Accrual basis. Days payable. Liquidity. These are just a few of the many business finance terms you’ll come across as you run your business. To help you make sense of them all, we put together the following financial literacy guide for small business owners. It includes a glossary of 65 business finance terms you should know, plus additional resources to help you streamline your business finances.
1. Accounts payable
Accounts payable (A/P or AP) refers to your small business’s debts to lenders, suppliers, and creditors.
2. Accounts receivable
Accounts receivable (A/R or AR) refers to money owed to your small business in exchange for goods or services rendered. Your accounts receivables are considered a current asset.
3. Accrual basis
Also known as accrual basis accounting, accrual basis is an accounting method with which you record income and expenses as they are earned and made, respectively. It is the most common accounting method.
Accruals refer to incurred expenses or earned revenues whereby cash has not yet changed hands for related transactions.
5. Adjusted net worth
If your business has experienced hardship or been through a disaster, your adjusted net worth refers to the fair market value of your tangible assets—less liability—after the disaster.
An accounting technique used when paying off debt through installment payments of both principal and interest over a certain period (i.e., the process of spreading out loan payments over time). Amortization also refers to the process of expensing the cost of an intangible asset over a certain period (usually the life of the asset), which helps tie the cost of the asset to revenues it generates.
7. Annual Percentage Rate
Known as APR, the annual percentage rate is the annual rate of interest (or yearly cost of funds) over a loan term; it includes all interest, fees, and additional costs. APR also allows borrowers to compare rates across lenders easily.
Appraisals refer to the market value of certain business assets or your business in general. When applying for a small business loan, you might need to get appraisals for real estate, equipment, and overall business value.
9. Articles of Incorporation
Articles of incorporation are the legal documents associated with your business, including business structure (LLC, C-corp, or S-corp, etc.), business name, and business/industry type. Appropriate governmental agencies receive this filing, and some bank loans require it for applications.
Assets include everything with economic value that your business owns, often categorized as current assets, fixed assets, tangible assets, intangible assets, operating assets, and non-operating assets.
- Current assets: Also known as liquid assets, these are assets that are convertible to cash—for example, inventory, short-term investments, stock holdings, bank account balances, and more.
- Fixed assets: These are assets that are not easily convertible to cash, such as land, real estate, equipment, and machinery.
- Tangible assets: These are assets that you can touch and see. They can include both current and fixed assets.
- Intangible assets: These are assets that you cannot touch and see, such as patents, brands, trademarks, copyrights, franchise agreements, and more.
- Operating assets: These are assets your business uses and requires to run day-to-day operations. They include cash, bank account balance, and inventory.
- Non-operating assets: These are essential assets to your business but are not critical to providing your product or service.
11. Balance sheet
Your balance sheet is a report on your business assets (what you own) and liabilities (what you owe) that gives a snapshot of your company’s current financial situation and overall net worth.
12. Balloon loan
A balloon loan is a loan that a business owner pays off in regular installments on a certain schedule with one much larger—or balloon—payment at the end.
Bankruptcy is a legal proceeding for individuals and/or businesses experiencing extreme financial duress that forgives unpayable debts. Bankruptcy filing usually offers creditors some form of repayment based on liquid assets.
Bookkeeping is an accounting practice whereby a business owner, accountant, or other qualified person records a business’s financial transaction in real-time.
Bootstrapping refers to the use of your own money or your profits to finance your business. For example, you’d use your own money to start your business and then use its profits to reinvest in growth.
16. Break-even analysis
A calculation of how much sales volume is required to cover costs. Anything below break-even is considered unprofitable or “in the black,” while anything above is deemed profitable.
17. Business credit report
A report of your business’s financial history that is maintained by credit bureaus. It generally includes the size of a company, its time in business, amount and type of issued credit, credit management information (like payment history), and any legal filings such as bankruptcy. Evaluation of a business’s risk exposure, financial health, and ability to repay debts occurs using these reports.
18. Business credit score
A business credit score calculates a measure of your business’s creditworthiness using the information found in your credit report.
19. Business plan
A comprehensive outline of your small business, including plans for financial growth, operations, and marketing. Essentially, what your business is, and how you will run it to make money and grow over time.
Also known as fixed capital, capital refers to your business’s overall wealth. It includes cash accounts, assets, and investments and can include both tangible and intangible assets.
21. Cash flow
The amount of cash that flows into and out of your business.
22. Cash flow projections
A forecasting of the cash you will receive and spend in the future.
23. Cash flow statement
A report of all monies received and spent over a specific time period. Cash flow statements also help determine a business’s solvency (whether or not it can pay its bills).
24. Cash-basis accounting
An accounting method that records revenues upon cash receipt and tracks expenses when upon cash payment.
Assets that a borrower pledges to secure a loan or other credit—and which a lender can seize if you default on your payments. In business, real estate is a common and preferred piece of collateral.
26. Comparative analysis
An analysis of certain business trends from one year to the next using financial statements of comparable dates and time periods. You can use a comparative analysis to forecast future revenues. Alternatively, certain traditional lenders might use one to gauge your financial position and creditworthiness.
27. Credit limit
Most commonly applied to credit cards and lines of credit, a credit limit is the absolute max amount of credit you can use or borrow.
28. Days payable
The average time it takes your company to pay its vendors, calculated as follows: accounts payable divided by annual credit purchases times 365.
29. Days receivable
The average time it takes your customers to pay for purchases, calculated as follows: accounts receivable divided by annual sales on credit times 365.
30. Debt consolidation
The process of combining multiple loans into one single loan that usually reduces total interest and payment amounts. Debt consolidation is especially helpful for small businesses with several loans looking to improve cash flow.
31. Debt financing
Borrowing money from a lender and repaying the principal—plus interest—in regular payments over a certain period of time. Debt financing includes small business loans, bank loans, business credit cards, lines of credit, invoice factoring, and more.
