As a business manager, it is extremely helpful to familiarize yourself with common business terminologies as follows:

"ACID TEST" RATIO: Also known as the "Quick Ratio". Cash plus those other assets which can be immediately converted to cash should equal or exceed current liabilities. The formula used to determine the ratio is as follows:

CASH Plus RECEIVABLE (NET) plus MARKETABLE SECURITIES
CURRENT LIABILITIES

The "acid test" ratio is one of the most important credit barometers used by lending institutions, as it indicates the ability of a business enterprise to meet its current obligations.

AGING RECEIVABLES - A scheduling of accounts receivable according to the length of time they have been outstanding. This shows which accounts are not being paid in a timely manner and may reveal any difficulty in collecting long-overdue receivables. This may also be an important indicator of developing cash flow problems.

AMORTIZATION - To liquidate on an installment basis; the process of gradually paying off a liability over a period of time, i.e., a mortgage is amortized by periodically paying off part of the face amount of the mortgage.

ASSETS - The valuable resources or properties and property rights owned by an individual or business enterprise.

BALANCE SHEET - An itemized statement which lists the total assets and the total liabilities of a given business to portray its net worth at a given moment in time.

BREAK-EVEN ANALYSIS - A method used to determine the point at which the business will neither make a profit nor incur a loss. That point is expressed in either the total dollars of revenue exactly offset by total expenses (fixed and variable); or in total units of production, the total cost of which exactly equals the income derived by their sale.

CAPITAL EQUIPMENT - Equipment which you use to manufacture a product, provide a service, or use to sell, store, and deliver merchandise. Such equipment will not be sold in the normal course of business, but will be used and worn out or be consumed over time as you do business.

CASH FLOW - The actual movement of cash within a business - inflow minus cash outflow. A term used to designate the reported net income of a corporation plus amounts charged off for depreciation, depletion, amortization, and extraordinary charges to reserves, which are bookkeeping deductions and not actually paid out in cash. A cash flow perspective offers a better indication of the ability of a firm to meet its own obligations and to pay dividends than with the conventional net income figure.

CASH POSITION - See LIQUIDITY

CORPORATION - An artificial legal entity created by government grant and endowed with certain powers; a voluntary organization of persons, either actual individuals or legal entities, legally bound together to form a business enterprise.

CURRENT ASSETS - Cash or other items that will normally be turned into cash within one year, and assets that will be used up in the operations of a firm within one year.

CURRENT LIABILITIES - Amounts owed that will ordinarily be paid by a firm within one year. Such items include accounts payable, wages payable, taxes payable, the current portion of a long-term debt, and interest and dividends payable.

CURRENT RATIO - A ratio of a firm's current assets to its current liabilities. The current ratio includes the value of inventories which have not yet been sold, so it is not the best evaluation of the current status of the firm. The "acid test" ratio, covering the most liquid of current assets, provides a better evaluation.

DEAL - A proposal for financing business creation or expansion; a series of transactions and preparation of documents in order to obtain funds for business expansion or creation.

DEPRECIATION - A reduction in the value of fixed assets. The most important causes of depreciation are wear and tear, the effect of the elements, and gradual obsolescence which makes it unprofitable to continue using some assets until they have been exhausted. The purpose of the bookkeeping charge for depreciation is to write off the original cost of an asset (less expected salvage value) by equitably distributing charges against operations over its entire useful life.

ENTREPRENEUR - An innovator of a business enterprise who recognizes opportunities to introduce a new product, a new production process, or an improved organization, and who raises the necessary money, assembles the factors or production, and organizes an operation to exploit the opportunity.

EQUITY - The monetary value of a property or business which exceeds the claims and/or liens against it by others.

ILLIQUID - See LIQUIDITY.

LIQUIDITY - A term used to describe the solvency of a business, and which has special reference to the degree of readiness in which assets can be converted into cash without a loss. Also called CASH POSITION. If a firm's current assets cannot be converted into cash to meet current liabilities, the firm is said to be ILLIQUID.

LONG-TERM LIABILITIES - These are liabilities (expenses) which will not mature within the next year.

MARKET - The number of people and their total spending (actual or potential) for your product line within the geographic limits of your distribution ability. The market share is the percentage of your sales compared to the sales of your competitors in total for a particular product line.

NET WORTH - The owner's equity in a given business represented by the excess of the total assets over the total amounts owning to outside creditors (total liabilities) at a given moment in time. Also, the net worth of an individual as determined by deducting the amount of all his personal liabilities from the total value of his personal assets.

PARTNERSHIP - A legal relationship created by the voluntary association of two or more persons to carry on as co-owners of a business for profit; a type of business organization in which two or more persons agree on the amount of their contributions (capital and effort) and on the distribution of profits, if any.

PRO FORMA - A projection or estimate of what may result in the future from actions in the present. A pro forma financial statement is one that shows how the actual operations of the business will turn out if certain assumptions are realized.

PROFIT - The excess of the selling price over all costs and expenses incurred in making the sale. Also, the reward to the entrepreneur for the risks assumed by him in the establishment, operation, and management of a given enterprise or undertaking.

SOLE PROPRIETORSHIP or PROPRIETORSHIP - A type of business organization in which one individual owns the business. Legally, the owner is the business and personal assets are typically exposed to liabilities of the business.

S-CORPORATION OR TAX OPTION CORPORATION - A corporation which within certain limitations has elected Sub-chapter S of the IRS Tax Code (by unanimous consent of its shareholders) not to pay any corporate tax on its income and, instead, to have the shareholders pay taxes on it, even though it is not distributed. Shareholders of a tax option corporation are also entitled to deduct, on the individual returns, their shares of any net operating loss sustained by the corporation, subject to limitations in the tax code. In many respects, Sub-chapter S permits a corporation to behave for tax purposes as a proprietorship or partnership.

TAKE-OVER - The acquisition of one company by another company.

TARGET MARKET - The specific individuals, distinguished by socio-economic, demographic, and/or interest characteristics, who are the most likely potential customers for the goods and/or services of a business.

WORKING CAPITAL, NET - The excess of current assets over current liabilities. The excess current assets are available for carrying on business operations.

Now – on to Summary Session 4

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