It’s important that you properly speak the language of business. Imagine someone talking about football and they say, “and then he hit a homerun…” Perhaps this person doesn’t really understand football?!?
Accounts Payable • A current liability representing the amount owed by an individual or a business to a creditor for merchandise or services purchased on an open account or short term loan. Accounts Payable is one of the most common liabilities which normally appear in the Balance Sheet listing of liabilities.
Accounts Payable Days • This is the number of days, on average, that you take to pay your suppliers. One method to estimate this is to take your accounts payable balance at the end of the year divided by your total cost of goods sold for the year.
Accounts Receivable • The money that is owed to your company for goods and services provided to customers on credit. The accounts receivable amount is an asset of your company and is listed on your Balance Sheet.
Accounts Receivable Days • This is the number of days, on average, that it takes to collect payment for your sales. It is also referred to as Days of Sales Outstanding.
Accrual Basis Method • A way of determining when income and expenses are computed for tax purposes. This method recognizes income and expenses when they actually occurred or wee rendered, rather than when the payment was made.
Accumulated Depreciation • The total depreciation taken for an asset since it was placed in service. Also known as life-to-date depreciation and depreciation reserve. Accumulated depreciation is an account in the asset section of the balance sheet that s
Acid Test • A ratio of the ready-cash items like cash, accounts receivable, and marketable securities, to the current liabilities of a company. Acid Test ratio is a test of a company’s ability to meet its immediate cash requirements.
Acid-Test Ratio • See also “Quick Ratio.”
Advertising Opportunity • A product or service may generate additional revenue through advertising if there is benefit from creating additional awareness, communicating differentiating attributes, hidden qualities or benefits. Optimizing the opportunity
Agent • A business entity that negotiates, purchases, and/or sells, but does not take title to the goods.
Amortization • The process of reducing principal and interest in equal installment payments at specific intervals over a set term. Such payments must be sufficient to cover both principal and interest. Writing off an intangible asset investment over the projected life of the assets.
Asset • An item of value owned by a business or individual, whether or not there is another claim on the item.
Asset • Anything having commercial or exchange value that is owned by a business, individual, institution, or government. Assets are any possessions that have value in an exchange. The primary classifications of assets are: current assets, long-term assets, prepaid and deferred assets, and intangible assets.
Asset Turnover • Sales divided by total assets. Asset turnover is important for comparison over time and to other companies of the same industry. Asset turnover is a standard business ratio.
Available Credit • The amount of open but unused lines of credit. Too much Available Credit can negatively impact a person’s Credit Score.
Balance Sheet • The Balance Sheet statement presents a projection of your financial position at the end of each month in the first year; At the end of each quarter for years 2-3; And at the end of each year for years 1-5. (The calculation begins on the month and year you entered in the “Budget Assumptions” section.) This encompasses everything a company owns (Assets), owes (Liabilities) and the equity of the owner(s). Assets must equal Liabilities. Some say/think/feel that this financial statement shows the value of a business at a particular point in time—a good investment banker or business broker will show you how your business can be worth a lot more.
Bankers • Provide loans for equipment and expansion. They’re lending money deposited by people who have been guaranteed to get it back, with interest. The money was deposited with the idea that there is little risk, so bankers won’t risk it.
Beginning Month & Year • These cells establish the dates for the assumptions sections and financial statements. Replace the sample month value by entering a number between 1 and 12 that represents the first month of your budget period (1=January, 2=February ,…). Replace the sample year value by entering the year in which your budget period begins (you may enter the year as four digits, such as 2005, or as two digits, such as 05).
Benchmark • A standard or guideline used to compare some aspect of a business to some objective or external standard measure.
Billable Hours • The number of hours per period (such as a year or month) that a company expect to be working at the client’s expense.
Book Value • T he original purchase price of a Capital Expenditure minus accumulated Depreciation. Long Term Assets are listed on a Balance Sheet at Book Value.
Brand Equity • T he added value a brand name identity brings to a product or service beyond the functional benefits provided.
Brand Recognition • The customer’s awareness that a brand exists and is an alternative to purchase. Brand recognition also establishes a certain perception in the customer’s mind as to the quality, characteristics and mindset of the people behind the products or company. Brand recognition is a process whereby a firm has to develop enough publicity for a brand that its name is familiar to and how it is perceived by consumers.
Break-Even Analysis • This analysis determines at what point revenues equal expenditures based on fixed and variable expenses. It is a standard financial analysis that measures general risk for a company by showing the sales level needed to cover both fixed and variable costs. The Break-Even Analysis presents a summarized projection of revenues, fixed costs, and variable costs (beginning on the month and year you entered in the “Budget Assumptions” section), and calculates the monthly Contribution Margin, Break-Even Sales Volume, and Sales Volume Above Break-Even for both Income from Operations and Net Income After Taxes. This statement is usually used as an internal tool to anticipate the effect that sales volume increases or decreases will have on your income stream.
Break-Even Point • The point of activity at which a company earns zero profit. It is reached when total revenue equals total expense—the level of sales whereby you are neither making a profit nor incurring a loss. Break-even point is a combination of sales and costs that will yield a no-profit, no-loss situation and is also known as Break-Even Sales.
Break-Even Pricing • Pricing at a level that will enable a firm to break even.
Break-Even Volume • This determines the point of sales and production at which you are neither earning a profit nor incurring a loss.
