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| Small Business Terms Glossary Search for Terms C "C" corporation n: the most common legal form of organization for a company. Virtually all established companies of any meaningful size, as well virtually all startups that seek outside investment capital (venture capital), take this form (as opposed to other legal forms such as an "S" corporation, LLC or LP).Though the income of "C" corporations is subject to double taxation (federal and state governments tax a corporation's earnings as well as dividends distributed by the corporations to shareholders ), many venture-fundable companies chose this structure because it is advantageous from a long-term capital gains perspective for tax purposes. CAGR n : (see compound annual growth rate) COGS n: (see cost of goods sold) Callable Bond. A bond that can be redeemed by the issuer before the stated maturity date. Usually, the bond cannot be redeemed before a certain time, say 5 years. And often bonds are only callable at certain times. If a call date is missed, the bond may not be callable until the next call date. The call priviledge is to enable the issuer to refund the bonds at a lower interest rate should that occur during the term. The yield and value of a bond can be affected by any call priviledge. Sometimes known as a call feature. Call Option. 1. The right to buy 100 shares of a stock (or stock index, etc.) at set price. Usually, the option holder has the right, but not the obligation to purchase the property. The option expires at a set time. For example, the current price of Madison Inc. is $50. For $5 per share you can purchase a option that allows you to buy Madison stock at $52 at anytime within the next 60 days. Traded options expire at preset times. 2. The right to prepay a mortgage. Call Premium. In the case of straight or convertible bonds or preferred stock it's the amount in excess of the par value of the security the issuer may have to pay for the priviledge of redeeming the security before maturity. For example, if the par value is $1,000, the issuer may have to pay $1,100 to redeem the bond. The call premium can vary with the timing of the call feature. For example, the call premium may be $100 on a bond that's callable 5 years from issuance. The premium may be only $50 if the bond is callable 10 years after issuance. The term call premium can also refer to the purchase price of a call option. Call Protection. The length of time during which a bond, preferred stock, etc. cannot be redeemed by the issuer. Capital. Sometimes used as a synonym for the owner's equity in a business. Capital Budgeting. A formal plan for making investments in plant, equipment, other fixed assets, advertising projects, etc. Items included in the capital budget have lives in excess of one year and often require long-range planning. Capital Expenditure. The purchase of or outlay for an asset with a life of more than a year, or one that increases the capacity or efficiency of an asset or extends it's useful life. Generally, such expenditures cannot be deducted currently for tax purposes (or expensed for financial accounting purposes. Instead, they must be depreciated or amortized over their useful life. Capital Gain (or loss). A category of gain or loss under the tax law resulting from the sale or other disposition of specified property such as stock or bond investments, real estate, etc. It does not include property used in a trade or business. However, special rules apply in such situations that can result in similar treatment for business property. Capitalization Rate. The rate of interest used to discount the future income from a property to arrive at a present value. cap table n: (see capitalization table) capital n: finance/accounting term; money. Specifically refers to funds contributed by investors or lenders to a company for the purpose of funding (capitalizing) the infrastructure and growth needs of the business. capital asset - n: An asset that is purchased for long-term use such as machinery and equipment. capital structure n: finance/accounting term; a.k.a. cap structure; owners' equity plus long term debt; how a company is financed; shown on the assets side of the company's balance sheet. capital structure explained: A typical company's capital structure would include various pieces, or tranches, of debt and equity. The make-up of a capital structure is typically represented either in a capitalization table, where each instrument is laid out with the corresponding dollar amounts and owners, or is represented by ratios, such as the debt-to-equity ratio, or the debt-to-total- capitalization ratio, or percentages (e.g., 30% debt/70% equity). A typical start-up company is financed primarily with equity, so that its capital structure is comprised nearly 100% of equity. capital call n: the legal right of a firm to call, or demand, a portion of the money committed to it by an investor under a previous capital commitment; the act of making such a call. For example, when a venture capital firm (general partner, or G.P.) has received capital commitmentsfrom its limited partner(L.P.)investors for a venture capital fund, and