Financial Terms: A Cheat Sheet of 77 Essential Words for Business Owners

Understanding financial terms can feel like learning a new language, and it’s a challenge for many small business owners. This guide breaks down important business terms to give you a quick way to learn the basics and feel more confident in your business decisions.

77 Financial Terms for Business Owners

1. Asset Allocation: The strategic distribution of a business’s investments across various asset types (like stocks and bonds) to balance risk and achieve specific financial goals.
2. Annual Operating Plan (AOP): An annual operating plan is a detailed outline of a company’s goals, strategies and projected financial activities for the upcoming year. It serves as a roadmap for managing daily operations and achieving short-term objectives.
3. Accounts Payable: The amount of money a business owes to suppliers or creditors for goods and services received but not yet paid for.
4. Accounts Receivable (AR): The amount of money customers owe a business for goods or services delivered but not yet paid for.
5. Acquisition: The process by which a company purchases most or all of another company’s shares or assets, gaining control over that company.
6. Affiliate: An individual or entity partnered with a business, often to promote or sell each other’s products or services. This relationship is typically performance-based, with compensation linked to sales or referrals. Additionally, the term can describe a situation where two or more companies are subsidiaries under a single larger parent company.
7. Adjusted Gross Income (AGI): Income calculated by taking a business’s gross income and subtracting allowable deductions. It is an important figure for tax purposes, determining eligibility for certain tax credits and deductions.
8. Annual Interest Rate (AIR): The yearly interest percentage paid based on a borrower’s average loan balance. This rate excludes any fees.
9. Amortization: The process of spreading out the cost of an intangible asset (such as a patent or trademark) over its useful life for accounting and tax purposes.
10. Annual Percentage Rate (APR): The annualized interest rate plus any fees that are a condition of receiving capital — expressed as a yearly rate.
11. Asset: Within the context of a small business loan, an asset is something of value owned by the borrower, which can be used as collateral by a lender.
12. Balance Sheet: A financial statement that provides a snapshot of a business’s financial condition at a specific point in time, showing its assets, liabilities and equity. It helps business owners understand what the company owns and owes, as well as the amount invested by shareholders.
13. Beneficial Owners: Individuals or entities that enjoy the benefits of ownership in a business, even if they are not the named owners on legal documents. They often hold significant control over the company through share ownership, voting rights or profit entitlement.
14. Business Credit Profile: A collection of information based on a business’ history of credit. It’s used to predict the likelihood of a business paying back borrowed funds.
15. Business Incubator: A program designed to support startups and early-stage companies. They often provide resources like office spaces, mentorship, and access to investors and networks.
16. Business Line of Credit: A flexible type of funding that allows a company to borrow up to a certain limit and pay interest only on the portion of money used. It provides businesses with funds to address cash flow needs, purchase inventory or finance other short-term operational expenses.
17. Business Loan: A sum of money borrowed by a business that is repaid over time with interest. The funds can be used for business purposes such as expansion, equipment purchases or increasing working capital.
18. Business Plan: A document that outlines a business’s objectives, strategies, market analysis, financial projections and operational structure. It serves as a roadmap for the business’s growth and a tool for attracting investors or lenders.
19. Capital Gains: The profit made from selling a business asset, like property or stocks, for more than its purchase price.
20. Cash Flow: The movement of money into and out of a business, showing how well the company generates cash to cover debts and operating expenses.
21. Cash Flow Statement: A financial report that tracks the amount of cash and cash equivalents entering and leaving a small business. It provides a detailed view of the company’s liquidity and financial health over a specific period.
22. Cents on the Dollar (CoD): The total amount of interest paid per dollar borrowed. This amount excludes any fees.
23. Chargeback: Occurs when a customer disputes a credit card transaction and the charge is reversed, transferring the money back from the business to the customer’s bank account. This can happen in cases of fraud or dissatisfaction with a purchase.
24. Collateral: An asset, or assets, a borrower offers to a lender to secure a loan. The lender can take possession of these assets if the borrower defaults on the loan.
25. Cost of Debt Formula: A calculation business owners can use to figure out how much their debt actually costs them. The cost of debt formula divides the interest paid on debt by the total amount of those debts.
26. Cost of Goods Sold (COGS): The total cost a small business incurs to make or buy the products it sells, including materials and labor directly used in production.
27. Current Assets: Assets that can be converted to cash within one year.
28. Current Liabilities: Debts or obligations a business needs to pay within one year, like short-term loans, accounts payable and taxes owed.
29. Default: Failure to make the agreed-upon periodic payments on a loan. Default can lead to legal action, damage to credit ratings, and the potential loss of assets or collateral.
30. Depreciation: An accounting method used by business owners to spread out the cost of a physical asset (like equipment) over the time they expect to use it, showing the asset’s decreasing value over time.
31. Dividend: A portion of a company’s earnings distributed to its shareholders, typically in cash or additional shares.
32. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): A measure used by business owners to evaluate their company’s operating performance. It focuses on the business’s profitability from core operations, excluding the effects of financing and accounting decisions.
33. Employer Identification Number (EIN): A unique nine-digit number assigned by the IRS to businesses in the United States for tax reporting purposes. It’s like a Social Security number for a business. An EIN is necessary for hiring employees, opening bank accounts and filing tax returns.
34. Ending Market Value (EMV): The total worth of a small business’s investments at the end of a certain period, showing how much their value has changed over time.
35. Equity: The value and rights that shareholders own in a company. The value of equity can be subjective and calculated in different ways, including the amount that would be returned to the shareholders after liquidating all assets and settling all debts.
