The basic steps in processing accounting data during an accounting
period: 1) transaction occurs, 2) transaction classified (entered
into journal), 3) recording the classified data in ledger accounts
(posting), 4) preparation of financial statements and 5) closing
of nominal accounts.
Accounts Payable (A/Ps)
Money owned to suppliers.
Money owed by clients and customers.
Accrual Basis Accounting
A method of reporting income when it is earned and expenses when
incurred, even though they may not have been received or actually
A speculative investment, more risky than venture
Business organizations or individuals that control each other or
are controlled by a third party (i.e., a parent company). Affiliates
may share such things as management staff, employees, facilities,
Aging of Accounts Receivable
The classification of unpaid customer accounts receivable according
to the date of sale. The aging of A/Rs can reveal a pattern of delinquent
accounts that shows where collection efforts should be concentrated.
The longer accounts are left unpaid, the more likely they will become
uncollectible. The aging of A/Rs can help prevent losses on future
sales from delinquent accounts.
All real or intellectual property owned by the enterprise that has
a positive financial value. On a Balance Sheet,
a summary list of the property and things owned.
An accounts receivable or loan that has become uncollectible and
is written off.
A summary statement of assets, liabilities, and owner's equity used
to assess the financial condition of a business. Also referred to
as the statement of financial condition.
The process of making sure your bank statement, checkbook, and books
(ledger, journal, etc.) all agree. Usually performed at the end
of each month.
Barriers to Competition (Barriers to
Any condition or circumstance that makes it difficult for a new
business to enter an industry, such as exclusive ownership of a
unique resource, economies of scale, patents, licenses, trademarks,
copyrights, dedicated distribution channels, and high initial investment
Merchandise or services exchanged for other merchandise or services
without the use of money.
Board Of Directors
Individuals elected by stockholders to establish corporate management
policies and make decisions, such as if and when dividends will
be paid to stockholders.
The point at which revenues are equal to expenses.
A detailed schedule of planned financial activity.
Repetitive cycles of economic expansion and recession within an
industry over a measurable period of time. Companies regularly experience
recurring periods of profitability and poor cash flow often the
result of annual fluctuations in economic activity due to seasonal
variations or holiday periods.
General practices established within a company that can be either
written or unwritten.
A term used in business planning that implies a careful selection
and application of resources to obtain a competitive advantage in
anticipation of future events or trends.
Money or property owned or used in business by a sole proprietor
or corporation, to produce wealth. In a start-up business, capital
is the amount of money required to initiate and/or operate a business
before borrowing from others.
Cash Basis Accounting
An accounting method that enters income and expenses into the books
when payments are received or expenses incurred.
Cash Conversion Cycle
The time required to convert raw materials into finished goods,
finished goods into sales, and sales into received payments from
customers. In a retail business, it is directly related to inventory
turnover. Startups should strive to keep the cash conversion
cycle as short as possible.
The transfer of money into and out of an enterprise. In accounting
terms, it is the amount of cash generated by a business after expenses
(including interest) and principal repayment on financing are paid.
Assets that can be pledged to guarantee a loan. If the borrower
fails to repay the loan according to the terms, the lender has the
legal right to seize the collateral and sell it to repay the loan.
Consumer Price Index (CPI)
A measure of change in consumer prices, revised monthly by the U.S.
Bureau of Labor Statistics.
Goods frequently purchased by the consumer that need to be made
easily available to facilitate purchasing. Consumers are usually
not willing to shop around much for convenience goods, such as candy,
cigarettes, prescription drugs, magazines, and most grocery products.
Corporate Image Advertising
Advertising designed to promote the company first and the products
or services second.
An analysis tool that measures the results or benefits of a decision
compared with the required costs.
Cost of Goods Sold (COGS)
The sum of expenditures involved in producing a product or service
which usually includes labor and materials. Also referred to as
Cost of Sales
The cost of goods sold plus any expenses incurred in the selling
and delivery of the product or service.
Assets that can be converted quickly to cash, usually within a year,
through sale or exchange, such as cash, inventory, and accounts
receivable. Also called liquid assets.
Debts, loans, trade credit or other obligations due for payment
within one calendar year.