Broker • An intermediary that serves as a go-between for the buyer or seller.
Budget • The Budget statement presents a projection of revenues, cost of goods sold, and detailed operating expenses for years 1-5 (beginning on the month and year you entered in the “Budget Assumptions” section). In year 1, the budget is calculated monthly; Quarterly for years 2 and 3; Annually for years 1-5. This statement calculates the percentage of Total Sales each sales item represents, and the total amounts for Sales, Gross Profit, Income From Operations, and Net Income After Taxes, as well as totals for each operating expense category in the time period.
Budget Assumptions • The Budget Assumptions section allows you to enter the first month and year for your budget period, and to estimate each revenue and expense item that is included in the first year’s budget. This assumptions section also allows you to specify the label you want to use to identify year 1 on the financial statements (see Projection Methods). The results of these assumptions will be displayed in the “Gross Profit Analysis” and “Budget” statements located on separate worksheets in the “Integrated Financials.”
“Burn Rate” of Cash • The net amount of cash you spend every month.
Business Brokers • Agents who can assist you in the selling or purchasing of a business.
Business Cycle • (also called the Operating and Cash cycle) begins when you purchase raw materials or inventory and ends when the inventory is sold and the cash collected. Depending on the nature of your business, this may take a few days to a year or more.
Buy-sell Agreement • an agreement designed to address situations in which one or more of the entrepreneurs wants to sell their interest in the venture.
CAGR or Compound Annual Growth Rate • The year over year growth rate applied to an investment or other aspect of a firm using a base amount.
Cannibalization • The term used for the undesirable tradeoff where sales of a new product or service decrease sales from existing products or services and minimize or detract from the total revenue contribution of the organization.
Capacity • The ability of your present facility to produce your product or deliver your service, and how your product plans affect manufacturing schedules or affect the way production is currently done.
Capital expenditure • The spending on capital assets like plant and equipment or fixed assets, or long-term assets. Usually capital expenditures may not be deducted in the year they are paid, even if they are paid in connection with a trade or business.
Cash Basis Method • A way of determining when income and expenses are computed for tax purposes. This method recognizes income and expenses when the payment was made rather than when the items occurred or were rendered.
Cash Flow Projection • A monthly forecast of the cash (checks or money orders) a business anticipates receiving and disbursing. Cash Flow Projection is useful in anticipating the cash portion of a business at specific times during the period projected.
Cash Flow Statement • A summary of the inflows and/or outflows of the business over a period of time. Cash flow statement is divided into 3 sections, namely, operating cash flow, investment cash flow, and financing cash flow.
Cash Flows Statement • The Cash Flows statement, also called a Statement of Changes in Financial Position, presents a projection of your sources and applications of cash (beginning on the month and year you entered in the “Budget Assumptions” section). In year 1, the statement is calculated monthly; Quarterly in years 2 and 3; Annually for years 1-5. This statement calculates the monthly net increase or decrease in Cash, and annual totals for each cash source and application.
Channel Conflicts • Situations where one or more channel members believe another channel member is engaged in behavior that is preventing it from achieving its goals. Channel conflict most often relates to pricing issues. Do you sell your products through retail stores as well as directly from your own website or through your own sales reps?
Channels of Distribution • A system whereby customers are provided access to an organization’s products or services. Retail, Direct, Multi-Level, Online, OEM
Commercial Finance Company • a company that makes business loans for equipment collateralized by the equipment itself. Interest rates at a Commercial Finance Company are typically higher than at a bank.
Company Description • A section in a business plan that describes the company’s current situation and overall big picture. Describes your business, its name, legal organization, location and sites, and type of business you are in. It also describes the current state of your business; new, existing, etc.
Competitive analysis • the process of assessing and analyzing the comparative strengths and weaknesses of competitors; may include their current and potential product and service development and marketing strategies.
Consumer Finance Company • a company that makes small personal loans secured by collateral, such as a car title. Interest rates are typically higher at a consumer finance company than a bank.
Contribution Margin • This value represents the excess of total revenue over total variable costs, reflecting the sales dollars available to pay for fixed costs or provide a profit.
Contribution Margin Percentage • Shows the percent change in income as a result of changes in sales and expressed as a percentage. Calculate sales minus the variable costs associated with those sales. Divided sales are expressed as a percentage.
Controller • An executive officer whose job embraces the audit functions of the business. The person who’s responsible for managing the company’s operations. Part of this task is the comparison of the company’s actual performance to its projected performance.
Core marketing strategy • a statement that communicates the predominant reason to buy to a specific target market.
Corporation • A business incorporated under the laws of a state or other jurisdiction. Corporations are recognized as entities unto themselves separate and distinct from the owners. They have limited liability so owners cannot be sued for the debts of the business unless they have personally guaranteed those debts. Therefore, the only potential loss to owners is the investment. An S-Corporation has the same legal liability properties as a C-Corporation and the shareholders must vote or elect to become an S-Corporation. S-Corporations are owned by shareholders, shares may be sold or transferred. They are separate legal entities and organized under state law. An S-Corporation differs from a C-Corporation in regard to a few tax considerations.