decides to invest in a portfolio company, the VC makes a capital callto its L.P.investors in order to fund the new portfolio investment. capital commitment n: a contractual agreement between an investor and a company or venture capital firm wherein the investor commits to provide up to a specified amount of capital (money), or any portion thereof, over an agreed-upon period of time. Example:If an institutional investor ("limited partner") agrees to invest $10 million in a venture capital fund, that investor does not simply send the VC a check for $10 million. Rather, the limited partner makes a capital commitment to the VC for the life of the fund (or the defined investment period of the fund). When the VC wants to make an investment in a portfolio company, it makes a capital call to the limited partner for some portion of the investor's total capital commitment typically its pro rata share of the investment. When a capital call occurs, the investor is contractually obligated to provide the funds requested. capitalization n: (see capital structure, also referred to as capitalization structure) capitalization table n: finance/accounting term; a.k.a. cap table; a chart or table that displays the specific make-up of a company's capital structure. A capitalization table lays out line-by-line the debt and equity instruments on a company's balance sheet, and who owns such instruments. In the start-up world, as most start-ups are financed with 100% equity, the capitalization table shows who owns how much of the company, and in which round or trancheeach owner has invested, thus outlining the equity ownership of the company. capitalize v: to fund or finance a business; provide capital to enable the business to fund initial startup, ongoing operations and/or growth. cash accounting- v:The simplest form of accounting in which income is considered earned when received and expenses are not taken into account until paid. cash burn rate n: (see burn rate) cash equity n: also referred contributed equity or invested equity, cash equity denotes the cumulative total of all cash invested in a company through equity (as opposed to debt, or borrowing) instruments over all of the company's financing rounds. cash flow n: finance/accounting term referring to the amount of cash that "flows" in and out of a business over a period of time. Cash flow means exactly what it sounds like: if your business is "cash flow negative," you are spending more cash in a given time period (typically per month or quarter) than you are taking in; conversely, if your business is "cash flow positive," you are taking in more cash than you are spending. cash flow statement n: also statement of cash flows; a standard finance/accounting statement that shows the amounts of cash that are spent by a business (cashoutflows) and collected by that business (cash inflows) over a specified period of time, typically a quarter or year.channel n: (see distribution channel) Cash-On-Cash Return. Usually reserved for real estate income properties, it's the annual cash flow from the property divided by your cash investment. Sometimes called return on equity or equity dividend rate. It's a quick and dirty way to evaluate an investment. caveat emptor-adj:"let the buyer beware" Certificate of Compliance. A vendor's certification that the supplies or services delivered meet certain specified requirements. certified lenders-n: Banks that participate in the SBA's guaranteed loan program. chart of accounts n: finance/accounting term; a numbered or coded list of all accounts (categories and subcategories of expenses and revenues) for a company. The chart of accounts is the basic bookkeeping or accounting tool of companies. charter n: (see articles of incorporation) charter of incorporation n: (see articles of incorporation) chasm n: a term coined by Geoffrey A. Moore in his seminal work on marketing for technology startups,"Crossing the Chasm"; refers to the dramatic differences between the characteristics of and the ways a business markets to: a) on the one hand, the initial customers for a technology-based product or service, called innovatorsand early adopters; versus b) on the other hand, the bulk of the business's potential customers, referred to as pragmatists, or the early majorityand late majority. Claims-Made Basis. Under this type of insurance policy the insurer is responsible only for claims filed during the period the policy is in force. See Claims-Occurrence Basis below. Claims-Occurrence Basis. With this type of insurance policy the insurer is responsible for claims from events that occurred during the time the policy was in force. It makes no difference when the claim is filed. Example--A customer slips on a wet floor in your store in March 1997. You're covered by Madison Insurance. The customer doesn't file a claim until a year later when you're covered under a new company, Chatham. Under a claims-occurrence basis policy you'd report the claim to Madison, the insurer at the time the accident occurred. Under a claims-made basis you'd report the claim to Chatham, the insurer at the time the claim is filed. closely-held adj : describing a company that is owned by one or a small