Accounts payable is a liability that reflects the bills you owe other companies. Accounts payable is a current liability, which means you expect to pay off the accounts over the next operating cycle (usually 12 months).
Accounts receivable is an asset that reflects the bills that are owed your company. Accounts receivable is a current asset, which means you expect to collect on the accounts over the next operating cycle (usually 12 months).
After-tax interest rate is the effective interest rate you pay on a loan if you deduct interest expense. For example, if you have an 8% loan and are in the 25% tax bracket, the after-tax interest rate is 8% multiplied by (1 minus 0.25), or 6.00%.
Your after-tax return is your investment rate of return net of taxes. Assume you are in the 25% income tax bracket and qualify for the 15% capital gains rate. If you sell 100 shares for $15 that you paid $10 for 366 days ago and which earned $100 in dividends, your after-tax return is based on paying 15% on the $500 in capital gains and 15% on the $100 in dividends. After taxes, this equals $510. Divided by your $1,000 investment, your after-tax return is 51.0%.
Amortization is the gradual reduction of loan principal that occurs as you make periodic loan payments. Generally, the loan principal is completely amortized with the final payment. As you pay back the loan, an increasing amount of each payment is applied to principal and a lesser amount is applied to interest. Amortization is also a process of spreading a cost that is incurred upfront over the term of the loan or life of the asset.
Articulation is the way in which the three major financial statements relate to each other. The balance sheet is a representation of the financial position of a company at a given point in time. Between two of these points in time, the income statement and cash flow statement together explain the changes in accounts on the balance sheet.
A purchase option gives you the right to buy leased equipment at the end of the lease term. The purchase price is called the residual value, which is close to the book value of the asset. In a lease transaction, the party that leases the equipment (the lessor) retains ownership of the asset and takes depreciation expense.
For a company, a balance sheet shows its assets, liabilities and equity. The balance sheet may be displayed using a T-account, with assets on the left and liabilities and equity on the right. Or it may be displayed vertically, with assets on top and liabilities and equity on the bottom. A personal balance sheet is a similar display of your personal assets and liabilities. If your assets exceed your liabilities, the difference is your equity.
A board of directors makes strategic decisions for a corporation and is responsible for hiring the management team, including the chief executive officer and president. Directors are obligated to make fiduciary decisions that are in the best interest of the corporation. Board members are nominated by the rest of the board and elected by a vote of current board members after nomination.
A break-even analysis focuses on the level of sales a company is required to generate in order to pay for its total fixed costs. Once the company covers its fixed costs, each additional dollar of sales should generate profit, as long as the company incurs less than a dollar in variable costs for each dollar of sales.
When you refinance a mortgage, the decision is profitable if you are able to pass the break-even point. At the break-even point, the savings you receive from refinancing equal the costs. A common break-even analysis is to calculate how long you must live in a home after you refinance in order to recover the closing costs you paid to refinance. For investing in stocks and mutual funds, break-even analysis is used to calculate the minimum sale price that allows the buyer to recover the transaction costs from buying the shares. For business operations, a business reaches its break-even point when it generates enough sales to pay for all its fixed costs. For each additional dollar of sales, variable costs should be less than a dollar. As a result, each dollar of sales past the break-even point generates some profit.
The three main forms of business ownership are a sole proprietorship, partnership, and corporation. There are limited-liability partnerships (LLPs) and limited liability companies (LLCs). The two main types of corporations are Subchapter C corporations (C corporations) and Subchapter S corporations (S corporations).
A business plan is a document that a business owner writes when he or she establishes a business. A business plan should explain the planned product or service, and the plan for manufacturing or distributing the product or service; plans to pay for the start-up and expansion of the company; plans for hiring a management team and staffing the company; and a marketing strategy. Additional financial information includes a forecast of sales, profits, and cash flows. A business plan is helpful in persuading prospective lenders or investors.
Capital is one of what economists call the factors of production. Together with labor, land, and technology, capital is a necessary ingredient in building companies. In its most basic form, capital is money. Capital is required to invest in the fixed assets of a company that allow a company to sell, earn profits, and pay employees.