Corridor Principal • the principal where an entrepreneurial venture may find that it has significantly changed it’s focus from the initial concept of the venture as it has continually responded and adapted to it’s market and the desire to optimize profit
Cost of goods sold • traditionally the costs of materials and production of the goods a business sells. For a manufacturing company COGS is materials, labor, and factory overhead. For a retail shop COGS would be what it pays to buy the goods that it sell
Cost of Goods Sold-Fixed COGS Allocation • These are the various costs to the manufacturer/service provider in order to produce the finished good/service. These costs include Labor (the human effort required in production and operation); Material (the physical materials used in production); Fixed Costs (those production factors whose price does not change).
Cover Letter • The cover letter asks permission to introduce yourself, your business and your plan to the prospective evaluator of your business plan.
Credit – the 5 “C”s • Credit history, Capacity, Character, Cashflow and Collateral, used by bankers when evaluating a loan request package.
Credit Score • a number calculated to reflect the likelihood of a particular person meeting their debt obligations. A Credit Score is reported to potential lenders when they review the credit report.
Current Assets • includes cash, securities, bank accounts, accounts receivable, inventory, business equipment, assets that last less than five years or are depreciated over terms of less than five years.
Current Liabilities • The money owed by a business that must be paid within one year such as Accounts Payable and Loan Principal and Loan Interest that is due within one year.
Current Ratio • It is your total current assets divided by your total current liabilities; these values come from your balance sheet. Your current ratio indicates your ability to pay your current debt out of your current assets. Although it varies from industry to industry, a general rule of thumb is that a current ratio of 2 to 1 or greater is fairly healthy.
Current Ratio • Measures the business’ ability to meet obligations that are coming due soon such as payments to suppliers or taxes. Current ratio is derived by dividing current assets by current liabilities. Current ratio is particularly useful as an early warning signal of an impending cash crisis.
DBA or Doing Business As • A company name, also commonly called a “Fictitious Business Name.”
Debt and Equity • The sum of liabilities and capital. Debt and equity should always be equal to total assets.
Debt to Assets Ratio • Total liabilities divided by total assets. The Debt to Assets Ratio is a measure of the riskiness of a business.
Debt to Net Worth Ratio • Also called Debt to Owners’ Equity, this ratio compares the total liabilities of your business to your net worth.
Demographic Information • The data about the company’s existing and potential customers such as age, income, ethnicity, family size, etc. that can be used to design targeted marketing strategies. The US Census Bureau is a prime source of Demographic Information.
Depreciation • an accounting and tax concept used to estimate the loss of value of assets over time.
Dictionary of Occupational Titles • A publication from the Department of Labor that has descriptions and details about various job titles.
Direct Costs • The costs that are directly related to production and change with the level of sales such as costs for Raw Materials (for a manufacturer) or Inventory bought for resale (for a retailer). Also known as Variable Costs.
Direct Marketing • any method of distribution that gives the customer access to your products and services without intermediaries (800# directly to your salespeople, buy factory-direct); also, any communication from you that communicates with your market to generate a sales-producing response.
Diversification • a product-market strategy that involves the development or acquisition of offerings new to the organization and/or the introduction of those offerings to the target markets not previously served by the organization.
Diversification Goal • An existing business moves into totally new and different markets.
Dividends • the money distributed to the owners of a business as profits.
Earnings • the amount of profit a company realizes after all costs, expenses and taxes have been paid. Earning is calculated by subtracting business, depreciation, interest and tax costs from revenues. Earnings are the supreme measure of value as far as
EBITDA • earnings before interest and taxes. EBIT is calculated by subtracting costs of sales and operating expenses from revenues. EBIT is often used to gauge the financial performance of companies with high levels of debt and interest expenses.
Economies of Scale • per unit cost savings that increase as the number of items produced increases. As the number of units produced increases, Fixed Costs remain the same; therefore, the currency amount added to each unit to recover Fixed Costs is reduced.
Ending Balance • the amount of cash left over at the end of the month on a Cash Flow Statement, after all cash outflows have been subtracted from the total inflow of cash. Ending Balance always equals the Opening Balance of the next month.
Equity • Money you personally invested in the company plus profits. Also defined as the value that is left after liabilities are subtracted from assets.
Equity • the value of the owner’s investment in the business. On the Balance Sheet, Equity is calculated by subtracting Total Assets from Total Liabilities and is written on the liability side of the Balance Sheet.
Equity Investor • A person who invests money in a business and in return receives part ownership of the business. An Equity Investor would be compensated in the form of Dividends and/or when he later sells his ownership stake at a profit.
Excess Capacity, Use of • A company’s use of resources that are currently under-used or idle in order to improve it profits.
Exclusive distribution • A distribution strategy whereby a producer sells its products or services in only one retail outlet in a specific geographical area.
Executive Summary • A generalized synopses of the entire business plan.
Executive summary • A synopsis of the key points of a business plan. The executive summary is not simply a background statement, nor is it an introduction. Executive summary is in a sense the business plan in miniature. Investors are willing to read this much to determine whether or not they want to move forward with your project.
Exit/Payback Strategy • A description that tells your investors how and when you will be able to pay them back. It must be backed up by your financial projections. It tells your potential investors how they can turn their investment back into cash.
Experience Curve • A visual representation, often based on a function of time, from exposure to a process that offers greater information and results in enhanced efficiency and operations advantage.
Factoring • The process of purchasing commercial accounts receivable (invoices) from a business at a discount.
