Category: Terminology
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Negative Basis in Business – Tax Shelters
Negative 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.
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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.
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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. With 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 revenue without…
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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. 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…
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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.
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Phantom Income
Those 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 pay…
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Variable Costs
Variable 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.
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Stock
The 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 of investments generally have…
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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’.
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Rule of 72
A 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 72.