Business Terminology

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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

    Book ValueThere are several definitions associated with the term ‘Book Value’ and depending on the context of its use, determines the correct definition and proper use.
  • Business Trusts

    Business TrustsThe 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

    Capital GainsWhen 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.
  • Contract

    ContractA 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’. 
  • Discounts – Various Meanings in Business

    DiscountsThe 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

    Economic Substance PrincipleThe taxpayer must prove that the underlying economic transaction was not concocted to avoid or reduce tax liability. In the Gregory Vs.  Helvering case,  the Supreme Court actually uses the word  ‘sham’.
  • Economies of Scale

    Economies of ScaleOf 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.
  • Elasticity in Economics

    ElasticityOne 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 ProductGross 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 world.  Profit refers to the amount earned net of costs in a transaction. The key is defining a transaction.
  • Internal Rate of Return (IRR)

    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’.
  • Leverage in Business

    Financial LeverageIn 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 ...
  • Lien – Simple, Business and Legal Definitions

    lienA documented right to property owned by a debtor and granted to a creditor is referred to as a ‘lien’.  Although relatively a simple definition, it gets much more complicated when used in various contexts.  The word is most commonly used in business and is defined as the right to take property of a borrower ...
  • Long Term Debt – Explanation and General Understanding

    Long-Term DebtIn the arsenal of capitalizing a business operation, long term debt serves as one of the primary sources of capital.  If you are 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 ...
  • Mixed Costs

    Mixed CostsMixed 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.
  • Negative Basis in Business – Tax Shelters

    Negative Basis in BusinessNegative basis in business refers to the value of the equity investment in the company.  It literally means you have no actual equity investment and worse you owe somebody money because other parties have fronted the necessary capital to make the business viable.
  • Overhead – General Definition

    Overhead - General DefinitionThose costs not directly tied to the production of revenue are referred to as overhead costs.
  • Owner’s Draw in Business

    Owner's DrawWhen 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 word 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 RatioPrice 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.
  • Profit

    ProfitProfit 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.
  • 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 ...
  • Revenue (Sales) Codes

    Revenue CodesRevenue (sales) codes are unique identifiers for products sold or services rendered. They are used to organize information so management can better understand customer demands and the company’s profitability related to the items sold.
  • 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 in BusinessSkimming 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

    StockThe 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. 
  • 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.
  • Vertical Integration in Business

    Vertical IntegrationVertical 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.  
  • Winding Up (Going Out of Business)

    Winding UpWinding up is a business phrase referring to the final steps a business entity takes to cease operations, comply with all financial obligations and distribute the final profits to the remaining owners.

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