Fatal “1%” Rule • The concept according to which if a venture can just get “1%” of total market share it will be successful. This percentage can be unattainable based on the approach, limited resources, and/or structure of the industry. Saying this indicates that you have not really researched your market and projected a realistic market share.
Fictitious Business Name • “DBA or Doing Business As.”
Fictitious Name • Also called a Doing Business As (DBA) name. Any name, other than your own, by which your business is called.
Financial Plan • The section of your Business Plan that states your business assumptions, points to and highlights your projections, and provides data on your overall financial picture. Summarizes all the financial data from your financial statements. Includes analysis and supporting spreadsheets or other suitable descriptions of your business and your capital requirements.
Financial Projection • Conclusions based on future business assumptions and research rather than on actual historical data generated by your business. Also called Pro Forma statements.
First-Mover Advantage • Having a leadership position in a market by virtue of having been one of the first companies in the sector. Key first-mover advantages includes reputation effect, experience curve and customer commitment and loyalty.
First-Mover Disadvantage • “The second mouse gets the cheese.” Arises when costs of pioneering are sizable and loyalty of first time buyers is weak. First mover disadvantages includes resolution of technological uncertainty, resolution of strategic uncertainty, Free-rider effect – others duplicating your work
Fiscal Year • A period of 12 consecutive months without regard to the calendar year. The fiscal year is designated by the calendar year in which it ends. The federal government’s fiscal year begins October 1 and ends September 30. The fiscal year carries
Fixed Assets • Assets of a long-term character which are intended to continue to be held or used, such as land, buildings, machinery, furniture, and other equipment. Fixed assets are normally represented on the balance sheet at their net depreciated value.
Fixed Costs • The running costs that are usually considered to keep the business open: usually rent, overhead (utilities, services, some salaries)—Expenses that you must pay regularly regardless of producing and selling your product or services. Technically, fixed costs are those that the business would continue to pay even if it went bankrupt.
Full-Cost Price Strategy • meant for the costs that consider variable and fixed cost (total cost) in the pricing of a product of service.
Future Value Projections • The process of projecting the future value of a venture and/or an investment in the venture. Future value projections typically considers an expected rate of return, inflation, and the period of time to assess future value.
General Partnership • An ownership arrangement in which every partner is fully responsible for all debts and contracts. Unless otherwise specified in the partnership agreement, the partnership dissolves immediately upon death, insanity or insolvency of any one partner. Every partner is fully responsible for all debts and contracts of the partnership.
Goals • The necessary levels of achievement that must be met to achieve a company’s mission.
Goodwill • Any advantage, such as a well-regarded brand name or symbol, that enables a business to earn better profits than its competitors. Goodwill generally is calculated as the purchase price for a company over the fair market value of
Gross Profit • Revenue minus the cost of raw materials used to manufacture the items that were sold; or Revenue minus the cost of buying items for re-sale. Gross Profit is calculated for each individual item sold and for the business as a whole.
Gross Profit Analysis Statement • The Gross Profit Analysis presents a projection of revenues and costs of goods sold by sales item for years 1-5 (beginning on the month and year you entered in the “Budget Assumptions” section). In year 1, the analysis is calculated monthly; Quarterly for years 2 and 3; Annually for years 1-5. This analysis calculates the gross profit for each sales item by subtracting the costs for Material, Labor, and Fixed Cost of Goods & Services from the sales for each item in the corresponding time frame. (The Fixed Cost of Goods & Services are allocated to each sales item based on the percentages you entered in the “Fixed COGS Allocation” assumption section.)
Gross Profit Margin • A measurement of a company’s manufacturing and distribution efficiency during the production process. Gross Profit Margin can be calculated by dividing gross profit by total revenue.
Gross Profit Margin • The dollar difference between net sales and the net cost of goods sold during a stated time frame. Gross margin percentage is calculated by dividing net sales into this figure.
Guerrilla Marketing • Refers to unconventional marketing techniques for achieving maximum results from minimal resources—many things you can do yourself with hiring anyone or spending much money. A great book: Guerrilla Marketing by Jay Conrad Levinson.
Harvesting • Refers to the selling a business or product line, as when a company sells a product line or division or a family sells a business. Harvesting is also occasionally used to refer to sales of a product or product line towards the end of a product
Ideas versus Opportunities • Means that the ideas are the basis of potential business opportunities. Good ideas do not necessarily represent good opportunities.
Income from Operations • Can be calculated as gross profit minus operating expenses such as labor, rent, utilities, etc.
Income Statement (Profit & Loss Statement) • A financial statement that shows sales, cost of sales, gross margin, operating expenses, and profits or losses.
Income Statement • The Income Statement presents a projection of revenues, cost of goods sold, and summarized operating expenses (beginning on the month and year you entered in the “Budget Assumptions” section). In year 1, the statement is calculated monthly; Quarterly in years 2 and 3; Annually for years 1-5. This statement calculates the percentage of Total Sales each sales item represents, and the total amounts for Sales, Gross Profit, Income From Operations, and Net Income After Taxes, as well as totals for each operating expense category in the time period.
Indirect Costs • Costs related to expenses incurred in conducting or supporting research or other externally-funded activities but not directly attributable to a specific project.
Insolvency • The inability to pay one’s debts as they mature. Even though the total assets of a business might exceed its total liabilities by a wide margin, that business is said to be insolvent if the assets are such that they cannot be readily converted into cash to meet the current obligations of the business as they mature.
