Pitney Bowes Bank

Glossary of business terms

Accounts payable – A record of all unpaid short-term (less than 12 months) invoices, bills, and other liabilities. Examples of accounts payable include invoices for goods or services, utility bills, and tax payments due.

Accounts receivable – A record of all short-term accounts (less than 12 months) from customers you sell to but are yet to pay. These customers are called debtors and are generally invoiced by a business.

Angel  A wealthy individual who invests in entrepreneurial firms. Although angels perform many functions as venture capitalists, they invest their own capital rather than that of institutional or other individual investors.

Assets – Things you own. These can be cash or something you can convert into cash, such as property, vehicles, equipment, and inventory.

Audit – A check by an auditor or tax official on your financial records to check that you account for everything correctly.

Average age of accounts receivable – Sales divided by level of debt, expressed either as a number or by number of days. This shows how quickly (and therefore efficiently) the business collects its debts from customers.

Bad debts – Money that is unlikely to be paid in the near future.

Balance sheet – A snapshot of a business on a particular date. It lists all your assets and liabilities and identifies the net assets.

Bank reconciliation – A cross-check that ensures the amounts in your cashbook match the relevant bank statements.

Benchmark – A set of conditions against which you can measure a product or business.

Bill of sale – A legal document for purchasing property or other assets that details the purchase, where it took place, and for how much.

Bookkeeping – The process of recording the financial transactions of a business.

Bootstrapping – Where a business funds its growth purely through personal finances and revenue from the business.

Break-even point – When a business's income equals its expenses.

Burn rate  The rate at which a company requires additional cash to keep going. Usually measured in monthly expenses less turnover. For example, 'company XYZ has a burn rate of $45,000 a month'.

Capital cost – A one-off substantial purchase of physical items such as plant, equipment, building, or land.

Capital employed – The sum of equity and long-term debt used by a company to purchase long-term assets and for working capital.

Channels to market  Ways of getting your products or services to customers, such as online selling, retail sales, distribution agreements, or licensing deals.

Chart of accounts – An index of the accounts a business will use to classify transactions. Each account represents a type of transaction such as asset, liability, owner's equity, income, and expense.

Closing inventory – The value of the total inventory (stock) or number of units that a business has on hand at the end of an accounting period.

Collateral – A physical asset that a borrower owns and puts forward as security in case they default on their loan.

Commercial bill (also known as a bill of exchange) – A form of commercial loan on an interest-only basis, or interest-reducing basis. Commercial bills typically require some sort of security and suit short-term funding needs such as inventory.

Contingent liability – A liability where payment is made only if a particular event or circumstance occurs.

Cost of goods sold – The total direct costs of producing a good or delivering a service.

Credit – A lending term for when a customer purchases a good or service with an agreement to pay at a later date. This could be an account with a supplier, a store credit card, or a bank credit card.

Creditor – A person or business that allows you to purchase a good or service with an agreement to pay at a later date. A creditor is also anyone who you owe money to, such as a lender or supplier.

Credit limit – A dollar amount that you cannot exceed on a credit card or the maximum lending amount offered for a loan.

Credit rating – A ranking applied to a person or business based on their credit history that represents their ability to repay a debt.

Credit history – A report detailing an individual's or business's past credit arrangements. A lender may seek a credit history when assessing a loan application.

Crowdfunding – A way of financing your business idea through donations of money from the public. This usually occurs online, through a crowdfunding website.

Current asset – An asset in cash or something you can convert into cash within 12 months.

Current liability – A liability that is due for payment within 12 months.

Current ratio  Current assets (cash, debtors, stock) divided by current liabilities (overdraft, creditors). You should aim to keep the Current ratio at 2:1.

Debt – Any amount that you owe including bills, loan repayments, and income tax. Capital supplied for which there is a fixed income, fixed repayment period, and fixed repayment schedule.

Debtor – A person or business that owes you money.

Default – A failure to pay a loan or other debt obligation.

Depreciation – The process of offsetting an asset over a period of time. You can depreciate an asset to spread the cost of the asset over its useful life.

Dilution of equity – A stock market term used to describe the situation whereby the issue of new shares results in the original shareholders owning a smaller share of the company.

Disbursements – Money that a business spends.

Direct labor costs – Any labor costs such as wages relating directly to your product manufacture or service delivery, such as retail sales assistant, a builder's apprentice, or a machine operator. An indirect labor cost would be product support staff (as it is difficult to allocate their time to the sale of a particular product or job).

Direct material costs – All the costs of materials incurred preparing your products or services for sale. For example, a boat-builder's material costs might include wood, fiberglass, and fittings.