36. Expenses: Costs incurred during a business’s operation, such as rent, salaries and utilities.
37. Expense Report: A document compiled by employees to itemize and claim reimbursement for business-related expenses they have personally paid, such as travel costs and business meals.
38. FICO® Score: A type of personal credit score used by lenders to assess an individual’s credit risk, based on credit history. It can influence a business owner’s ability to get financing, especially if the business is closely tied to the owner’s personal credit.
39. Fixed Asset: A tangible asset, like property or equipment, that can be used as collateral.
40. Gross Income: The total revenue from all sources, before deducting any expenses or taxes. It serves as an indicator of the business’s overall financial performance.
41. Gross Profit: The difference between the revenue a small business earns from selling goods or services and the cost of goods sold (COGS). It indicates how efficiently the business is producing and selling its products.
42. Gross Profit Margin: A percentage that represents the gross profit as a portion of total sales revenue. It shows how much profit a business makes for each dollar of sales — after covering the costs of producing its goods or services.
43. Income Statement: A financial report that shows a business’s revenues, expenses, and profits or losses over a specific period, providing insights into its financial performance.
44. Independent Contractor: An individual or business hired to perform specific tasks or services for a company under a contract, not as an employee.
45. Interest: The cost of borrowing money, expressed as a percentage of the loan amount. Interest can also refer to the earnings from savings and investments.
46. Interest-Only Payments: Making only the interest payments on a loan without paying anything on the principal. At the end of the term, the borrower will either need to refinance or pay back the principal in a lump sum.
47. Investment: The allocation of resources, like money or time, into something like stocks, bonds, or business operations, with the expectation of future financial gain.
48. Invoice: A document issued by a business to a customer, detailing products or services provided, their prices, and the total amount due for payment.
49. Key Performance Indicators (KPIs): Specific, trackable values that show how well a business is doing in areas like sales growth, customer retention or profit margins.
50. Liabilities: Financial obligations a business owes to others, such as loans, accounts payable and mortgages.
51. Limited Liability Company (LLC): A business structure where owners have reduced personal responsibility for business debts and can pay taxes on business income through their personal tax returns.
52. Line of Credit: A line of credit is a flexible loan that offers a fixed amount of funds that can be accessed as needed and repaid either immediately or over time.
53. Liquidity: How quickly and easily assets can be converted into cash without significant loss in value.
54. Long-Term Liabilities: Debts or obligations due beyond one year, such as long-term loans, lease obligations or deferred tax liabilities.
55. Net Income: Net income is the total revenue for a given period of time, minus all costs and expenses.
56. Net Profit Margin: The percentage of revenue remaining after all operating expenses, interest, taxes and other costs have been deducted.
57. Net Working Capital: The difference between a company’s current assets (like cash, inventory and receivables) and its current liabilities (like accounts payable). It’s used to assess a business’s ability to meet its short-term obligations and manage its day-to-day operations effectively.
58. Net Worth: The value of a company’s assets minus its liabilities, indicating its financial health and stability.
59. Operating Cash Flow: The cash generated from a business’s regular operations, showing how much money is being produced through core business activities.
60. Personal Credit Score: A number determined by a collection of information based on your personal history of credit, used to predict the likelihood of your personal ability to pay back borrowed funds.
61. Principal: The amount of money being borrowed, excluding interest payments and fees.
62. Point of Sale (POS): Where a customer completes a transaction, like a checkout counter or a digital sales platform.
63. Profit Margin: The percentage of revenue that exceeds the costs of goods sold, indicating overall financial health and efficiency.
64. Return on Investment (ROI): A calculation that shows how much money an investment is making compared to its cost, helping a business understand how well it’s using its money.
65. Revenue: The total income generated for a given period of time before deducting any costs or expenses.
66. S Corp: A special type of business that, under U.S. tax laws, allows profits to pass directly to owners without being taxed at the corporate level, while also protecting the owners’ personal assets from business liabilities.
67. SCORE: A nonprofit organization that provides free business mentoring and education to small business owners and entrepreneurs in the United States.
68. Secured Loan: A loan where the lender requires collateral in the event the borrower should default. Small business loans can be either secured or unsecured.
69. Small Business Administration (SBA): A U.S. government agency that provides support to entrepreneurs and small businesses, offering resources like loan programs and business counseling.
70. Sole Proprietorship: A business owned and operated by a single individual, where there is no legal distinction between the owner and the business.
71. Stacking: A loan or cash advance approved on top of a loan or advance that is already in place with similar characteristics and payback terms.
72. Stock Market: A collection of markets where stocks (shares in companies) are bought and sold, providing a way for companies to raise capital and for investors to own a portion of the company.
73. Stocks: Ownership shares in a company, allowing investors to claim a part of the company’s assets and profits.
74. Term Loan: A term loan provides a lump sum to be paid back in a predetermined dollar amount per period (day, week, month, etc.), for a set length of time.
75. Unsecured Loan: A loan where the borrower is not required to put up collateral to secure the loan.
76. Valuation: The process of determining the current worth of a business or an asset. It’s based on factors like financial performance, market trends and future income potential. Valuation is crucial for investment, sale or merger decisions.
77. Working Capital: The difference between a small business’s current assets and its current liabilities. It shows how well the business can pay off its short-term debts and handle daily expenses. Different working capital formulas are used to calculate different types of working capital.