Capital budgeting is a process of identifying the most profitable capital investments of a firm, based on a limited supply of capital. Capital budgeting uses a discounted cash flow (DCF) or similar analysis to calculate a project's rate of return. The most profitable projects are placed at the top of the list for funding.
Capital investments are those investments you make in productive assets of your business. These assets are usually fixed assets such as property, plant, or equipment. For non-manufacturing companies, capital investments may include distribution facilities or technology capabilities.
A capital lease is one of the two major types of equipment leases (the other type is an operating lease). A capital lease is a contract that requires the lessee (the party that uses the equipment) to make periodic payments to the lessor (the party that retains ownership of the equipment) over the length of the lease term. Capital leases are fully amortized over the lease term. Tax benefits related to depreciation accrue to the lessee. Since they are essentially similar to a term loan, capital leases are required to be shown on the balance sheet.
Capital requirements are a measure of how much capital a firm needs to stay in business. The two main types of capital are investment capital and working capital.
Capital structure is the composition of debt and equity on the balance sheet of a company. For example, if a company finances 50% of its assets with debt and 50% with equity, its capital structure is equally weighted between debt and equity.
Cash and investments are the two most liquid accounts on your balance sheet. Cash and investments are included in current assets, since they are available to be used up over the next operating cycle (usually 12 months).
For a company, a cash flow statement shows its sources and uses of cash during a period. Sources and uses are primarily the operations, investments, and financing over a period. A personal cash flow statement shows your personal sources and uses of cash to assist you in personal cash budgeting.
Cash flows are the actual cash inflows and outflows that you or your business experiences. While you may earn revenues and incur expenses, your cash flows may not mirror these revenues and expenses. Managing your cash flows can work to your advantage. But mismanaging cash flows works to your disadvantage.
Cash inflows are dollars (or relevant currency) that you receive on an investment. Cash inflows are a payback, or source of cash, on an investment. Cash outflows, o the other hand, are dollars (or relevant currency) that you spend or invest in order to earn a rate of return. Cash outflows are uses of cash. The interest rate that equates the cash inflows and outflows for a project, even one extending many years, is called the internal rate of return.
Cash outflows are dollars (or relevant currency) that you spend or invest in order to earn a rate of return. Cash outflows are uses of cash. Cash inflows, on the other hand, are dollars (or relevant currency) that you receive on an investment. Cash inflows are a payback, or source of cash, on an investment. The interest rate that equates the cash outflows and inflows for a project, even one extending many years, is called the internal rate of return.
The communications plan is your roadmap of how you will achieve your goals. Itís where you identify your audiences and clearly define your objectives.
A corporation is a form of business ownership. A corporation issues shares of stock that represent an ownership interest in it. One of the unique features of a corporation is the limited liability of shareholders. Shareholders who make a personal financial guarantee or commit fraud are liable to the extent of the guarantee or owing penalties stemming from a personal act of fraud. A board of directors is the overseeing body of a corporation. The board is responsible for the strategic decisions of a corporation, including the appointment of a management team. The three main subtypes of corporations are Subchapter S corporations, Subchapter C corporations, and limited-liability corporations (LLCs).
Cost of capital: 1) the weighted-average cost of debt and equity financing; 2) the required rate of return a business expects to earn on its investments. Cost of capital is used to discount future cash flows to present value. Which cost of capital to use to discount future cash flows depends on the transaction. If financing a project, the appropriate cost of capital is the cost of debt and equity financing. If the business uses only debt to finance the project, the after-tax interest rate is the cost of capital. If investing in a project, the appropriate cost of capital is the rate of return a business requires on its investment elsewhere. This rate of return is also called the opportunity cost of capital since it is the rate of return the business earns if investing elsewhere.
Cost of goods sold is the total expense a company incurs on the merchandise it sells. Cost of goods sold is subtracted from revenues to calculate gross profit. For example, if a company has $1 million in revenues and the expense of the merchandise it sells is $600,000, the cost of goods sold is $600,000. Gross profit is $1 million minus $600,000, or $400,000.
Current assets are those assets that are in cash or can be converted to cash over the next business cycle, which is generally 12 months. Current assets include cash, investments in marketable securities, accounts receivable, and inventory.