An amount of money added to a budget for delays, poor weather, changing
economic conditions, and other unforeseen occurrences.
The total list of customers for a business, as well as the total
number of potential customers with specific classification or buying
A precise description of the characteristics of buyers for a specific
product or service.
The payment, in whole or in part, for a capital investment with
The amount of money required for the payment of current interest
and principal on a long-term debt.
The expense deduction on an income statement allowing for gradual
wearout of a fixed asset.
The sale of products by a producer direct to consumers with promotional
efforts using direct mail, advertising, or telephone sales. Avoids
the use of middlemen such as wholesalers and retailers. Commonly
used for business-to-business sales.
A business that purchases your products for resale to wholesale
and retail outlets. Distributors expect to receive a significant
discount for providing the distribution service of getting your
factory produced products to the end users.
The path your product follows to reach the end user, through distributors,
wholesalers, retailers, self service outlets, telephone sales, the
Internet, direct mail, vending machines, etc.
Economy of Scale
The decrease in the long-term total cost of manufacturing a product
due to the lower cost per unit for larger quantities produced.
One who assumes the financial risk of starting and operating a business
venture. Usually carries the connotation of being creative, self-motivated,
The psychological realization by an entrepreneur that starting and
operating a small business is full of difficult decisions and disappointments.
Corporate workers who have not been previously exposed to the complications
of running a business are most vulnerable.
An accounting term used to describe the investment made by the owners
or stockholders of a business. On a balance sheet,
equity represents assets less liabilities. Same as Net Worth in
The raising of money in a corporation by issuing and selling shares
of common or preferred stock or taking on a partner in a partnership.
A brief synopsis at the beginning of a business plan or business
document that highlights key facts, issues, and conclusions.
Goods such as jewelry, clothing, furniture, and kitchenware where
style is important and price is secondary.
An analysis of a possible business opportunity that emphasizes income
potential and likely expenses, with recommendations for an advantageous
Fixed Assets (long term assets)
These are usually non-liquid business assets used in the operation
of a business. Tangible fixed assets include real estate, buildings,
furniture, fixtures, and equipment, whereas, intangible fixed assets
include trademarks, patents, and brand recognition. Fixed assets
do not include items normally consumed during business operation
or production, such as office stationary or product raw materials.
Business expenses that do not change regardless of production increases
or decreases, for example, lease expenses, insurance, interest on
loans, salaries, utilities, etc. As opposed to variable
The right under which a franchisee person or company may market
a product or service, as granted by the franchisor (the proprietary
owner). A franchise agreement is the contract defining the terms
and conditions between the franchisor and franchisee. Franchises
often give exclusive rights for a specified area.
Full Service Retail Outlet
A retail outlet where products are sold directly to the end user
at retail prices by sales personnel who are able to explain the
value and purpose of the products.
An accounting record of business transactions in chronological order.
The formal listing of journal accounts in a business used for financial
statement preparation and tax filing.
Generally Accepted Accounting Principles (GAAP)
Conventions, rules and procedures defined by the Financial
Accounting Standards Board (FASB) as proper accounting practices.
An intangible but salable asset, such as reputation or location
of a business, that engenders the expectation of continued customer
or client patronage if the business is sold to a potential buyer.
The gross revenue or sales of a business over a period.
Gross profit expressed as a percent of net sales.
The profit before overhead (fixed operating expenses) has been deducted.
Total sales not reduced by customer discounts, returns, allowances
or other adjustments.
A loan made by a bank upon which a government agency (e.g., the
Small Business Administration) has insured partial reimbursement
to the bank in the event the borrower defaults.
A risk associated with a business startup that is unknown or not
easily apparent. In any business venture, there are always unforeseen
factors that can affect the profitability of a business. Astute
business planners try to minimize these risks by anticipating possible
unknown factors all phases of their operations and establishing
preventative measures or backup plans where possible.
Actual costs or expenditures recorded as opposed to projected or
House Agency (In-house
Any service performed by a branch of a large company that otherwise
would be purchased from another company, such as advertising or
Income Statement (Profit & Loss
A statement of revenues and expenses. It shows the shows the financial
progress of a company over a period of time.
