Business Owners

Ten Terms Every Business Owner Should Know

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1. acceleration clause – A provision normally included in loan document that gives the lender the right to demand the entire loan amount (principal plus interest) to be paid at once, in case the borrower fails to make payments (defaults) or gets into serious financial difficulties.

2. accounting method – A set of rules to determine when and how income and expenses are recorded. The two most common methods are accrual method and cash method.

3. cash basis accounting – An accounting method in which income is recorded when cash is received, and expenses are recorded when cash is paid out.

4. accrual basis accounting – A system of accounting based on the accrual principal, under which revenue is recognized (recorded) when earned, and expenses are recognized when incurred. Totals of revenues and expenses are shown in the financial statements (prepared at the end of an accounting period), whether or not cash was received or paid out in that period. Accruals basis accounting is employed by most companies except the very small ones (which use cash basis accounting).

5. actual cost – The actual amount paid or incurred, as opposed to estimated cost or standard cost. In contracting, actual costs amount includes direct labor, direct material, and other direct charges.

6. bad debt – An account receivable that is unlikely to be paid and is treated as loss. The ratio of bad debt losses and the open account (credit) sales is an indicator of the quality of a firm’s collectibles, and the efficiency of its credit monitoring efforts.

7. balance sheet – A condensed statement that shows the financial position of an entity on a specified date (usually the last day of an accounting period). Among other items of information, a balance sheet states (1) what assets the entity owns, (2) how it paid for them, (3) what it owes (its liabilities), and (4) what is the amount left after satisfying the liabilities.

8. billing cycle – The number of days between one invoicing period (during which invoices are prepared and dispatched) and the next.

9. bottom line – Net income after tax. Also defined as what is left after all expenses are paid.

10. business growth – The process of improving some measure of an enterprise’s success. Business growth can be achieved either by boosting the top line or revenue of the business with greater product sales or service income, or by increasing the bottom line or profitability of the operation by minimizing costs.

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Rosenthal Goldhaber