Insolvent • An individual who has ceased to pay his or her debts, or is unable to pay such debts, as demanded by creditors.
Interest Payable • The portion of Loan Interest that is due within the next year. Interest Payable is a Current Liability.
Inventory • A company’s merchandise, raw materials and finished and unfinished products which have not yet been sold.
Inventory • The name given to an asset of a business. Inventory is of two general types (A) Direct inventory consists of raw materials, work in process and finished goods. (B) Indirect inventories, in general, are all supplies used to carry on the business and not purchased for resale.
Inventory Turnover • Total cost of sales divided by inventory. Inventory turnover is usually calculated using the average inventory over an accounting period, not an ending-inventory value.
Investors • An individual whose principle concerns in the purchase of a security are regular dividend income, safety of the original investment, and, if possible, capital appreciation.
Jobber • An intermediary that buys from producers to sell to retailers and offers various services with that function.
Legal Form of Business • A description of how a business is owned, its legal liability with regard to creditors and taxes, and what agencies or regulations it is governed by. Forms of business include proprietorship, partnership, corporations and more.
Liability • A financial obligation, debt, claim or potential loss. Usually debt on terms of less than five years is called short-term liabilities, and debt for longer than five years in long-term liabilities.
Life Cycle, Product • There are four cycles or stages of product viability: (1) introduction, the stage where the new product is originally made available for sale; (2) growth, where product sales and marketing are expanding; (3) maturity, steady, predictable performance; and (4) decline, where sales decline at end of useful product life.
Limited Liability Company (LLC) • LLCs are a hybrid form of business. They provide the equivalent tax benefits of a Limited Partnership and the equivalent protection of a C-Corporation or an S-Corporation. LLCs can only be privately held companies.
Limited Partner • A member of a partnership who is not personally liable for incurred debts of the partnership. By law, at least one partner must be fully liable. Only the general partners have any decision-making authority or any type of input as to the operation of the business. The limited partner contributes capital only and cannot participate in the running of the business.
Liquidity • A company’s ability to meet current obligations with cash or other assets that can be quickly converted to cash. Liquidity is one of the most important characteristics of a good market. Liquidity also refers to how easily investors can convert their investment into cash.
Loan Interest • The expense of borrowing money. A total loan payment would consist of Loan Interest plus the repayment of Loan Principal.
Loan Principal • The original amount of money borrowed
Long Term Assets • Assets like plant and equipment that are depreciated over terms of more than five years, and are likely to last that long, too.
Long Term Liabilities • The amount owed for leases, bond repayment and other items due after 1 year.
Loss • An accounting concept, the exact opposite of profit, normally the bottom line of the Income Statement, which is also called Profit or Loss statement. Start with sales, subtract all costs of sales and all expenses, and that produces profit before t
Management Team • Provides the leadership for your business and must include combined strength in both management and technical areas. The management team should be selected for complementary talents rather than overlapping or duplicate skills.
Manufacturability • The feasibility of your company to produce your product. This includes factors such as availability and training of labor, appropriate materials and machines, sufficient finances, availability of supplies, and suitability of site.
Market Analysis • Explains what market you are targeting and the characteristics of that market; what segment you may focus on, its size, its potential, its projected growth, and cur-rent and future competition.
Market Expansion Goal • The market share you hope to attain for your existing product or service in an existing market.
Market Maintenance Maintaining your status quo in the existing marketplace.
Market Penetration • Marketing strategy that increases market share among existing customers. A means of reaching a specific market by offering an existing product to an existing market or offering a new or improved product to an existing or similar market. May also be defined as a measurement showing the percentage of possible customers who are current customers?
Market Segmentation • The categorization of potential buyers into groups based on common characteristics such as age, gender, income, and geography or other attributes relating to purchase or consumption behavior.
Market Share • The total sales of an organization divided by the sales of the market they serve.
Marketing Plan • A written document containing description and guidelines for an organization’s or a product’s marketing strategies, tactics and programs for offering their products and services over the defined planning period, often one year.
Marketing Plan • Based on your market analysis, explains your strategy for reaching your customers. Their demographics, why they will want to do business with you, your sales goals and your promotional plans.
Marketing-Cost Analysis • Assigning or allocating costs to a specified marketing activity or entity in a manner that accurately captures the financial contribution of activities or entities to the organization.
Mission • A brief description of an organization’s purpose with reference to its customers, products or services, markets, philosophy and technology.
Mission Statement • A statement that captures an organization’s purpose, customer orientation and business philosophy.
Net Income • The remains from earnings and profits after all costs, expenses, and allowances for depreciation and probable loss have been deducted.
Net Profit • The excess of all revenues over all costs and expenses incurred to obtain the income in a given enterprise during a given period of time. A specific net profit percentage can be used as the driving force of the marketing program in a company.
Net Profit • The operating income less taxes and interest. Net profit is same as earnings or net income.
Net Profit Margin • A ratio comparing net profit after taxes to revenue. Investors can calculate the net profit margin by using the income statement. Net profit margin is calculated by dividing income before extraordinary items by total revenue and multiplying by 100.
Net Worth • The amount by which total assets exceed total liabilities. Also known as shareholder’s equity or book value, net worth is what would be left over for shareholders if the company were sold and its debt retired.