Current liabilities are liabilities that you expect to be paid with cash over the next business cycle, which is generally 12 months. Current liabilities include accounts payable and deferred income taxes.
Debt servicing is a banking-industry phrase to describe the regularity of making scheduled payments of principal and/or interest on your debt.
Debt-equity ratio is the percentage of debt to equity on a balance sheet. For example, if you have $100,000 in debt and $100,000 in equity, the debt-equity ratio is 1-to-1, or 100%. If you have $50,000 in debt and $150,000 in equity, the ratio is 1-to-3, or 33%. Together, how your debt and equity are structured as a percentage of total capital is called your capital structure.
When you fail to repay a loan under the terms of the loan agreement, you trigger a loan default. This allows the lender to take extra steps to recover the loan. If it is a student loan that on which you are in default, you are generally ineligible to receive federal financial aid.
Deferred income taxes are a liability that reflects the federal, state, or foreign income taxes you owe. Deferred income taxes are a current liability, which means you expect to pay the taxes over the next operating cycle (usually 12 months).
Degree of operating leverage, or DOL, is the percentage change in your operating income divided by the percentage change in sales. DOL is related to operating leverage, which is using cost structure of a business to magnify a change in operating income. As sales increase, a cost structure more heavily weighted towards fixed costs will result in higher operating income.
Depreciation is the systematic reduction of book value over time due to wear and tear and obsolescence. Some equipment types depreciate faster than others. If a piece of equipment has a longer useful life, it suggests that its depreciation rate is lower than one with a shorter useful life. Depreciation is also used to calculate the residual value of leased equipment. Depreciation expense is a non-cash expense that creates tax savings.
Discount factor is the inverse of one minus the discount rate. To determine the present value of a cash flow, divide the future cash flow by the discount factor. For example, if you expect a cash inflow of $100 in one year, and the discount rate is 6%, the discount factor is 1.06. If you expect an inflow of $100 in two years, the discount factor is 1.06^2, or 1.1236.
A discounted cash flow (DCF) analysis is a spreadsheet-based display of the cash inflows and outflows of a project. Since cash flows occur over a period of longer than one year, future cash flows are discounted at the appropriate discount rate in order to calculate the present value of the cash flows. The present value of all cash inflows and outflows is added to determine the net present value (NPV).
A regular e-mail communication to interested prospects, customers, colleagues, competitors, as well as industry and media contacts.
Published stories resulting from your media relations efforts Ė online or in print and broadcast.
Equipment leasing is a financing alternative to borrowing money or paying cash in order to finance the acquisition of office and capital equipment necessary for a business to run its operations.
Real estate: the residual ownership claim on a home's value. Equity equals the fair market value of a home, less any mortgage debt or other obligations. Stocks or businesses: an ownership stake in a company. Shareholders equity is equal to assets minus liabilities.
Financial leverage is the use of debt to magnify return on equity to shareholders. Financial leverage is a risky strategy for financing: If your firm is too leveraged (too much debt) and it experiences a downturn in sales, it may be unable to pay the interest on its debt. As a result, excessive financial leverage is regarded as increasing the default risk of a firm.
The Securities and Exchange Commission requires companies whose shares trade on U.S. stock exchanges to publish financial statements every three months. Primary financial statements of a company include: income statement, which shows sales, expenses and profit or loss for the reported period; balance sheet, which shows assets and liabilities at the end of the period; and cash flow statement, which reconciles cash flows with the income statement and balance sheet.
Fixed assets are the assets a company uses to create income. Fixed assets include property, plant, and equipment (PPE). Fixed assets are depreciated over their usable life and may be sold at the end for a salvage value. Depreciation expense is a non-cash expense, so it is added back to cash flow amounts when calculating cash flows from operations for a business.
A business incurs fixed costs and variable costs. Fixed costs represent those costs that the business must pay no matter what level of production it is operating at. Fixed costs include such expenses as depreciation of fixed assets, interest, expense, rent, etc.
A franchise is a business that licenses its business idea for revenue. First, a franchisor builds or buys a profitable business. Encouraged by the profit opportunities, a franchisee pays a fee and a share of revenues to license the franchised product or service. Fast-food restaurants, convenience stores, and copy-center stores are often franchised businesses.