32. Debt-service coverage ratio
A measure of cash your business has to pay for or service debts. If it is above 1, you have enough income to meet your debt requirements.
When an asset loses some of its value over time through things like wear and tear.
34. Employer Identification Number
Also known as EIN, it is the federal tax ID number for your business that you receive after incorporating. Many lenders (banks, for example) require your EIN as part of their loan application process.
35. Equity financing
Financing from an investor that you repay with equity (a share of your business). Such investors can include angel investors and venture capitalists, or even friends and family. In most cases, you’ll have to relinquish some control and/or voting rights to equity investors.
A cost that, according to the IRS, is “ordinary and necessary” to run your business. For example, rent, utilities, wages, legal fees, marketing costs, etc.
37. FICO Score
Also known as a personal credit score, FICO refers to the credit score of an individual. Even though it does not account for your business, traditional lenders like banks often consider your FICO Score as part of your business loan application.
38. Financial statements
Lenders and investors alike will want to look at your financial statements to get a sense of your business’s overall financial health. Typically, this includes an income statement, balance sheet, cash flow statement, and—if you have shareholders—a statement of their equity.
39. Fixed interest rate
An interest rate on a loan or mortgage that will not change for the entire term of the loan.
40. Floating interest rate
Also known as variable rate or adjustable rate, a floating interest rate changes with market fluctuations.
41. Gross profit
A calculation of a business’s total sales or income minus any costs associated with making and selling its products or providing its services. Such expenses include raw materials, manufacturing and labor costs, and marketing.
An individual who guarantees repayment of a loan if you or your business cannot meet the payment obligations.
43. Income statement
Also known as a profit and loss statement, your income statement reports on your business’s earnings and expenses over a given time period.
44. Interest rate
Interest rates refer to the cost of borrowing money and is some percentage of the principal amount borrowed. Types of interest rates include APRs, fixed interest, floating interest, and more.
45. Invoice financing (or Invoice factoring)
Invoice financing refers to business financing that specifically covers outstanding invoices owed to your business. For example, you receive an advance on your outstanding invoices from a factoring company or business lender such as BlueVine.
Liabilities include debts or other financial obligations for which your business is legally responsible—examples include bank loans, credit cards, and money owed to vendors, suppliers, and manufacturers. Current liabilities are those that must be repaid within one year, while non-current liabilities are longer-term.
A claim or legal right against assets to guarantee repayment of a loan.
48. Line of credit
A borrowed pool of funds that businesses can use whenever they need. In most cases, businesses pay only for what they use and, as it makes payments, the line of credit replenishes (a revolving line of credit).
How quickly a business can turn an asset into cash.
Also known as LTV, the loan-to-value ratio determines if an asset’s value will cover loan repayment if your business cannot meet its repayment obligations.
51. Long-term debt or long-term loan
Any loan product with a repayment schedule that lasts longer than one year.
52. Merchant cash advance
A short-term business loan issued by a credit card company, bank, or alternative lender. They often come with high interest and fees.
Small loans, typically under $50,000, made through nonprofit, community organizations.
54. Net profit
Sometimes referred to as net income or net earnings, your net profit refers to the total amount a business has earned, less all business expenses. To calculate yours, subtract all business expenses from your total sales revenue for a given time period.
55. Net worth
A calculation of your business’s total value; subtracting your total current liabilities from your total current assets yields this number.
56. Personal guarantee
A statement provided to a lender affirming that you, the individual business owner, will act as guarantor for your business’s debt. Lenders often use this guarantee when a business doesn’t have high-value collateral to offer and makes you, as the business owner, personally liable for the loan balance (even if your business fails or closes).
The original amount that is borrowed from a lender. The principal typically determines interest and fee amounts.
58. Profit and loss statement
Refer to “Income Statement” above.
59. Secured loan
A loan that requires you to provide some form of security (collateral) to the lender. If you default on a secured loan, the lender can seize the collateral to offset your unpaid balance.
60. Short-term loan
Any loan product with a repayment schedule that is less than one year.
61. Statement of Shareholders’ Equity
A financial statement for businesses with equity financing that details how shares are divided, which shareholders have controlling interests, and more.
62. Tax lien
A claim against your business that allows the IRS to seize your assets and/or charge you penalties if you fail to pay taxes owed.
63. Term loan
A type of debt financing whereby a business receives a lump sum of cash at once in exchange for principal and interest repayments at specified intervals over a set period of time. There are two types of term loans: short-term loans with terms less than one year and long-term loans with terms longer than one year.
64. Unsecured loan
A loan that does not require collateral. Unsecured loans are a higher risk for a lender and typically have higher interest rates and shorter payment terms than a secured loan. The most common type of unsecured loan is a credit card.
65. Working capital
Working capital refers to a business’s cash on hand that is necessary for day-to-day operations.
A loan that does not require collateral. Because these loans pose a higher risk for the lender, they typically have higher interest rates and shorter payment terms than a secured loan. The most common type of unsecured loan is a credit card.
Improving your business finances
As you’re fine-tuning your business finance expertise, you might decide to overhaul your business finances. At BlueVine, we offer a variety of solutions to help you streamline your business banking, maximize cash flow, and grow your business:
- BlueVine Business Checking: Enjoy the only online checking account built specifically for small businesses, with no monthly or hidden fees, no transaction limits or minimum balance requirements, and 1.00% interest.
- BlueVine Payments: Simplify vendor and bill payments with easy scheduling, no monthly fees, and more.
- BlueVine Line of Credit: Get up to $250,000 in a revolving line of credit. Draw what you need and pay only for what you use.
- BlueVine Invoice Factoring: Get an advance on your outstanding invoices.
Learn more at www.bluevine.com