In effect, this statement affirms that you as an individual will act as guarantor for the business’s debt, making you personally liable for the balance of the loan even in the event that your business fails. This primer will walk you through the basic business terms in easy-to-understand ways. Any loan product with a total repayment schedule lasting longer than one year is considered a long-term debt. All debts that a company has yet to pay are referred to as Liabilities. It consists of the financial resources necessary for maintaining the day-to-day operation of the business. From accounting, to business loans, to general business financial operations, here’s the ultimate list to all the business finance terms and definitions you need to know: 1. Accounting involves the systematic recording and … Start My Free Trial. During her stint as a scribe, she's been featured by MileIQ, Trulia, and other leading digital properties. When shopping for the right loan for your small business, you should know the APR for the loan in question. It is used to calculate the total interest and fees charged. Payment due on last day of the month following the one in which the invoice is dated. Common Contract Terms Explained Disclaimer In every contract there are invariably a slew of legal terms and conditions that, regardless of the contract’s purpose, go unchanged and often unchecked by the contracting parties. These are maintained by credit bureaus that record information about a business’s financial history. Before deciding to use equity financing to raise the cash necessary for your business, decide how much control you are willing to share when it comes to decision-making and philosophy. Also known as your “bottom line.” Net profit represents total revenues less total expenses. Depreciation occurs due to wear and tear. always be learning as a business owner, no matter where you are in your career—there’s always a new tool to master, new problems to solve, and new vocabulary to understand. When. This business finance key term is a legal obligation to repay or otherwise settle a debt. Inventory is the term used to classify the assets that a company has purchased to sell to its customers that remain unsold. With your business’s most recent balance sheet in hand, you can calculate the net worth using a simple formula: Assets – Liabilities = Net Worth. Here are some of the fundamental business terms you should know. This represents your small business’s obligations to pay debts owed to lenders, suppliers, and creditors. Learning basic business terms is pivotal to improving your business acumen. Capital account. Lenders, investors, and insurance companies use these reports to evaluate risk exposure and financial health of a business. Calculate these by dividing the profit (revenue minus costs) by the revenue. You may want to hire a professional to handle this. Capital gains tax. Click on the individual terms for more formal definitions. This category may require frequent maintenance to avoid becoming too large. It’s easiest to understand indemnification through an example: say you rent a car and sign a contract with the rental agency that you will indemnify them against any future claims. Cost of Goods Sold are the expenses that directly relate to the creation of a product or service. Accounts Payable. The business finance term and definition cash flow refers to the amount of operating cash that “flows” through the business and affects the business’s liquidity. Debt payments include making principal and interest payments on the loan you are requesting. The good news is that you don’t have to be an accountant or a financial planner to negotiate in the world of business finance. Many terms have variations, and new terms are added daily, so it's important to stay current. This means that a contract signed in California could be litigated in Florida if that’s what the parties agreed. The interest rate on a loan that is established in the beginning and does not change for the lifetime of the loan is said to be fixed. Indemnification is a way for people to protect themselves from being financially liable for another’s actions or negligence. All rights reserved. This line of credit is considered a short-term funding option, with a maximum amount available. Learn more about personal vs. business expenses here. If the other party attempted to sue the rental agency, you would be legally obligated to assist in the agency’s legal defense. If the buyer were unable to make the $700 payment, he would not only lose the couch, but all the money he had previously paid. These types of loans represent a higher risk for the lender, so you can expect to pay higher interest rates and have shorter repayment time frames. Subcategories. Lenders often require collateral as a way to make sure they won’t lose money if your business defaults on the loan. These are usually classified as current or fixed. Connect with her on to find out what she's been writing about lately. An Accounting Period is designated in all Financial Statements (Income Statement, Balance Sheet, and Statement of Cash Flows). These are costs that change with the volume of sales and are the opposite of Fixed Costs. These patterns will give you a comprehensive look at how and when you receive and spend your cash. This concept should be in every entrepreneur’s arsenal of basic business terms. Generally speaking, if your DSCR is above 1, your business has enough income to meet its debt requirements. Interest is the amount paid on a loan or line of credit that exceeds the repayment of the principal balance. As these items are sold to customers, the inventory account will lower. A liquidated damages clause states that if a party fails to live up to the terms of an agreement, that party will be liable for a specific sum of money. Further, this clause can also limit your ability to litigate a dispute in the courts. If your business has a significant amount of open invoices outstanding, you may contact a factoring company and have them purchase the invoices at a discount. Credit cards are an excellent example of unsecured loans that are a good option for small business funding when combined with other financing options. On the flip side of B2B businesses are B2C businesses. Tips on productivity, collecting payments and growth delivered straight to your inbox. GAAP requires that all Material considerations must be disclosed. >>Supporting Post: How to Calculate Days Sales Outstanding to improve cash flow. , it should include financial, operational, and marketing goals as well as how you plan to get there. A tangible, long-term asset used for the business and not expected to be sold or otherwise converted into cash during the current or upcoming fiscal year is called a fixed asset. 21st Floor, New York, NY 10038. Credit cards are an excellent example of unsecured loans that are a good option for small business funding when combined with other financing options. When this happens, this business finance term and definition is a secured loan. should reflect activity in the areas of operating, investing, and financing and should be an integral part of your financial statement package. . This info is the key to unlock informed, accurate cash flow projections. Liabilities are debts your business owes another person or entity. 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