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Small Business Finance: Financial Terminology

Provided by IFC's Gender Entrepreneurship Markets Program. 


Accrual basis an accounting method in which you record a transaction when the service is rendered. The alternate method is the cash basis, which records transactions only when cash comes in or goes out of the business.

Amortization schedule a table that breaks down a monthly loan payment into two categories: principal and interest. It also reports the balance due.

Asset any item of value which your business owns and is owed by others. Current assets can be converted into cash in one year. Fixed assets take over 1 year to convert into cash.

Balance Sheet a statement which shows what the business owns, what liabilities the business has, and the resulting worth of a business at a particular date.

Break Even the point at which all income equals all expenses

Business Plan a document which presents information on the current state of the business and the plans for the business' expansion over a future period. If used to get a bank loan, it also discusses how the loan resources will be used and establishes the credibility of project.

Cash basis an accounting method in which your record transactions only when cash is received or is paid.

Cash Flow Projection a spreadsheet which tracks cash coming into the business and flowing out, usually on a monthly basis. By projecting the flow of cash, the business owner can ensure that the business has sufficient cash to pay expenses, including the monthly loan payment.

Collateral an asset of value which can be used to guarantee a bank loan.

Co-signer/co-guarantor an individual who serves as a guarantor for someone else's bank loan. Sometimes the guarantor needs to pledge collateral, at other times, a simple signature will be considered sufficient.

Cost of Goods Sold costs to make a product, including materials, labor and related overhead.

Credit line a certain amount of money made available to a borrower for a predetermined amount of time.

Credit scoring a predetermined process of scoring the financial status of an individual or business used to approve or reject loan applications.

Finance charges fees charged by a financial institution. Examples of such charges are: interest charges on a loan, late charges on a credit card, and charges for a checking account.

Equity the worth of a business, after all debt has been subtracted, all of the assets minus all of the liabilities.

Factoring short-term financing from the sale of accounts receivable to a third party.

Financial Statement reports showing the financial condition of a business on a particular date or over a period of time.

Income Statement same as a Profit and Loss Statement, see below.

Indirect Expenses expenses that are not specifically associated with or cannot practically be traced to a specific supply

Interest the money paid for the use of money.

Inventory assets held for eventual resale. May be in the form of raw materials, work in progress, or finished goods.

Lease contract giving a business owner the right to use an asset for a specified period of time. A lease can be used for a building, equipment or machinery.

Liability debt, how much the business owes. Current liabilities are due within one year. Long-term liabilities are due after one year.

Lien a claim against a business' assets to secure payment of a debt.

Net Profit money left over after all expenses have been paid. Used to pay loans and to grow the company.

Net Worth the equity that the business has, all of its assets minus all of its liabilities.

Overhead business expenses not directly related to a particular good or service produced.

Profit and Loss Statement a spreadsheet which shows the income, expenses, and

profits of a business over a specified period.

Retained Earnings net profits accumulated through the company's life and reported in the Net Worth (or Equity or Capital) section of the balance sheet. Can be negative if losses occur.

Rate of Interest Fixed: interest rate remains the same for the length of the loan.

Variable: interest depends on an index and increases or decreases at specified times

Term a loan's maturity, stated in months or years.

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