Discount – A reduction applied to a full-priced good or service.

Distribution costs – Costs such as tariffs, storage, or freight costs associated with getting your product or service to market.

Distributors – Businesses, usually with wider-reaching connections or contacts than you have yourself, that on-sell your products to wholesalers, retailers, or consumers.

Double-entry bookkeeping – A bookkeeping method that records each transaction in 2 accounts, both as a debit and a credit.

Drawings – personal expenses paid for from a business account. Money you withdraw from your business for your personal use. This is quite separate from any wages or salaries you may pay yourself that have tax deducted.

Due diligence – The process of researching a business and its management prior to proceeding with a venture capital deal, or not.

EBIT – Earnings before interest and tax.

Employee share schemes – Where you give your employees the opportunity to buy shares in your company. Other terms include an 'employee share purchase plan' or an 'employee equity scheme'.

Equity – The value of ownership interest in the business, calculated by deducting liabilities from assets.

Equity finance – Money provided to a business in exchange for part ownership of the business. This can be money invested by business owners, friends, family, or investors like business angels and venture capitalists.

Expansion financing – Capital provided for the growth and expansion of an established company. Funds may be used to finance increased production capacity, market or product development, and/or provide additional working capital. Capital provided for turnaround situations is also included in this category, as is the refinancing of bank debt.

Facility – An arrangement such as an account offered by a financial institution to a business (such as a bank account, a short-term loan, or an overdraft).

Factoring (also known as debtor's finance and invoice financing) – When a factor company buys a business's outstanding invoices at a discount. The factor company then chases up the debtors. Factoring is a way to get quick access to cash but can be quite expensive compared to traditional financing options.

Financial statement – A summary of a business's financial position for a given period. Financial statements can include a profit and loss, a balance sheet, and a cash flow statement.

Fixed asset – A physical asset used in the running of a business.

Fixed costs – Those costs that tend not to vary with your level of output. Your phone or internet costs are a good example. Often called overheads.

Foot traffic – A count of the people that walk past your business or a location you think might be suitable for a business. Usually measured per day or per week.

Franchise – An existing set-format business that you can buy or rent the rights to operate within a certain area or territory and timeframe. You must usually run your business according to the pre-set franchise methods. There will typically be ongoing royalties or other fees to pay in return for business support such as training, advertising, and promotions.

Goodwill – An intangible asset that represents the value of a business's reputation.

Gross income – The total money earned by a business before you deduct expenses.

Gross profit (also known as net sales) – The difference between sales and the direct cost of making the sales.

Guarantor – A person who promises to pay a loan in the event the borrower cannot meet the repayments. The guarantor is legally responsible for the debt.

Initial public offering (IPO) – When a company first offers shares on the stock market to sell them to the general public. Also known as floating on the stock market.

Insolvent – A business or company is insolvent when it cannot pay its debts as and when they are due.

Intangible assets – A non-physical assets with no fixed value, such as goodwill and intellectual property rights.

Intellectual property – Legal term used to describe the patents, licenses, copyrights, trademarks, and designs owned by a company.

Interest – The cost of borrowing money on a loan or earned on an interest-bearing account.

Interest rate – A percentage used to calculate the cost of borrowing money or the amount you will earn. Rates vary from product to product and generally the higher the risk of the loan, the higher the interest rate.

Inventory – A list of goods or materials a business is holding for sale.

Invoice – A document to a customer to request payment for a good or service received.

Joint venture – A venture where two businesses or organizations form a partnership with the purpose of working together, usually on a particular project.

Just-in-time – The process of organizing your production so that stocks of raw materials arrive at the business just in time to produce a product or service a customer needs. Just-in-time allows you to free up the money that is normally tied up in stock (inventories) for more productive purposes.

Key money – Money paid in advance to secure a tenancy or lease business premises. Often paid to ensure that no one else takes a desirable space.

Lease – A legal contract covering the use of assets drawn up between the owner (lessor) and another party (lessee) at a given rent, for a stated period of time.

Liability – Any financial expense or amount owed.

Line of credit – An agreement allowing a borrower to withdraw money from an account up to an approved limit.

Liquidate – To quickly sell all the assets of a company and convert them into cash.

Liquidation – The process of winding up an insolvent company. An appointed administrator will do this by ceasing business operations, selling assets, and paying creditors and shareholders.

Liquidity – How quickly you can convert assets into cash.

Loan – A finance agreement where a business borrows money and pays it back in installments (plus interest) within a specified period of time.

Margin – The difference between the selling price of a good or service and the profit. Margin is generally shown as a gross margin percentage which shows the proportion of profit for each sales dollar.

