock market, which are publicly accessible.

Innovation: Evolutionary or Revolutionary

Innovation means that there is a concept that is either new or improved. When it is taken to a new level, it is known as evolutionary. If the innovation is truly rare and totally reinvents a product, service or concept, it is known as revolutionary.

Innovators

It describes the first group of people to buy or invent a new service or product.

J

Jobber

A type of intermediary who purchases from producers and aims to sell to retailers. A jobber will offer a range of different services in order to achieve this.

L

Liabilities

The total debt that a company owes, including accounts payable and bank loans.

Limited Liability Company (LLC)

A very specific type of company that offers an alternative to corporations and partnerships, by essentially combining the partnership advantage of pass-through taxation (which means that earnings are taxed just once) with the corporate advantages of entering into a limited liability agreement.

Limited Partnership

A setup in which at least one ‘general’ partner runs the company, while ‘limited’ partners share in the profits by contributing capital. The general partner is personally liable for the debts and risks of the company, but limited partners do not have any liability in terms of the partnership other than providing their capital.

Line of Credit

A type of revolving credit in which funds that have been paid back can be used again. Usually, this is only possible for a set period of time.

M

Marketable Securities

Bonds and stocks that are sold on the open market, such the New York Stock Exchange (NYSE), for instance. It means that a sale is readily available.

Maturity

This applies to loans and describes the date on which they become due.

N

Net Worth

The assets (owned properties), minus obligations and debts (liabilities) owed. This is the equity, or net worth of an owner.

Non-Profit

An entity that does not pay dividends or issue shares. Additionally, it comes under Federal Tax Code Section 501 (c)(3), which means that it is eligible for a number of state and federal tax exemptions. Additionally, on dissolution, the organization must transfer any assets it still has to a different non-profit organization.

O

Obligations Incurred

The expenses or costs of a business that have to be paid, but remain stagnant as ‘accounts payable’ for some time, instead of being immediately paid.

Offering

All of the satisfaction or benefits that are provided to target markets by a type of business. An offering is an actual product or a service, as well as any related services like repair, installation, guarantees or warranties, technical support, packaging, field support and so on.

Offering Mix or Portfolio

All of the offerings within a business, which include all of their services and their products.

Operating Expenses

The expenses that are incurred through regular business operations. These can include such things as salaries, wages, research and development costs, administrative costs and so on. However, taxes, depreciation and interest are not included in operating expenses.

P

Partnership

It is quite difficult to describe a partnership because they are anything but stagnant. Various state laws govern them, although most states now follow the Uniform Partnership Act. The act, however, only determines that the partnership agreement is the true legal core of the partnership itself. This means that the other legal details can vary. Generally speaking, the losses and income of a partnership pass through to the partners without them having to pay a partnership tax. The agreements can look at such things such as levels of risk, which is why it is possible to have both general and limited partners. In these cases, different partners have different levels of risk. Within the agreement, it should also be clear what would happen in the event one partner withdraws, what the buy and sell arrangements are, and how the liquidation arrangements have been set up. It is very important to set up a partnership properly by seeking legal assistance from a highly experienced attorney. This is because the chances of something going wrong and causing irrevocable problems within partnerships are high.

Payables

Usually used to describe Account Payables, which are the bills that have to be paid as part of the standard business operation. Payables is used all across accounting to describe the most common liability. It usually enters the balance sheet under ‘liabilities’. When a business receives services or goods from someone else and get an invoice for this, the invoice will be paid and then entered under ‘accounts payable’.

Payback Period

The length of time that is required for a business to earn back its original investment. This could be for the full business operation, or a specific project.

Payment Days

The average number of days that will pass between the receipt of an invoice and its payment. This isn’t as simple as making an estimate. Rather, it uses a financial formula.

Q

Questionable Costs

The types of costs that can be either fixed or variable, depending on the type of situation they are found in.

R

Receivables

This generally refers to ‘Account Receivables’. These are the debts that are owed to a business, usually from sales that were provided on credit. Receivables are a type of asset and represent the total amount of money that is owed to you through upcoming payments. As a standard, when services or goods are delivered, they come with an invoice and a set payment date in the future. Customers expect things to go this way, and the business expects the invoices to be paid on time. The invoice will be entered as ‘accounts receivable’ in the business’ book and as ‘accounts payable’ in the customer’s book.

Receivables Turnover

The amount of sales that have been made on credit during a set period of time, divided by the average balance of the accounts receivable.

Regional Marketing

Using different types of marketing techniques and strategies in order to be able to reach personal and unique preferences as well as competitive conditions on a variety of geographical areas.

Relevant Cost

The expenditures that a business expects will occur in the future because of a type of marketing action. It is different from any other type of possible marketing alternative.

S

S Corporation

An S corporation is similar to a C corporation because it is its own legal entity and because it prevents its shareholders from having an legal liability. It also requires some yearly maintenance. However, there is a big difference whereby shareholders in an S corporation are able to claim the income they earned through their share of the corporation on their personal tax return. This means they do not have to pay double taxes. In most cases, there is a limit on the amount of shareholders an S corporation can have.

Service Corps of Retired Executives (SCORE)

This is a volunteer association with over 10,000 members and is sponsored by the SBA. SCORE matches present prospective small business owners to volunteer business-management counselors. This way, all small businesses can receive expert advice.

Small Business Administration (SBA)

This is a governmental organization that counsels, aids, protects and assists small businesses and their concerns and interests. They also advocate on behalf of small businesses within the government.

Sole Proprietor

This is not a separate entity. Rather, it is an individual who fully owns a business and is thereby fully responsible for its debts as well.

T

Term Loan

A loan that has been provided over a specific time period, such as 60 months, that requires monthly payments on both interest and the loan principal.

Time Loan

A type of loan that has been issued for a set period of time, usually with both principal and total interest due when it matures.

U

User Interface (UI)

The graphic design of a website and how it appears to people who use it on a browser website. Ultimately, a website’s UI is what users get to see and how they find out what a business offers them. If it is not designed for easy navigation, users will find themselves lost and unable to find the information they need. As such, having a proper UI in place is vital to the success of a small business, particularly if they operate online.

Unique User Sessions

This is a term used specifically in online marketing, whereby it is tracked and calculated how many unique visitors actually make requests on the service, known as log analysis, or how many pages they view, known as page tagging. One visit can make more than one visit.

Unit Variable Cost

The specific materials and labor that are associated with creating one unit of goods that are sold. This does not include the unit’s general overhead.

Unit Break-Even

The sales volume of a unit whereby the variable and fixed costs equate exactly to the sale. A specific formula is used to calculate this.

V

Valuation

This describes the worth of a business. For instance, a company’s valuation can be $20 million. In this case, the company is worth $20 million. In most cases, the term is used in order to determine whether or not a company would make a good investment. In this case, the valuation is the price of a single share multiplied by the number of outstanding shares. The price of a share, meanwhile, is the total valuation of the company divided by the number of outstanding shares.

Value

The ratio of the possible or intended benefits of a product or service compared to its price.

Variable Cost

A cost that changes depending on how many units are produced. This is best explained by looking at the physical cost of any unit that is sold, direct costs like materials, the products that have been purchased to be sold again, the costs of production, the overhead and so on. Variable cost is a very important part of calculating the risk of a company. In general, less risk is associated with variable costs than with fixed cost. This is because variable costs are only incurred if sales are actually made or production is actually started on a product.