GLOSSARY

A

accounts payable A current liability account on the Balance Sheet that typically captures outstanding invoices suppliers have sent the business for goods that have been shipped or services that have been rendered for the business. Also called payables.

accounts receivable A current asset account on the Balance Sheet that typically captures outstanding invoices that your business sends to customers after it ships merchandise or fulfills a service. Also called receivables.

accounts receivable turnover rate A measure of the efficiency of your collections department, indicating how many times a year it collects on receivables.

Accounts Receivable Turnover Rate =
Yearly Credit Sales ÷ Accounts Receivables

accrual basis accounting A method of accounting that captures sales and expenses as they happen regardless of when the cash event occurs; net revenues are booked when the goods are shipped out the door or invoices sent, not when payment is received and, similarly, expenses are booked when bills and invoices from suppliers or subcontractors are due, not when the business pays them.

aging invoices report A report that shows all unpaid invoices, the due date for payment of each and the number of days it is outstanding, the amount due on each invoice, and the client responsible for each invoice.

assets What the business owns and has title to, including unpaid invoices.

B

Balance Sheet The financial statement that captures all the outstanding loans and debt or liabilities incurred by the business since its inception, the value of all your business’s assets, and its net worth.

Beginning Cash The amount of money in a business’s account at the beginning of the month, before payments are received and expenses paid; it’s the same amount as the previous month’s Ending Cash.

bond A usually long-term debt instrument that formalizes a loan between a lender and a borrower, reflecting the amount owed and payment terms for that specific loan; it’s an asset (receivable) to the lender and a liability (payable) to the borrower.

bottom line See net income.

breakeven point The point at which a business “breaks even,” which occurs when its net income is neither positive nor negative but is zero, net revenues are large enough to cover all fixed and variable expenses, and the business has the potential to generate sustainable profits.

breakeven unit volume The number of units sold that corresponds to the number of units that must be sold to reach the breakeven point. Also called breakeven volume and breakeven point volume.

C

cash basis accounting A method of accounting that records when cash comes in from customer payments and when cash goes out to pay bills; revenues and expenses do not get captured on the Net Income Statement until a cash transaction is made.

Cash Flow Statement The financial document that measures the flow of cash in and out of your business; the Ending Cash for one month becomes the Beginning Cash for the following month.

Cash In The line on your Cash Flow Statement that captures all the cash coming into the business. Also called Cash Received.

Cash Out The line on your Cash Flow Statement that captures all the cash going out of the business to pay expenses. Also called Cash Expenses.

Collateral An asset that is pledged against a loan; it can be liquidated if the business defaults on the loan.

Cost of Goods Sold (COGS) A direct variable cost made up of the expenses associated with manufacturing, purchasing, or delivering a product or a service; it includes your direct materials and direct labor costs. See also unit cost.

credit lines payable Typically, revolving lines of credit that can be used in part or in full; as the money gets paid back, the credit line opens up again.

credit sales Sales transactions where the client receives the good or service and is extended payment terms to pay the bill with cash or a cash equivalent at some point in the future.

current assets Cash (in a bank account, money market account, or CD), accounts receivable (money owed the business), and inventory that can be converted into cash within 12 months.

current liabilities Obligations on the part of the business that need to be paid within 12 months; includes accounts payable, notes payable, and credit lines payable.

current ratio A measure of short-term liquidity that will tell you if there’s enough accessible cash in the business to pay short-term obligations:

Current Ratio =
Total Current Assets ÷ Total Current Liabilities

D

Depreciation A portion of the total expense of an asset that is deducted each year over the useful life of the asset until the total original cost is accounted for.

E

earnings before taxes (EBT) Earnings from operations before federal, state, and local taxes are paid.

Ending Cash The amount of cash in a business's account at the end of the month, after payments received have been added and expenses paid have been deducted from Beginning Cash; one month’s Ending Cash becomes the following month's Beginning Cash.

equity investment Capital that a business owner has put into the business at start-up, and sometimes later as well; it appears on the Balance Sheet, under owner’s equity.