A website that hosts and distributes your news release online.
A graphical view of a firm's revenues, expenses, and profits. An integral part of a firm's financial statements.
Internal rate of return (IRR) method calculates the annual interest rate that equates the cash outflows and inflows of a project. It is the rate of return earned on the cash flows of the project, in other words. As a general rule, if the IRR is greater than the firm's cost of capital, it should undertake the investment.
Inventory is an asset that reflects the products you are holding for sale. Inventory is a current asset, which means you should expect to be able to sell the inventory over the next operating cycle (usually 12 months).
Investment capital is capital to invest in the fixed assets or human resources that are necessary for increasing production or replacing depreciated assets.
Investment return is the gain or loss on an investment, stated as an annual percentage rate. Investment returns for periods of more or less than a year are annualized. Annualizing is the process of converting returns to a one-year period. Investment returns for multiple-year periods are generally average annual returns.
A lease is a contract between two parties, a lessor and lessee. Under the terms of the lease agreement, the lessee makes periodic payments to the lessor. Ownership of the equipment at the end of the lease term, as well as which side receives the tax benefits from the related depreciation expense, depends on the type of lease.
A lessee is the side of a lease contract that is obligated to make payments in order to use the leased equipment.
A lien is a legal claim held by a creditor against an asset to guarantee or secure repayment of the debt. Mortgage liens are regularly used in real estate lending as collateral for a loan.
A line of credit is a form of borrowing money called a revolving credit instrument. With a line of credit, the borrower can draw down only the amount needed, up to the amount of the credit limit. The borrower only pays interest on the amount drawn, or disbursed. Like a credit card (another form of revolving credit), you can continuously draw down from the credit line up to the amount of the credit limit.
Liquidity is a favorable characteristic of a stock, bond or other security. It represents the relative ease with which a security may be sold. The more buyers and sellers there are for a security, the greater its liquidity. Liquidity is often reflected in the spread of the price of the security: A narrow spread between bid and ask prices is a positive sign of liquidity.
A liquidity crunch is a business condition that results in having too little cash and other current assets to be able to pay current liabilities as the liabilities mature. A liquidity crunch is a timing issue: not having enough liquidity can force you to make an emergency borrowing at a less than favorable interest rate.
A majority stake is an ownership interest in the stock of a company that constitutes more than 50% of the voting rights of stock. A majority stake allows the majority investor to control the strategic decisions that board members vote on.
A marketing plan is a comprehensive effort to define a marketing strategy for your business. A marketing plan identifies potential customers and their characteristics, pricing, advertising, and distribution of your product or service.
The practice of working with the media to communicate with the public about your company or organization.
A minority stake is an ownership interest in the stock of a company that constitutes less than 50% of the voting rights of stock. A minority stake prevents the minority investor from controlling the strategic decisions that board members vote on.
Navigation is the user interface of your website. Itís the device that lets your users know where they should go and what they should do
Net cash flow is the difference cash inflows and outflows. If you forecast that cash outflows will be larger, you are expecting negative net cash flow. If you forecast that cash inflows will be larger, you are expecting positive net cash flow.
Net means "the difference of two or more amounts." Net cash outflows is the arithmetic difference of cash inflows and cash outflows. If you forecast that cash outflows will be larger, you are expecting net cash outflows. If you forecast that cash inflows will be larger, you are expecting net cash inflows.
Individuals: Net income is the amount of income left after all deductions and taxes. Corporations: Net income is a company's profit for a given period of time after it pays taxes and all other expenses.
Net margin is net profit divided by net sales. It measures the ability of a firm to generate net profits from sales. A higher margin suggests a higher level of profitability. Net margin can be influenced adversely by non-operating items, such as interest expense on debt, nonrecurring charges, or dividends paid to preferred shareholders.
Net present value is a method of determining the value of an investment in today's dollars. To calculate net present value, you discount future cash flows at the appropriate interest rate. You subtract your cash outlay from the sum of the present value of your cash inflows to determine your net present value. As a general rule, if net present value is positive, the investment should be made.
Net sales, or net revenues, is the amount of revenue that adjusts for any merchandise returns or sales discounts.