A facility designed to encourage entrepreneurship and minimize obstacles
to new business formation and development, particularly for high
technology firms, by housing a number of budding enterprises that
share an array of services, such as rent, secretarial services,
and business counseling. Incubators may be funded by state or local
government as well as private interest groups.
Products requiring large and expensive capital investments such
as manufacturing facilities, that need cranes, robotic assembly
line processors, and packaging equipment.
Non-physical assets such as trademarks, patents, a customer base,
and brand recognition. Sometimes referred to as goodwill.
A ratio for evaluating sales effectiveness that is often calculated
by dividing annual sales by ending inventory i.e., how fast new
inventory is purchased and then resold to customers. Startups need
to research industry averages to better budget their finances. A
low turnover rate is acceptable for high-price goods, but low-price
goods and consumables must generally turnover much more quickly.
In accounting, the record of original entry where financial transactions
are initially recorded. In a double-entry accounting system, all
transactions are listed in chronological order with added notation
of the accounts to which they belong.
A business association of two or more businesses or persons whereby
the teams works together on a single project. A joint venture is
usually limited in either scope or duration or both. In international
trade, joint ventures are often mandated by national laws to prohibit
majority ownership by a foreign company.
A production and inventory method whereby materials and products
are delivered to the production site or retail outlet at the precise
time they are needed or sold rather than being stockpiled in a warehouse.
Popularized by the Japanese
A federal tax law giving substantial tax advantages to small-self
employed business owners and others who do not have a company pension
plan. Designed to encourage self-employed business people to set
aside money for retirement.
An amount added to a deal to induce a potential buyer to consummate
An agreement between two business enterprises allowing one to sell
the other's products or services and to use their name, trademarks,
sales literature, etc. in a limited manner to market the product
The percentage of an enterprise's assets that can be quickly converted
Long Term Liabilities
All debts that are not current liabilities, that is, debts that
are not due until at least one calendar year in the future.
An opportunity for a company to enter a specific market to sell
its products or services. A market access analysis considers issues
like competitiveness, regulations, and trade restrictions.
Market Life Cycle
The period of time that a specific segment of the consumer market
is interested and willing to purchase a i given product or service.
Market Penetration Pricing Strategy
A pricing policy whereby inventory prices are set very low to gain
market control or penetration. Once obtained, prices are raised
back to market standards.
The relationship of a product or company to the competition in a
specific market. Can be expressed as a percent of your total sales
compared with total sales of the market. Understanding your market
position can help you develop strategies to improve it.
A portion of the entire market that your company is targeting.
A percentage value calculated by dividing your sales with the total
sales of a product or service within a specified market.
The total dollar amount of potential sales to all customers within
a given market.
The price at which buyers in the open marketplace are willing to
pay for a product or service.
A selection of products by a company from which a customer can choose.
The advantage is that more customers will likely consider one of
the options as opposed to purchasing from a competitor.
The selection of the product mix and customer profile for maximum
profit potential. The 4 "Ps" of product, price, promotion,
and place (distribution) are often incorporated into a marketing
The speed and ease with which a new product or service could be
promoted and sold.
Normally raw or processed materials such as coal or steel that will
become part of the purchaser's end product.
Modified Cash Basis
An accounting method whereby income is recognized when cash is received
and expenses when cash is paid, except for long-term assets that
are accounted for using the accrual basis
method. Many small and start-up businesses adopt this accounting
As applied to business formation and operation, the idea that "Whatever
may go wrong, will go wrong."
Net Income (or Net Loss)
On an income statement, the sum remaining after all expenses have
been deducted from income. Net income is usually specified whether
taxes have been deducted or not (Net Income After Taxes) or haven't
been deducted (Net Income Before Taxes). Net income after taxes
is the amount of most interest to business owners. It is their Net
Profit (or Net Loss).
A positive net income after total expenses have been subtracted
from total revenues. The opposite of net loss.
An accounting term used to define gross sales
less returns, allowances, freight, and cash discounts.
The amount owned by the owners. In accounting terms, the amount
by which assets exceed liabilities on the company balance sheet.
Also referred to as equity or owner's equity.
