These 25 business terms form the lingua franca of starting a business:
Accrual accounting: In this method of accounting, income, and expenses are recorded at the time they occur (such as when an invoice is created or products are ordered), whether or not money is actually received or paid. (See “Cash Accounting.”)
Angel investor: Private individuals who invest their own money in small businesses. Angels are often former entrepreneurs who have expertise in a particular industry and share their know-how as well as their capital with the companies they fund.
Balance sheet: Part of a company’s financial statements, the balance sheet provides a picture of a company’s assets (current, fixed, and intangible), its liabilities (current and long-term), and the owner’s equity in the business at any given moment in time.
Bootstrapping: Derived from the phrase “pull yourself up by your own bootstraps,” bootstrapping means financing your business from your own funds and the business’s own earnings rather than seeking outside financing from banks, non-bank lenders, or investors.
Business opportunity: An investment in a package that enables the buyer to start a business. All franchises are a form of business opportunity, but all business opportunities are not franchises.
Business plan: Used in seeking financing as well as to guide the development of a business, the business plan explains the concept behind the business, the market for the product or service, the competition and how the business plans to compete, the business’s operations, and its financials.
Cash accounting: The cash method of accounting records income when it is received and expenses when they are actually paid. This is the simplest accounting method and is often used by businesses that don’t have inventory and by sole proprietors. (See “Accrual Accounting.”)
Cash-flow statement: Part of a company’s financial statements, the cash-flow statement tracks the movement (flow) of cash in and out of a business, providing a current snapshot of available cash on hand.
Corporation:A regular (C) corporation is an independent legal entity separate from its owners. The corporate structure enables owners to protect their personal assets from liability for the business’s debts, raise capital, and retain some profits in the corporation without paying taxes.
Crowdfunding/Peer-to-peer lending: Using the Internet to solicit donations from many individuals to finance a business.
Debt financing: A type of financing that must be paid back, such as a loan from a bank, family member, or nonbank lender.
Equity financing: A type of financing that requires the entrepreneur to give up equity, or ownership, in the business in exchange for capital.
Franchise: A system in which an investor (the franchisee) pays an upfront franchise fee and ongoing royalties to a franchisor in return for access to the franchisor’s method of doing business, trademarks, and ongoing assistance.
Income statement: Part of a company’s financial statements, the income statement measures a company’s revenues and expenses over a given time period. These include sales, cost of goods sold (COGS), gross profit, operating expenses, depreciation, operating profit, other income and expenses, income taxes, and net profit before and after taxes.
Intellectual Property: Creations of the mind. In business, such things as inventions, symbols, logos, trademarks, names, images, and industrial designs are considered intellectual property.
LIFO vs. FIFO: Methods of inventory accounting. FIFO (First In, First Out) is typically used in periods of low inflation and values inventory at its most recent price by assuming the products you receive first are the ones you sell first. LIFO (Last In, First Out) is often used in periods of high inflation and assumes the products you purchased the most recently are the ones you sell first. This lets you keep older (cheaper) products in inventory so your inventory is valued less and you pay less taxes carrying it.
Line of Credit (LOC): Financial institutions may extend your business a line of credit, which sets a maximum loan amount the company can borrow. The company can draw on the line of credit as needed, as long as it doesn’t exceed the maximum limit. Interest is charged only on the amount of credit that is actually used.
Limited Liability Company (LLC): This form of business structure protects owners from personal liability (like a C Corporation) and allows income and losses to pass through to the owners’ personal tax returns (like an S Corporation).
Partnership: A legal structure in which two or more individuals own and operate a business. In general partnerships, all partners are responsible for the partnership’s debts; limited partnerships have both general partners (who are liable for the partnership) and limited partners (who contribute money but have no liability for the partnership).
S Corporation: An S Corporation provides the same protection for personal assets as a C Corporation. The major difference is that income and losses “pass through” the S Corporation and are taxed on the shareholders’ personal tax returns.
Sole proprietorship: The simplest legal form of business structure, the sole proprietorship can be used when only one person owns and operates a business.
Trade credit: Credit that one company extends to another to buy products or services. For instance, a manufacturer might deliver goods to a wholesaler and give the wholesaler trade credit for 30, 60, or 90 days; the wholesaler doesn’t have to pay until that date.
Trade secret: Without being trademarked or patented, your company’s recipes, formulas, or systems may be considered trade secrets — and protected by law — if they have monetary value to people outside your business, if they are unknown to the general public and not obvious, and if the business owner takes steps to keep the information secret.
Venture capital: Venture capital firms manage venture funds made up of investors’ money. They earn money for the investors by investing in high-growth companies with the potential for rapid, high rates of return and/or liquidity events such as initial public offerings or being sold to another company.
Working capital: The amount of liquid capital a company has available to operate its business. Working capital is determined by subtracting current liabilities from current assets.