F

financial dashboard The three gauges you need to understand to manage a business—your Net Income Statement, your Cash Flow Statement, and your Balance Sheet; they provide critical information about how much profit the business is generating, how much cash you have in the bank to run the business, and the overall health of the business at a particular point in time.

fixed assets Assets that can take longer than 12 months to convert into cash, such as buildings, land, equipment, computers, and furniture.

fixed expenses Expenses that do not change with fluctuations in sales volume, such as rent and insurance.

forecasted demand The amount of a product or service that you predict customers are going to buy.

G

going concern A well-run, self-sustaining business that isn’t under threat of bankruptcy; it has predictable revenue streams, reasonable expenses, and adequate cash levels to pay its bills now and in the foreseeable future.

good will An asset that occasionally appears on the Balance Sheet, reflecting with the monetary value of a brand name.

gross An adjective used in accounting—gross margin, gross profits, gross receipts, gross revenues—to mean before expenses or discounts are deducted.

gross margin The gross profit available to pay all your operating expenses; it is calculated by deducting COGS from net revenues.

gross margin percentage A formula that shows what percentage of every net revenue dollar is gross margin—that is, profit before expenses.

Gross Margin Percentage =
Gross Margin ÷ Net Revenue × 100

I

Income Statement See Net Income Statement.

interest expense The amount of interest paid on a short-term debt, such as a loan or a credit line.

inventory Product manufactured or purchased but not yet sold; its value as an asset is assessed as the amount it took to manufacture or purchase it.

investor’s draw See owner ’s draw.

L

liabilities What the business owes, that is, obligations it needs to pay either now or in the future.

M

mortgage A long-term liability that is typically paid back, with interest, over several decades.

N

net An adjective used in accounting—net revenues, net expenses, net income—to mean after certain expenses have been accounted for.

net income The amount of money the business has retained after all expenses (COGS and other variable and fixed expenses) and taxes have been paid. Also called net profit and bottom line.

Net Income Statement The financial statement that reveals whether a business is generating a profit, breaking even, or showing a loss. Also called Income Statement, Profit and Loss Statement, and P&L.

net margin Net revenue minus both direct variable expenses (COGS) and indirect variable expenses (operating costs) per unit.

net margin ratio The relationship between your net revenue and your net income; it expresses the relationship between the top line and the bottom line on your Net Income Statement.

Net Margin Percentage =
Net Income ÷ Net Revenue × 100

net revenue The value of what you’ve sold for that month, less any discounts you may have offered customers. Also called net revenues.

net 30 days A statement of terms of payment meaning payment is due within 30 days after the order is placed.

net worth See owner’s equity.

notes payable Short-term obligations to investors, suppliers, or the bank; the proceeds from the note are typically used to cover cash crunches or to build inventory and must be paid within 12 months.

O

overdraft protection A credit line on a checking account that must be satisfied every month; it’s a liability or an obligation of the business until it has been paid.

owner’s draw Money that owners of businesses structured as sole proprietors and partnerships can legally pay themselves apart from salary; it’s considered income and the recipient must pay income taxes on it. Also called investor’s draw.

owner’s equity The monetary value of a business; it is the difference between what your business owns and what it owes. Also called net worth and shareholder equity.

P

payables See accounts payable.

Profit and Loss Statement (P&L) See Net Income Statement.

Q

quick ratio An estimate of the short-term liquidity of a business; it’s a conservative variation on the current ratio that removes the value of inventory from current assets.

Quick Ratio =
(Cash + Accounts Receivable) ÷ Total Current Liabilities

R

real demand The amount of a product or service that customers actually buy.

receivables See accounts receivable.

retained earnings The total of all the net income that has been generated by the business since its inception minus any dividends or owner’s or investor’s draw that have been paid out since inception.

S

salaries payable Money that has been earned by the employees but not paid yet by the business.

shareholder’s equity See net worth.

sunk cost An expense that has yielded no benefit and can never be recovered.

T

terms of payment The date full payment is due and under what conditions a discount may be taken.

U

unit cost The direct cost of materials and labor required to create a saleable product whether that product has been sold or not. See also cost of goods sold.

V

variable expenses Expenses that vary based on sales volume, such as sales commissions, marketing expenses, and the like.

W

working capital Current assets minus current liabilities.