Non-Disclosure Agreement • A document signed by an evaluator of your business plan to protect your company, ideas, assets and competitive position from inappropriate use of your confidential information. The nondisclosure statement is a legally binding agreement to not reveal information about the business.
Objectives • Those specific and measurable actions that result in the attainment of a particular goal. You may have one or many goals, each of which require the completion of objectives.
OEM • Original Equipment Manufacturer. An example of OEM sales are a tire company selling their tires to a car manufacturer—the product is sold as a component part of another company’s product.
Opening Balance • The amount of cash on-hand at the start of each month before any sales have occurred or any other inflow of cash on a Cash Flow Statement. The Opening Balance is always equal to the previous month’s Ending Balance.
Operating Expenses (aka Overhead) • The expenses incurred by the business that are not directly related to production such as utilities, salaries, office supplies, etc. Operating Expenses do not necessarily change when the business’ level of production rises or falls. Operating e
Operating Income • The profit realized from the day-to-day operations of the business. Operating income is net sales less direct and indirect operating costs and before deducting cost of capital, extraordinary items and taxes.
Opportunity Analysis • The process of identifying and exploring revenue enhancement or expense reduction situations to better position the organization to realize increased profitability, efficiencies, market potential or other desirable objectives.
Outsourcing • The process of subcontracting operations and support to an organization outside the company to replace performance of the task with an organization’s internal operations.
Partnership • A legal form of business defined as an association of two or more persons to carry on as co-owners of the business for profit.
Percentage Analysis • Comparison of your company’s performance to other companies in your industry, and to your own business’ performance over time. Although a direct dollar for dollar comparison can be impractical, percentage comparisons are very useful.
Personal Financial Statement • A balance sheet summarizing your personal financial position. It may also present specific information about your savings accounts, credit accounts, securities and other personal financial details. Often requested of the CEO and possibly other top management of a company by investors.
PEST Analysis • A technique for identifying and listing the political-legal, economic, socio-cultural and technological factors in the general environment most relevant to an organization at that time. PEST analyzing is often used for generating marketing ideas, product ideas, etc.
Positioning • Devising an organization’s offering and image to occupy a unique and valued place in the customer’s mind relative to competitive offerings. A product or service can be positioned on the basis of an attribute or benefit, use or application. Avis is #2 therefore they “try harder.”
Premium • A product-oriented promotion that offers some free or reduced-price item contingent on the purchase of advertised or featured merchandise or service. The term Premium is also used for the amount payable for an insurance policy.
Price Elasticity • The measure of how price sensitive demand for a product is. If demand is elastic, unit sales fall sharply as the price of the item is increased, leading to an overall decrease in sales revenue. If demand is inelastic, unit sales may still fall when the price is increased but total sales revenue will rise. Alternatively, in a market where demand is inelastic, a price reduction will not lead to a sharp rise in unit sales and therefore overall profit will be less.
Pro forma Income Statement • A projected Income Statement. Pro forma in this context means projected. An income statement is the same as a profit and loss statement, a financial statement that shows sales, cost of sales, gross margin, operating expenses,
Pro Forma Statements • the financial statements that project the results of future business operations. Examples include a pro forma balance sheet, a pro forma income statement, and a pro forma cash flow statement.
Product / Service Strategy Section • The section of your business plan that describes what you sell, your products and services, both in the present and in the future. Includes information such as why your product and/or services will be successful, who your customers are, who your competition is, research and development requirements or accomplishments to date.
Product Fulfillment • The method a company utilizes to respond to requests for products and product information. Includes monitoring and managing the delivery, billing, warranty handling, list management, and repairs of your product.
Product Line • A group of products marketed by an organization to one general market. The products have some characteristics, customers and uses in common and may also share technologies, distribution channels, prices, services and other elements of the
Product Selection Criteria • The set of factors or parameters you use to decide what ideas to turn into a product or service based on market need, competition, uniqueness, and other factors.
Profit • An accounting concept, normally the bottom line of the Income Statement, which is also called Profit or Loss statement. Start with sales, subtract all costs of sales and all expenses, and that produces profit before tax. Subtract tax to get net
Profit • The excess of the selling price overall costs and expenses incurred in making a sale; the money remaining after a company has paid all of its bills. (I think of it as the value YOU add to the product or service that you sell, and to your customers. You add or bring value, then you deserve a profit! – BF)
Profit Maximization Goal • A goal of generating the greatest dollar value of profits from the sale of your products or services.
Profit Objective • The profit goal of a profit seeking organization, which is achieved by efficient use of scarce resources.
Profitability • The ability of a business to generate cash.
Profitability Ratios • Various measures of company performance based on the net income that the company generates. Includes Return on Owner’s equity, Gross Profit Mar-gin, Operating Profit Margin and Net Profit Margin.
Prospectus • The document that presents a stock offering. The offer must describe the quality of the stock as regulated by the Securities Exchange Commission.
Quick Ratio • A measure of a company’s liquidity, used to evaluate creditworthiness. Quick ratio is calculated as quick assets divided by current liabilities. Also called acid-test ratio.