number of shareholders. cofounder n: also co-founder; an individual who starts a new business jointly with another person or persons (fellow cofounderorcofounders). (see founder) Coinsurance Amount Limit. A requirement under burglary insurance that a minimum amount of insurance be maintained, based on the type and amount of merchandise. Coinsurance Clause. In the case of a partial loss where the property is not insured for the indicated percentage of its cash value at the time of the loss, the recovery from the company is based on a percentage. Example--Your insurance policy contains a coinsurance clause of 80%. Your building sustained $100,000 in damages. The actual cash value of the property at the time of the loss was $500,000, but you only carried $300,000 of insurance. Based on the coinsurance clause, you should have had coverage of $400,000 (80% of $500,000). You can't recover the full $100,000 in damages. Instead, your recovery is limited by the percentage of your coverage ($300,000/$400,000) times the loss, or $75,000. If you had coverage of $400,000, your insurance would have reimbursed you for the full $100,000 loss. collateral- n: An asset that can be sold for cash and which has been pledged to a creditor to secure a future obligation. (For example, if you finance a car it is the collateral for the loan). commercial bank n: banking servi ces provided to commercial organizations (corporations and partnerships) and individuals; typically refers to traditional banking services, such as checking and savings bank accounts, cash management accounts, interest bearing accounts, and loans. Commercial Blanket Bond. A bond that covers employee theft by one or more employees up to a fixed amount. Commercial Paper. Short-term (generally 2 to 270 days) obligations (notes) issued by banks and corporations with high credit ratings. These notes are usually unsecured and usually issued at a discount. Commercial Property Form. An all-risk type insurance policy covering business personal property against physical loss for retailers, wholesalers and certain other types of businesses. committed capital n: (see capital commitment) Common Control. In tax parlance, the situation where a group of five or fewer persons own more than 50% of an undertaking and therefore have the ability (whether or not it is exercised) to direct operations. common stock n: finance/accounting term; equity or stock ownership of a company representing owners who have the lowest-priority, or a "residual," interest in the company. In other words, in a liquidity event such as the sale of a company of all of its assets, common stockholders get paid last, only after theprincipal amountsowed senior debt-holders, subordinated debt-holders, and preferred stockholders are paid. company backgrounder n: a standard, one- or two-paragraph description of a company used to describe your business to your various target audiences customers, prospects, industry analysts, investors, journalists and/or the general public on your website, in press releases, and/or in brochures and pamphlets about your company or your company's products. comparable n: also compor comps,a company in the same or a similar industry, and/or at the same or similar stage of development, to which a startup can compare itself regarding various key operating ratios and valuation metrics. Comparablesare useful for planning startup costs and common operating ratios by providing entrepreneurs examples of the financial performance experienced by established companies in the same or similar lines of business. Comparables are also used to derive valuations of private and public companies by performing a comparable companies analysis. comparable companies analysis n: an analysis of several comparables by a business, or a consulting or banking firm hired by that company, to derive valuation as well as to compare and benchmark financial and operating multiplesand metrics. competitive analysis n: the art of analyzing an industry, sector or niche to determine the identity, size, market share, growth rates and competitive dynamics of all the businesses competing in that space. The key to valuable competitive analysis is to determine not only the numerical facts, but more importantly, to understand the competitive dynamics of the industry in question: What is the basis of competition (e.g., features, price, shelf-space, channels, brand image)? How does profitability vary among the various competitors and why? A comprehensive competitive analysis looks at each company's competitive positioning and what each company's competitive differentiationis within its sector. Many schools of thought exist regarding competitive analysis, and several different courses in each major MBA program focus on the topic. competitive differentiation n: the ways a business differentiates itself from its competition. Competitive differentiation can take many forms, though the focus of competitive differentiation is to set your company apart from the competition, or potential competition if you are a startup company. As a startup company, it's important to determine what makes your offerings different, faster, cheaper, and/or better than