Net working capital is capital that you have at your disposal over the next operating cycle (usually 12 months). Working capital is equal to current assets minus current liabilities.
A communication distributed to relevant media, announcing a newsworthy event.
An operating budget shows forecast sales, operating expenses and operating income for your business for a period of time. A budget is useful to compare actual and expected performance. The difference in actual and budgeted performance is called the variance. Variances are useful in making adjustments to a future budget.
Leasing: Operating expenses are those expenses required to maintain and service equipment. With real estate leasing, operating expenses include those related to using the real estate. These expenses include cleaning, heating and cooling, and a pro rata share of common-area expenses such as security, parking, cleaning, and advertising.
An operating lease is one of the two major types of equipment leases (the other type is a capital lease). An operating lease is a contract that requires the lessee (the party that uses the equipment) to make periodic payments to the lessor (the party that retains ownership of the equipment) over the length of the lease term. Operating leases allow lessees to conserve cash and avoid buying too much equipment. Operating leases have a cancellation provision in case the lessee wants to stop making payments. At the end of the lease term, the leased equipment may be leased again or sold to the lessee for the residual value of the equipment.
Operating leverage is the use of fixed costs in your cost structure to magnify operating income. Operating leverage can be a risky strategy: If your firm is too leveraged (too much in fixed costs) and it experiences a downturn in sales, it may be unable to lower expenses on the way down.
Opportunity cost is the sacrifice of benefits from the next-best alternative that you face when you make a financial or economic decision. For example, say you had $1,000 to invest. You could invest it in a stock mutual fund that might return 20% or more. If you make this investment decision, you sacrifice the opportunity to earn a lower rate of return on an investment that has no risk. This might be a CD or other fixed-term deposit that had a 6% rate of return. This 6% guaranteed return would be the opportunity cost of investing in the mutual fund instead.
A partnership is a legally binding form of business ownership between two or more individuals or entities. The three main forms of partnerships are general partnerships, limited partnerships, and limited liability partnerships (LLPs). The extent of personal liability depends on the type of partnership. General partnerships enjoy the least amount of limited liability.
Payback method is used for ranking an investment project. The simplest version of the payback method calculates the positive net cash flows from a project and determines the number of years it takes to recover an investment. For example, if you invest $100,000 and receive $50,000 the first year, and $25,000 in each of the next two years, it takes you three years ($50+$25+$25=$100) to receive a payback on your original investment.
A planning tool that lays out in simple and concise terms how much you earn and spend each month. For example, you may decide to spend $1,000 and save $200 from your monthly after-tax income of $1,200. You can do a personal budget for the entire household. As part of the budgeting process, you want to save for several months of emergency, or rainy day, expenses. These are funds you can live on for three to six months in the event of an emergency. Part of setting up a personal budget is using it to compare to your actual spending. If you actually spend $1,100 a month and save only $100, you either need to discipline your spending, or adjust your budget to more realistic circumstances.
A brief, well-prepared story that links your publicity desires with the news reporterís need for story ideas and leads.
Present value is the value of a future payment, or series of payments, discounted at the appropriate interest rate to determine the value in today's dollars. For example, if you were given the choice of $100 today or a year from now, you would choose to take it now. You can invest or spend it. If you could invest it at 10%, you would have $110 a year from today ($110/$100). In other words, the present value of $110 a year from today is $100 if the discount rate is 10%. The discount rate should be at least equal to the inflation rate, which has averaged about 3% a year over the last decade. As a result, $103 a year from now has a present value of $100 ($103/1.03).
Project ranking is a means of allocating your investment capital to those capital projects that add the most value to your business. Payback, net present value (NPV), and internal rate of return (IRR) analysis are three common methods used to measure and rank a project's value.
Public perception is the true, pervasive view of your company. Itís what the world says about you right now. Good positioning, meaningful action, strong communications and helpful dialogue can help you align publicís perception with the perception of your organization. †
Public Relations is the way businesses, people or organizations foster understanding and build relationships. Frequently, this entails working with the media, influencers and customers to promote understanding of your organization.
Your Public Relations Strategy is a clear public relations objective Ė and your plan for reaching it.