The area of a target market where a company or product is particularly
strong. This specialization often results in super high quality
by the specialist company and elimination of competition because
of the uniqueness.
A written promise to back funds borrowed, stating the amount, the
interest rate, the time, the method of payment, and the obligation
to repay. A note is usually a short term business loan that may
be secured or unsecured by collateral. Also called a promissory
A NOTE by a person or business that is due and owing; an obligation
or lien that must be repaid and is due.
An amount loaned to another that is owed and payable to the holder
of the note.
A bookkeeping method where only one entry is made to record each
business transaction, as opposed to a double-entry system where
the transaction is entered twice or more in related credit and debit
On-Site Sales Method
Selling directly to the end user using a sales force that calls
on the prospect at their home or place of business.
An illustrative display of the relationships between owners and
mangers to supervisors and subordinates.
As defined by The Uniform Partnership Act, a partnership is "an
association of two or more persons who carry on a business for profit
A legal document issued by a federal government that grants exclusive
rights for the production, sale and profit from the invention of
a product or process for a specific period of time. Patents also
grant the right to prevent others from copying the invention.
Also called "pure competition," a market condition where
no buyer or seller has the economic power to alter or fix the price
of a product or service. Perfect competition is characterized by
a large number of buyers and sellers, all selling similar products
or services, with free access to resources and easy market accessibility.
It is the opposite of a monopoly or oligopoly.
The idea and practice of establishing an optimum price for a product
or service that will result in the highest profit.
Financial forms based on future expectations. Frequently used to
refer to a Pro Forma Balance Sheet which is based on assumptions
of future hypothetical events. A Projected Income Statement is used
more often than a pro forma income statement.
Product Benefits Advertising
A form of advertising designed to acquaint potential customers with
the strengths of a product or service and the benefits resulting
from those strengths.
Product Comparison Advertising
A form of advertising designed to compare the features of your product
or service with those of your competitors with the purpose of showing
your features to be superior or more feature rich.
Product Family Advertising
A form of advertising designed to convince potential customers that
your product line has a wide range of functionality and choices.
The volume of products or services your company can produce utilizing
A relation of profit to net sales, most often expressed as
a percent of sales or total revenues less total expenses.
Technological innovations or processes that are unique and legally
owned by a company.
Pull Promotional Strategy
A promotional strategy whereby channels of distribution are minimized
during the first stages of promotion and a major commitment to advertising
made. The idea is to "pull" potential customers towards
your offerings and create a demand.
A written authorization prepared by a buyer for the purchase of
goods or services at a specified price. Once accepted by the seller,
the purchase order becomes a legally binding purchase contract.
An employee of a large company who primary duty is to purchase goods
or services for the company.
Push Promotional Strategy
A promotional strategy whereby channels of distribution are maximized
to "push" the product or service out into the marketplace.
This strategy usually requires generous discounts or incentives
to your distribution channels to promoter your product or service
offering, thus minimizing the need for extensive advertising.
A review of a product or service after completion to determine the
degree of excellence achieved and deficiencies that need correction.
The process of making sure that products or services are made to
consistently high standards.
The ratio of current assets minus inventories, accruals, and prepaid
items to current liabilities. The acid-test ration is a measure
of the liquidity of a business. It helps to answer the question,
"If revenues stopped, could the business meet current obligations
with assets that are readily convertible into cash?" A quick
ratio of 1:1 or better is usually satisfactory. Also called acid-test
ratio or current ratio.
Anything expected to arrive at the business. In accounting, it is
a short form of accounts receivable.
Net profits or earnings retained by the company rather than
disbursing to the shareholders in the form of dividends. Retained
earnings are used to improve the business through development programs,
promotion, R&D, etc.
Revolving Line of Credit
A credit limit at a specified interest rate that is readily available
to a company for immediate borrowing.
Return on Investment (ROI)
A financial ratio indicating the degree of profitability of a business.
ROI is of particular importance to owners because it can be used
to compare with other investments. ROI is calculated by dividing
net profit for the period by net
worth (total equity). An analysis of ROI for the current period
with other periods can reveal positive or negative trends. It also
allows you to compare your company with industry values.
The cost of finding customers, enticing them to buy, delivering
the product or service, and collecting the amount due.