your competition. (see also: competitive positioning) competitive positioning n: how a company positions itself relative to its competitors in the minds of customers. Companies need to position themselves effectively to address the question: How is your product or service demonstrably better, faster, cheaper or otherwise more appealing than those of your competitors? (see also: competitive differentiation) Completion Bond. A guarantee provided by a bonding company to a lender or other party that the contractor will turn over the property to the owner free of any claims. compound annual growth rate n: often referred to by abbreviation CAGR; the annual growth in revenues of a company, a market niche or an industry factoring in annual compounding (similar to the concept of compound interest). Example: If market niche has aggregate revenues of $100 million in the year 2001, and then experiences a CAGR of exactly 20% over the next three years, then its 2002 revenues are (1.20 x $100,000,000 = $120,000,000); its 2003 revenues are (1.20 x $120,000,000 = $144,000,000); and its revenues in 2004 are (1.20 x $144,000,000 = $172,800,000). In other words, compounding means that the interest rate is applied to previous period's numbers. compound interest n: finance/accounting term; in the case of a loanor bondwhere interest accrues but is not paid, the interest accruedis added to the principal amountof the loan or bond. This increases the principal amount, and interest now accrues on the new higher amount. Simply put, compound interest is interest you pay on interest you have been charged. For the startup manager, you may see this concept in the form of compounding dividends on preferred stock that has a set dividend rate. compounding dividends n: finance/accounting term; (see compound interest). Concealment. Intentionally withholding adverse facts that are known when you're obligated to reveal them. Concessions. In real estate, free rent, allowances for alterations, etc., or similar payments or allowances from a landlord to induce a tenant to sign a lease. Conditional. In insurance parlance, a contract requiring the insured to meet specified conditions to obtain payment for any losses. confidential disclosure agreement n: (see non-disclosure agreement) confidentiality agreement n: (see non-disclosure agreement). Consequential Losses. Indirect losses from an event. conservative case n: in reference to a financial model, or financial projections; the downside, or low case of a business's projections using the most conservative set of assumptions. The financial results for your conservative case should be worse than those for your base case (most likely assumptions) or youraggressive, or upside case (using the most optimistic assumptions). consolidated financial statements n: finance/accounting term; combined financial statements of a parent company with those of all subsidiaries of the parent company as if the parent company and all its subsidiaries were one entity. If you look at the financial reports publicly issued by Fortune 500 companies, they are all consolidated financial statements representing all of the businesses and subsidiaries of the parent company. Construction Loan. A loan intended only to finance the construction of a property. Usually must be converted to a term loan after construction is complete. Constructive Total Loss. A partial loss where the cost of repairing the damage is greater than the value of the property after restoration. Contingent Business Interruption Insurance. An insurance policy that provides benefits if your earnings are reduced because of damages to another business on which yours is dependent. Contingent Financing Clause. A clause in a purchase and sale agreement the specifies that the buyer must be able to secure financing on reasonable terms or he can back out of the purchase. Contingent Payments. Payments where the amount and/or timing is dependent on other events, usually the income from the property. Example--Fred buys all the stock of Madison Inc. for $250,000 plus 5% of Madison's sales in excess of $1,000,000 for two years from the date of the sale. Contingent Interest. Income from a note that is at least partially based on the income from the property. This is common in financing commercial real estate. For example, Fred loans Madison $1 million at 8%. The terms also require the payment of 3% of the cash flow from the property in any year that the cash flow exceeds $750,000. continuous innovation n: modest, gradational, ongoing upgrades or enhancements of existing technologies or products; continuous innovation generally does not fundamentally change the dynamics of an industry, nor does it typically require end users to change behavior. The opposite of continuous innovation is discontinuous innovation, also known as disruptive innovation.Examples: In the television industry, continuous innovation occurred for years with the steady, gradational enhancements in, and improvements in pricing and programming for, standard color televisions. By contrast, in recent years, this industry has begun to experience two types ofdiscontinuous innovation, with the introduction of flat-panel, digital