Raising capital is a phrase that means, roughly, "to raise funds for a business." Companies build up capital over time by earning and retaining profits. This source of future capital is called retained earnings. Companies can also turn to the capital markets to raise debt or equity capital. However, the capital markets are inaccessible to most small businesses. Instead, if you want to raise capital through debt, you seek a bank loan or line of credit. If you want to raise capital through equity, you seek an equity investment by a venture capital (VC) or other firm that makes equity investments in small businesses. Often, the equity in a small business is a contribution from the business owner.
Real estate leasing is a financing alternative to borrowing money or paying cash in order to finance the acquisition of office, warehousing, or retail space necessary for a business to run its operations.
A systematic plan you use to repay debt. First, review personal budget and personal cash flow to see how much you can pay on a periodic basis. Next, pick a period in which you want to repay the debt. Finally, calculate a monthly payment. While repaying a debt, you want to avoid increasing your debts. That will only prolong the time that it takes to repay, and will discourage you. In other words, a repayment plan also requires spending discipline. For example, you may aim to repay a $1,000 debt in 12 months. A debt repayment plan is also helpful in repairing your credit.
Residual value is the value of a leased vehicle or other equipment at the end of the lease term. Residual value is the fair market value of the leased equipment. It is the price the lessee pays to buy the equipment if they exercise the purchase option.
Restrictive covenants are provisions of a loan agreement that restrict your use of funds. A lender may impose certain restrictive covenants on unproven borrowers in order to improve the collateral position of the lender. Examples of restrictive covenants are maintenance of a target working capital ratio or maximum allowable debt-to-equity ratio.
Measures a company's efficiency at earning a profit on its shareholders equity, and is calculated by dividing net income by shareholders equity. Shareholder's equity is assets minus liabilities.
A sale-and-leaseback is a real estate leasing transaction that involves the real estate owner selling real estate to a new owner and leasing it from the new owner in a typical leasing transaction. A sale-and-leaseback is intended to generate a large sum of cash from the sale of real estate and then a gradual return to the buyer in the form of leasing payments.
Salvage value is the value of a depreciated or leased asset at the end of its depreciable life or lease life. Salvage value is referred to as scrap, or residual, value. Scrap value is an alternative term for value of fully depreciated equipment. Residual value is an alternative term for value of equipment at the end of the lease life.
A systematic plan you use to save for a specific financial goal. If you have more than one financial goal, you may wish to set up a savings plan for each goal. First, review personal budget and personal cash flow to see how much you can save on a periodic basis. Next, pick a period in which you want to save the desired amount. Finally, estimate a realistic rate of return. It's important that you save regularly and avoid paying income taxes on your earnings, if possible. One way to do this is to contribute first to tax-advantaged retirement accounts and college savings plans.
An SBA loan is a business loan that is guaranteed by the U.S. Small Business Administration, a federal agency that is tasked with providing credit to small businesses.
Search engine optimization is the practice of writing keyword-rich copy, strategically placing it throughout the site, in specific ways, to achieve higher placement in search engine results.
A sole proprietorship is the simplest form of business ownership. A sole proprietorship is in the name of the business owner. Unlike corporations and some forms of partnerships, sole proprietorships do not enjoy limited liability. The sole proprietor is liable for the debts of the proprietorship.
Planned actions and communications that help you achieve a defined objective.
Tax savings are the amount you may save in taxes from a tax deduction or tax credit. Tax savings are also called a tax shield. To calculate tax savings from a deduction, multiply the amount of the deduction by your marginal income tax rate. For businesses, tax savings are realized on such deductible expenses as lease payments, interest on loan payments, and depreciation expense. Example: At a marginal business income tax rate of 25%, an increase of $2,000 in depreciation expense may save you $500 in taxes or $10,000 in operating lease payments may save you $2,500. You may wish to consult a financial or tax adviser.
A term loan is a loan whose principal is repaid, or amortized, over a fixed term. Banks sometimes call these bullet loans. A common term for term loans is three to five years.
A list of potential story ideas for a media contact.
A triple net lease is a leasing term used to describe the terms and conditions of leasing commercial property. Commercial property includes office buildings, shopping centers, and warehousing. With a triple net lease, the tenant pays taxes, insurance, and maintenance expenses for the property.