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Business Terminology

There are numerous sources for definitions related to business terminology.  These articles are designed to inform the reader of not only the definition and the associated variations but the proper use based on the context of the conversation.  Learn the correct way of expressing yourself related to business.  Understand what is being asked when in dialogue related to business.

These articles are in depth and written to educate the reader.  When you use and understand the term correctly, others will perceive you as the expert and your position within the group will rise.

  • Accounting

    AccountingAccounting refers to the business function of recording economic activity.  Accounting includes the processing of information and a reporting role.   The accounting term encompasses a broad range of functions for every business.  It starts out with a system of gathering economic information, categorizing the material, inputting the data into an accounting program, and generating outputs ...
  • Book Value – Definition and Usage

    There are several definitions associated with the term ‘Book Value’ and depending on the context of its use, determines the correct definition and proper use.  The three primary uses of the term are as follows: Stock, Corporate Value or Balance Sheet – simply stated as the equity value of a company divided by the number of ...
  • Business Trusts

    The common law definition of a business is an investment of capital or property by individuals which creates the means to carry on towards the goal of generating a profit.   Every state recognizes different legal formats to conduct business.   The simplest and most common is the sole proprietorship .   Other forms include partnerships, limited liability ...
  • Capital Gains – Introduction to Fundamentals

    When an individual or business sells an asset, the gain or loss is classified into one of two distinct tax groups – ordinary or capital.  The tax classification is strictly tied to the nature of the asset sold.  For most businesses, the assets sold are inventory.  Inventory is a normal function of the business so ...
  • Contract

    A contract is defined as any oral or written agreement between two or more parties that exchange rights and/or duties between the parties.  Every contract has four essential elements.  The first two create ‘mutual assent’ or what is commonly referred to in law as a ‘meeting of the minds’.  They are as follows: Offer – one ...
  • Discounts – Various Meanings in Business

    The term ‘discounts’ is a broad and varied meaning word when it comes to use in business.  It literally has four distinct definitions.  Each definition is used within a certain context of business.  The first and most dollar expensive use is with original issue discount related to bonds in the market.  The second use and ...
  • Economic Substance Principle

    The Internal Revenue Service uses an economic substance test to identify sham transactions that exist solely to reduce or eliminate taxes.    In addition,  the courts use this same doctrine to rule on the legitimacy of activity between two or more parties. This term ‘economic substance doctrine’ has other names including: *Substance over Form Doctrine * Sham Transaction(s) * Sham in ...
  • Economies of Scale

    Of the basic business principles, economies of scale has the greatest impact on profitability over any other business principle.   As an enterprise’s investment is spread over higher volume the cost per unit of production decreases.   The differential between sales price and cost changes add to the overall profitability for the company. Economies of scale ...
  • Elasticity in Economics

    One of the terms synonymous with the field of economics is ‘Elasticity’.  The term refers to the change in either the demand or supply (the other terms synonymous with economics) curve when there is a change in the price.  In general, if the price increases a little for consumer goods and the consumers decrease their ...
  • Gross Domestic Product (GDP)

    Gross Domestic Product is defined as the total production for the country.  It is measured by including all the dollars spent to purchase products/services from all the various sellers of goods.  The largest purchaser of products/services is consumers.  Coming in behind consumers are businesses, remember they are buying goods too.   This includes everything from office ...
  • Gross, Operational and Net Profit (Differences)

    The word ‘Profit’ is used loosely in the business word. Profit refers to the amount earned net of costs in a transaction. The key is defining a transaction. There is the direct transaction whereby a customer purchases a product and so it is simple math; sales value less cost of item sold equals profit. Then ...
  • Internal Rate of Return (IRR)

    Internal Rate of Return or IRR is the value rate earned on investment made by the company with its working capital.  In the small business world, this form of financial investment evaluation has little to no value.  Allow me to restate this: ‘IRR has limited to NO value in the small business world’.  This is ...
  • Leverage in Business

    In the simple lever and fulcrum machine the force is magnified onto a load.  The machine creates a mechanical advantage, a form of force amplification.  In business the principle is exactly the same.  Except here we are not moving a physical object but the objective is to amplify the profitability or financial gain by using ...
  • Long Term Debt – Explanation and General Understanding

