Are you a small business owner? Will that title apply to you soon? If you answered yes to either question, you should understand basic accounting and valuation terminology. As you start researching and speaking with investors, this guide will help you learn and negotiate with confidence.
The Terms You Need to Know
Tackle small business finance with a foundational knowledge of these common terms:
• Accounts payable: These are debts your company owes to vendors or other parties.
• Accounts receivable: Money that is owed to your business from customers, partners or other entities.
• Accrued payroll taxes: Collected payroll taxes that haven’t yet been delivered to the appropriate taxing entities on the federal and state levels.
• Accrued payroll: Payment owed to company staff as compensation for completed work hours.
• Assets: Any item with value that the company owns. This frequently includes real estate, investments and physical property.
• Balance sheet: A financial statement showcasing the state of your company at a stated period. Includes overall worth, assets and liabilities.
• Book value: This term refers to the value of the business on paper – primarily from the balance sheet information.
• Cost approach (asset-based): This approach determines your company’s worth based on the value of it in the marketplace.
• Current assets: If your asset can feasibly and/or easily be converted to cash in under 12 months, it’s current. Usually, this category includes inventory, cash, securities and accounts receivable.
• Current liabilities: Company debts due within 12 months are current liabilities. They usually include taxes payable, accounts payable and accrued expenses.
• Current ratio: Divide your total current assets by your total current liabilities. This ratio shows your company’s solvency or liquidity.
• Debt/worth ratio: Equals total liabilities divided by net worth. Shows how dependent your company is on loans.
• Depreciation: To account for asset deterioration, the item’s cost is allocated over its useful life.
• Fair market value: If the seller and buyer know all relevant factors about the item, the market value is the price of purchase.
• Fixed assets: Also known as long-term assets, these help you produce revenue but aren’t for sale. Think of office chairs, computers, etc.
• Generally accepted accounting principles: The professionally accepted principles of ethical and effectual accounting.
• Goodwill: How wiling are your venders, customers and community to continue business operations with your company?
• Liabilities: All debts your company owes to individuals and entities.
• Liquidation value: The value of the business after the liabilities are subtracted from the value taken from the balance sheet.
• Liquidity: How quickly can all your business assets be turned into cash?
• Liquidation: The act of selling all business assets, excluding ownership of the company.
• Long-term liabilities: Debts that will collect or become due more than a year after the current balance sheet’s reporting period.
• Market approach to valuation: Compare your company’s financial state to competitors in a same market and/or niche to determine your business’ value.
• Net worth: This amount is the difference between liabilities and total assets.
• Price/earnings ratio: Compare the value of your company’s stock to what the stock is earning individually.
• Profit/loss statement: A summary of your expenses and income in a stated period. Alternatively known as an income statement.
• Quick ratio: The value difference between your current liabilities and your assets such as accounts receivable, available cash and securities that are marketable.
• Valuation: Using a specified valuation method, the value of your company is measured for a specific date. Known as an appraisal.
• Working capital: The difference between your current liabilities and assets is your short term capital.
With this glossary of terms, you can have a deeper understanding of small business finance and how to move forward with your venture.”
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.