The mix of complimentary products and services a business offers
to entice sales. A business offering a product/service mix is usually
more concerned about the quality of the service than the products
being sold (e.g., a hair salon that cuts hair and sells professional
Self-Service Retail Outlet
A retail outlet where products are sold directly to the end user
at discount prices with few or no sales personnel to help and explain
the value and purpose of the products.
A type of savings fund in which deposits are made regularly to be
used later for a specific purpose, such as purchasing equipment
Skimming Pricing Strategy
A pricing strategy where you set the prices very high in the desire
for quick cash with minimal desires for significant market penetration
and repeat business.
An enterprise that is owned by a single individual who earns all
the profits and assumes all the losses. As contrasted with corporate
or partnership businesses.
The amount of money invested in a business by owners at the beginning
of operations, as opposed to any amounts borrowed.
An agreement between two or more companies to conduct a specified
business process in a joint manner such as technology development,
promotion, or opening new distribution channels.
Supply and Demand
The economic theory of market value where price is determined by
the interaction of sellers and buyers to reach an equilibrium price
which both are willing to accept.
A segment of a specific market that your company has identified
as your customers or clients. A target market is distinguished by
socioeconomic, demographic, and/or interest characteristics, that
make them the most likely customers for your products or services.
Small test runs of new products or marketing techniques to determine
effectiveness before making a full commitment.
A business that has progressed beyond the startup stage and is striving
to achieve long-term growth, prosperity, and stability.
A distinctive name, symbol, motto or emblem that identifies a product,
service or firm that has been legally registered as the property
of the firm. Trademarks grant the owner the right to prevent competitors
from using similar marks in selling or advertising.
Starting a new business without enough money to carry through the
start-up phase, especially if the business is likely to initially
operate at a loss. Undercapitalization is a frequent cause of new
Unfair and Deceptive Practices
Selling practices that tend to mislead potential buyers of a product
or service or result in unfair, unethical or immoral business behavior.
Regulated in the U.S. by the Federal Trade Commission (FTC).
Products that are usually purchased due to adversity rather than
desire, such as coffins, crutches, and medicine. Products, such
as life insurance, that the consumer rarely seeks to buy, can also
be classified as unsought goods. Here, aggressive selling processes
are usually required.
A cost that varies in proportion to the quantity produced. Theoretically,
variable costs are zero if there is no production. As opposed to
A source of business investment associated with a higher-risk opportunity
than conventional financial institutions are willing to bear. In
return for the higher investment risk, a venture capitalist usually
expects some combination of equity ownership in the business.
The strategy of incorporating all aspects of management, production,
sales, and distribution within a business in order to become less
vulnerable to outside forces.
A business that sells in large quantities and at lower prices to
full service or self service retail outlets, jobbers, merchants,
manufacturers, industrial firms, commercial, businesses and institutions,
and various other types of distributors. Wholesalers, as a rule,
do not normally sell direct to the end user.
A strategy often used in advertising, selling and marketing to make
a product or service appear more appealing than it actually is (e.g.,
photos of menu items in a restaurant that don't live up to the actual
food item when served). Such distortion can be considered unethical
The cash available to an enterprise for day-to-day operations. It
allows bills to be paid while awaiting payment of cash for sales.
In accounting, it is current assets less current liabilities.
An unknown or indefinable element. Often used in the entertainment
industry to separate successful entertainers from less successful
entertainers. Ross Reck, writer of The X-Factor: Getting Extraordinary
Results from Ordinary People describes it "the secret
of getting ordinary people X-cited about going the X-tra mile to
help their managers achieve X-traordinary results."
An employee who always agrees with the boss or supervisor regardless
of personal convictions. Such personnel seem to have no personal
opinions or convictions. Undesirable in a start-up operation where
creativity and innovation is desperately needed to survive and prosper.
In business or investing, the amount of profit expressed as an annual
percentage rate of the amount of capital invested (e.g., the ROI).
full service or self service retail outlets
Local municipalities regulating businesses to operate at particular
Rule of 72
A calculation of the approximate number of years required to double
an investment at an interest rate. For example, an interest rate
compounded at nine percent would double in eight years (72/9 = 8).