Quick Ratio • Also called Acid-Test Ratio, includes those current assets that can be most readily used to pay bills today. This is a more probing test of liquidity of a business than the current ratio because it looks only at the most liquid of a company’s current assets and compares them with the short-term obligations of the company. Calculated by taking current assets minus inventories divided by current liabilities. The Quick Ratio is a good indicator of how well your company is able to meet your current liabilities in a crunch situation.
Ratio Analysis • The Ratio Analysis presents annual projections of eleven common financial ratios. These ratios cannot be judged as good, bad or average just based on their value. What the values for these ratios indicate is dependent upon the nature of your company, comparisons to your company’s historical ratio values (if available), and comparisons to competitive companies in the same industry. (Standard ratios for many industries are avail-able from on-line database services, and are also published in various reference books avail-able at most libraries.)
Raw Materials • Unprocessed natural resources or products used in manufacturing.
Research & Development (R&D) • Activities that a company undertakes to turn a product concept into a prototype, and a prototype into a final product. Applies the findings of science and technology in creating a firm’s products or services.
Retained Earnings • The profit made by the business that has not been paid out to the owners as Dividends. Retained Earnings are available for reinvestment into the business. On the balance Sheet, Retained Earnings is listed as a Liability.
Return on Investment (ROI) • A return ratio that compares the net benefits of a project, verses its total costs. ROI is a measure of operating performance and efficiency in utilizing assets by a company.
Return on Investment (ROI) • The net profit (after taxes) generated by your product or service divided by the total amount invested in developing and marketing it. In short, ROI = Profit divided by investment. (1) The amount earned in direct proportion to the capitol invested. (2) The type of benefit customers receive for their purchase. Including time saved, effort lessened, or quality improved.
Return on Net Worth • The ratio of an organization’s net profit following taxes to its net worth, providing a measure of the rate of return on a shareholder’s investment.
Return on Owners’ Equity • This ratio compares the net profit of your business to the equity (net worth) of your business. It is calculated as net income after taxes (from your income statement) divided by total owner’s equity (from your balance sheet).
Revenue • The total flow of funds into a company, mostly for sales of its goods or services. Revenue is the earnings of a company before any costs or expenses are deducted. Revenue includes all net sales of the company plus any other revenue associated with selling activities.
Sales Assumptions • This section will allow you to estimate revenues for up to eight Product/Service sales items. Specify your sales items by typing the names of your products or services over the “Product/Service” sample labels. Your specific sales item names will be used for the following assumptions sections and the financial statements. See “Projection Methods.”
Sales-Annual Growth Percent • For each sales item using Projection Method “P”, replace the sample value by entering the estimated annual growth percent for projecting the first year’s monthly sales revenues. (Using this method, the second through twelfth month’s sales will be calculated as a fixed percentage increase over the previous month.) Enter the annual percentage to be used. Remember to enter percentage values as rates (for example, 10% should be entered as .10 not 10).
Sales-First Month Starting Dollars • For each sales item using Projection Method “P” or method “D”, replace the sample value by entering your estimated value for the first month of the budget. (If this sales item will not have a value in the first month of the bud-get, you should use method “S” in the “Projection Method” section and enter specific values for each month in the “Specific Monthly Values” section.)
Sales-Monthly Dollar Increase • For each sales item using Projection Method “D”, replace the sample value by entering your estimated value for the fixed monthly increment. Using this method, the second through twelfth month’s sales will be calculated as a monthly dollar increase over the previous month. (If you want to project sales as a constant amount for each month of the budget, you can enter that amount as the starting value and enter zero as the monthly dollar increase.)
Sales-Specific Monthly Values • For each sales item using Projection Method “S”, replace any sample values by entering your specific revenue values for each month of the budget. This is the best method if you are a start-up business, where you sales may be zero for the first few months and then grow rapidly, or if your business has seasonal sales cycles, where certain months of the year generate more revenue than others.
Salvage Value • The value of a capital asset at end of a specified period. Salvage value is also know as scrap value, trade-in value, and residual value. Salvage value is the current market price of an asset being considered for replacement in capital bu
S-Corporation • A hybrid form of corporate ownership created especially for small businesses. It has tax benefits because S-Corporations are taxed like partnerships, thus eliminating corporate level taxation. Requirements: Must be domestic. Can issue only two classes of stock-voting and nonvoting. Only individuals may own stock. No nonresident aliens can be shareholders. S-Corporations cannot own subsidiaries or be part of an affiliate.
Securities & Exchange Commission (SEC) • Established by Congress to protect investors. This regulatory agency is chartered to administer federal laws applying to securities, assure that corporations issuing securities and investment bankers selling them must make full disclosure of the character of the securities, etc.
Shipping Terms • Determines when customer takes title of the goods, is responsible for freight charges, establishes the cost of unloading, and responsibility for any damages in transit.
Small Business Administration (SBA) • An agency of the US Government created in 1953 to aid small businesses with either managerial advice or financial assistance.
Sole Proprietorship • A business owned and managed by one person, who is personally liable for all business debts and obligations. For tax purposes, the owner and his or her business are one entity, meaning that business profits are reported and taxed on
Sole Proprietorship • A form of business with a single owner who personally holds title to the business and its assets. Sole Proprietorships can be dissolved, or the business closed, at any time. These business entities automatically cease upon the owners death. The owner is personally liable for all debts and contracts. Proper usage may include “proprietorship,” “sole proprietorship” or even “individual proprietorship.”