    In the arsenal of capitalizing a business operation, long term debt serves as one of the primary sources of capital.  As an owner of a small business, you need to understand the relationship this source has to the overall financial status of the company.  Too much debt and the owner is burden by the cash ...
  • Mixed Costs

    Mixed costs are a more advanced business concept.  Mixed costs refer to a combination of both a fixed and variable component.  A common error made by most small business entrepreneurs is the misapplication of the formula.  Many small business owners understand the textbook definition but rarely exercise the concept in reality.  This article is written ...
  • Negative Basis in Business – Tax Shelters

    Almost one third of all the small businesses I’ve seen in my career had negative basis.  Most of the owners, actually almost every one of them did not understand what I meant by negative basis.  In private, I would lower my head and shake it in disbelief.   Negative basis in business refers to the value of ...
  • Owner’s Draw in Business

    When an owner of a small business operation transfers money from the business bank account to their personal bank account the transaction is commonly referred to as a ‘Draw’.  There are other terms but this is the traditional term used.   The technical definition is: ‘A transfer of earnings from the business on behalf of the ...
  • Phantom Income

    Phantom IncomeThose small businesses using partnership or S-Corporation formats issue Form K-1 to the respective owners.  When income is assigned to the owner and there is no corresponding cash related to that income, then this income is referred to as ‘Phantom Income’.  In effect, it is assigned income for tax purposes without the corresponding cash to ...
  • Price to Earnings Ratio – Introduction and Interpretation

    Price to Earnings Ratio (P/E) is an analysis tool used to evaluate publicly traded stock.  It is a simple mathematical formula relating the stock price in the market against the prior 12 months of earnings.  The following is the formula:  Price to Earnings Ratio = Current Stock Price in the Market/Prior 12 Months of Earnings per ...
  • Profit

    Profit refers the earnings from the business operations.  It customarily means the bottom line of the business income statement or its profit and loss statement.  For many business owners, it refers to the amount earned before income taxes are paid.  However, this is not correct.  It really means the amount earned for the owners of ...
  • Profit Shifting in Small Business – Internal Shifting

    Profit shifting in business is a term with two different interpretations.  The more modern use of profit shifting refers to large multinational U.S. based companies shifting their respective profits to other nations with a friendlier and lower income tax rates.  This article is written to explain the older and more traditional meaning of profit shifting ...
  • Rule of 72

    rule of 72A quick and easy way to determine the doubling of value for a given sum based on an interest rate is the Rule of 72.  This simple formula has three factors.  The first is the interest rate; the second is the amount of time in years to double the value and of course the number ...
  • Skimming in Business

    Skimming is a generic term referring to taking a little bit off the top.   In dairy, it refers to the cream at the top of the milk pail.  In painting, it refers to a very thin coat of paint to identify imperfections with the wallboard.  In business, it means taking a little bit of the ...
  • Stock

    New York Stock ExchangeThe one single term mostly equated to capitalism is ‘Stock’.  When a business is incorporated, stock is the core medium of exchange for the investment.  The company issues a certificate referred to as stock in exchange for the investment – most often cash.  This is the one true form of pure risk.  Most other forms ...
  • Syndication

    SyndicationSyndication refers to a group of individuals or business entities working together to achieve a set goal(s).  In business, the goals vary.  The most common goal is to acquire capital and use the combined power of the group in exercising that capital for a better than average rate of return.  This gets back to a basic ...
  • Tangible and Intangible – Business Definitions and Use

    Tangible and Intangible MeaningTangible and intangible are terms with several different meanings.  A lot of well educated folks have a difficult time providing an all inclusive definition.  Someone once described tangible as ‘something that can be burned’.  Well, land is tangible and yet, you can’t burn it.  Actually, in Boy Scouts, we teach the boys to use dirt ...
  • Variable Costs

    Variable CostsVariable costs are those business related expenditures that vary in proportion to production.  The most common examples of variable costs include raw materials, labor, packaging and distribution expenses related to producing and delivering the product or service.  The key to understanding this term is to realize that it is a cost accounting term.  Remember in ...
  • Vertical Integration in Business

    Vertical integration in business refers to the process of gaining control over more steps of the product production stream.  Whenever a business obtains or can greatly influence any one of these steps along the process of producing and selling a product, it is referred to as vertical integration.   Many of the Fortune 500 companies utilize this ...