Markdown – A discount applied to a product during a promotion or sale for the purposes of attracting sales or for shifting surplus or discontinued products.

Mark up – The amount added to the cost price of goods, to help determine a selling price. Essentially it is the difference between the cost of the good/service and the selling price. It does not take into account what proportion of the amount is profit.

Market size – Measures how much people spend on your particular product. Usually measured in total dollars spent per year.

Maturity date – When a loan's term ends and all outstanding principal and interest payments are due.

Net assets (also known as net worth, owner's equity, or shareholder's equity) – The total assets minus total liabilities.

Net income – The total money earned by a business after tax and other deductions.

Net margin – The amount remaining after the direct costs plus general overheads (cost of running your business regardless of sales levels) have been deducted from sales revenue generated.

Net profit (also known as your bottom line) – The total gross profit minus all business expenses.

Opening inventory – The value of the total inventory or the number of units a business has on hand at the beginning of an accounting period.

Overdraft facility – A finance arrangement where a lender allows a business to withdraw more than the balance of an account.

Overdrawn account – A credit account that has exceeded its credit limit or a bank account that has had more than the remaining balance withdrawn.

Overheads – The fixed costs associated with operating a business such as rent, marketing, utilities, and administrative costs. See also Fixed costs.

Partnership – The legal definition of a business owned by two or more people.

Personal property – Covers any property someone can own, except for land, buildings, and fixtures. Examples include goods, plant and equipment, cars, boats, planes, livestock, and more.

Petty cash – Cash for small miscellaneous purchases such as postage.

Plant and equipment – A group of fixed assets used in the operation of a business such as furniture, machinery, fit-out, vehicles, computers, and tools.

Principal – The original loan amount borrowed or the remainder of the original borrowed amount that is still owing (excluding the interest portion).

Profit – The total revenue a business earns minus the total expenses.

Profit and loss statement (also known as an income statement) – A financial statement listing sales and expenses. Use it to work out the gross and net profit of a business.

R&D – 'Research and Development'. Businesses conduct research and development to innovate, create new products and find better ways of doing things.

Receipts – A document given to a customer to confirm payment and confirm the sale of a good or service.

Record keeping – The process of keeping or recording information that explains certain business transactions. Record keeping is a requirement under tax law.

Refinance – When a new loan helps to pay off an existing one. Reasons to refinance include: extending the original loan over a longer period of time, reducing fees or interest rates, switching banks, or moving from a fixed to a variable loan.

Repossess – The process of a bank or other lender taking ownership of property/assets for the purpose of paying off a loan in default.

Resellers – Businesses that buy products and services usually mark up the prices before selling them to customers. As resellers buy the goods outright, they do have the option to discount prices if they choose.

Return on investment (ROI) – A calculation that works out how efficient a business is at generating profit from the original equity from the owners/shareholders. It's a way of thinking about the benefit (return) of the money you invest into the business. To calculate ROI, divide the gain (net profit) of the investment by the cost of the investment. The ROI then becomes a percentage or a ratio.

Royalties – An agreed amount paid to a person or business that holds the copyright or patent on a product or idea. Royalty payments are usually based on a percentage share of unit sales.

Single-entry bookkeeping – A bookkeeping method within a cash accounting system that records one side of each transaction.

Security (also known as collateral) – Property or assets that a lender can take ownership of when repayment of a loan does not occur.

Stock – The actual goods or materials a business currently has on hand.

Stocktaking – A regular process involving a physical count of merchandise and supplies actually held by a business, to verify stock records and accounts.

Strategic alliance – A longer-term partnership or agreement between your business and other individuals or businesses to collaborate on a shared strategic goal.

Tax invoice – An invoice required for the supply of goods or services over a certain price.

Variable cost – A cost that changes depending on the number of goods produced or the demand for the products or services.

Venture capital – An investment in a start-up business that has excellent growth prospects. However, it does not have access to capital markets because it is a private company.

Wholesalers – People or businesses who buy your goods and services to on-sell to retailers or other business users. Although they may have a 'retail outlet', they are unlikely to sell directly in large quantities to the end consumer.

Working capital – The cash available to a business for day-to-day expenses.

Pitney Bowes Bank understands the unique financial challenges of small- to mid-sized businesses. We provide real-world financial solutions that complement your existing bank relationships and are focused on your long-term objectives.

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Banking products and services are provided by The Pitney Bowes Bank, Inc., Member FDIC. Pitney Bowes, Pitney Bowes Bank, and the Corporate logo are trademarks of Pitney Bowes Inc. or a subsidiary. All other trademarks are the property of their respective owners. ©2023 Pitney Bowes Inc. All rights reserved.