Standard Industrial Classification System (SIC) • A numerical system developed by the US Bureau of the Budget to classify establishments by type of activity for purposes of facilitating the collection, tabulation, presentation, and analysis of data relating to such establishments and for promoting uniformity within US agencies.
Standard Ratio Values • Comparisons of significant values from your company’s financial statements to those of competitive companies in your same industry. These industry wide ratio values are available from on-line database services, from organizations that collect financial data (such as Dun & Bradstreet and Robert Morris Associates), and from various reference books available at most libraries.
Stock Offerings • A way of selling shares of your company to the public in accordance with the registration requirements of the Securities and Exchange Commission. They are presented in a document called a prospectus and represent a certain amount of ownership in a business that corresponds to a given cash value for each share.
Straight-Line Depreciation • A method for calculating the yearly amount of Depreciation for an item. Yearly Straight-Line Depreciation is the original purchase price of the item divided by the number of years that the business expects to use the item; ac
Strategic Partnerships • Two or more businesses joining forces for collaborative work. An agreement with another company to under take business endeavors together or on each other’s behalf; can be for financing, sales, marketing, distribution, or other activities.
Sunk Cost • The past expenditures for a given activity that are typically irrelevant in whole or in part to future decisions. The “sunk cost fallacy” is an attempt to recoup spent dollars by spending still more dollars in the future.
Supporting Documents • Includes example materials and operational details for your business such as copies of your advertising or detailed spreadsheets summarized in your financial section. These are usually attached to your business plan to provide depth and backup to the concepts discussed in your plan.
Switching Costs • The costs incurred in changing from one provider of a product or service to another. Switching costs may be tangible or intangible costs incurred due to the change of this source.
SWOT Analysis • An acronym for an organization’s internal Strengths and Weaknesses and external Opportunities and Threats. A formal framework of identifying and framing organizational growth opportunities.
Table of Contents • The list of sections in your business plan along with page number.
Target Market • A defined segment of the market that is the strategic focus of a business or a marketing plan. Normally the members of this segment possess common characteristics and a relative high propensity to purchase a particular product or service.
Taxes Incurred • The term used for all the taxes owed but not yet paid.
Title Page • A cover page and a listing of the order and parts of the business plan. Helps the reader to find the parts they want to read quickly.
Total Assets • The total sum of all property owned by the business including permanent assets such as buildings, machinery, etc. Total Assets is calculated as Long-Term Assets plus Current Assets.
Total Costs • The total sum of all money owed by the business and calculated as fixed Costs plus direct costs.
Trade Credit • A business has received Trade Credit when it buys goods from a vendor who does not expect immediate payment.
Underwriter • (from Coopers & Lybrand’s own glossary) – A PERSON OR FIRM THAT SUBSCRIBES AND PURCHASES FOR ITS OWN ACCOUNT SOME OR ALL OF AN ISSUE OF STOCK WITH A VIEW TO SELLING IT TO THE INVESTING PUBLIC. There is another unrelated definition that applies to insurance policies only, but what is above is germane to you. Many people use “underwriting” to mean only doing due diligence. Some use it to mean preparing offering memoranda paperwork for clients and the clients must do all of the marketing themselves (a sure way to fail). A full underwriter has connections with investment brokers and has them sell the issue. The full underwriter guarantees a certain level of funds and will pay for them out of his own pockets if the brokers cannot sell the full offering. You may need to get a party you are talking to to put what they mean by underwriting in writing. This is very important. In earlier backgrounders I show a couple of examples of budgets for underwriting. The full underwriter takes a percentage of the offering for their services.
Unit Variable Cost • is the specific labor and materials associated with a single unit of goods sold. Unit variable cost does not include general overhead.
Valuation • is the term used for estimating the value of a piece of property usually by considering its replacement cost or its actual cash value.
Variable Costs • are the costs that fluctuate in direct proportion to the volume of units produced. The best and most obvious example are physical costs of goods sold, direct costs, such as materials, products purchased for resale, production costs and overhead.
Venture Capital Firm • An investment company that invests its shareholders’ money in startups and other risky but potentially very profitable ventures. Venture capital companies focus on businesses that are likely to experience very rapid growth and are excellent candidates for and acquisition or public offering (IPO).
Venture Capitalists • Investors who typically invest between $500,000 and $3,000,000 in companies having a potential for fast growth. Generally a Venture Capitol firm will tend to invest in an industry or industries in which it has some specific knowledge and focuses on early stage (not typically start-up) investment in a company.
Vertical Expansion • Selling the same product in a new way in an attempt to penetrate a new market or new demographic group.
Vision & Mission • Describes your company’s personality. It is the way the business thinks about itself. Explains to your reader why you are in business and what you hope to achieve.
Working capital • Includes the accessible resources needed to support the day-to-day operations of an organization. Working capital is commonly in the form of cash and short-term assets including accounts receivable, prepaid expenses, and short-term accounts receivable
Working Capital • The excess of current assets over current liabilities. In other words, it is capital (debt or equity) that is used to generate sales on a current basis. Varies directly with sales volume because as sales increase or decrease, so do many of your current assets and liabilities (such as cash, inventory, accounts receivable and accounts payable).
Working Capital Ratios • Ways of measuring how well a company is able to meet its short-term obligations. Consist of current ratio, quick ratio, and Average Accounts Receivable Days and Average Inventory Days.