TVs, on the one hand, and the related phenomenon of high-definition (HD) programming phenomena that together are dramatically and rapidly changing the size and growth rate of the industry, competitive dynamics, pricing, etc. and are suddenly compelling many consumers to expensively upgrade their TV sets and services for the first time in decades. In the restaurant industry, menu changes or the emergence of new restaurants and chains represent continuous innovation, whereas the emergence of McDonald's and the fast-food phenomenon in the 1950's constituted a discontinuous innovation, completely changing industry growth rates, pricing assumptions, consumer perceptions of service and value, etc. The telephone industry experienced only very modest continuous innovation for decades (e.g., changes in call plans, the advent of the touch-tone phone to replace the rotary-dial phone, etc.). Then the industry experienced a dramatic in the 1990's with the emergence of cellular phones with their associated dramatic changes in mobility and convenience. Currently, the industry is experiencing yet another discontinuous innovation with the emergence of VOIP (voice over Internet protocol), or Internet telephony, which is suddenly and dramatically changing cost and pricing paradigms and competitive dynamics in the industry. Contra Account. An asset account that normally has a credit balance. The contra account is used to offset a related account. The approach is used so that the regular asset account is shown at the original or undiminished value. For example, accounts receivable has a contra account usually called allowance for doubtful accounts. Fixed assets have a contra account called accumulated depreciation. Contract Interest Rate. The stated, or nominal, interest rate in a contract. Contributory Negligence. A defense argument that the plaintiff did not exercise sufficient care and that this contributed to his injury. contributed equity n: (see cash equity) Convenience of Termination Clause. A contract clause that permits the party to terminate, at its own discretion. Conventional Loan. A mortgage loan that is not backed by insurance from a government agency or other source. convertible bond n: a bond or debt instrument with a provision allowing the holder or the issuer to convert the security from a debt (borrowing) instrument to an equity instrument (common stock or other equity security) of the issuing corporation; such conversions typically occur at a predetermined exchange ratiostipulated in the convertible bond. convertible preferred stock n: a preferred stock issuance that is convertible to common stock of the issuing corporation at a set per-share price known as the exchange ratio. Convertible Term. Term life insurance which is convertible into whole life without showing insurability. Conversion Costs. The costs required to convert raw materials into finished product; including direct labor and overhead. copyright n: the legal protection of the works of authors or artists which gives the originators the exclusive right to publish or benefit from their works, or to determine who else may do so. In the U.S., copyright law is administered by the federal government's U.S. Patent and Trademark Office (PTO). corporate bylaws n: the legal foundation document for a corporation (either "S" corporationor "C" corporation); serves the same purpose for a corporation that an operating agreement serves for an LLC. corporate governance n: the rules dictating how various rights and responsibilities are shared between the various stakeholders in corporations, primarily management team members, directors, shareholders, and other financial stakeholders. corporation n: a legal form of business organization that shields its individual principals (shareholders) from personal liability. Two types of corporation are available to businesses, the "C" corporation, which is a taxable entity; and the "S" corporation (a form commonly used only by small, closely-held companies), which is a pass-through entity for tax purposes. cost of goods sold n: finance/accounting term (often abbreviated COGS); the incremental, direct cost of producing each product or service unitthat is sold to customers; sometimes also referred to as variable cost. The selling price (revenuederived from selling an individual product or service unit) minus theCOGS equals the gross margin or gross profit. Cost Method. An appraisal method that values a property based on the cost to reproduce it today. That amount is usually adjusted for depreciation. Example--Madison owns a 15-year old factory building. The cost to reproduce the building today would be $900,000. The appraiser adjusts that figure downward for wear and tear and, possibly, the cost to upgrade electric service, etc. coupon n: finance/accounting term; also known as coupon rate; the interest rate paid on a bondor other debt instrument. coupon rate n: (see coupon) covenants n: legal term for the terms of a contractual agreement or contract that restrict the actions of one party. Restrictive covenants are typically written into financing agreements, such as loan or bond documents. credit n: finance term; the capacity to borrow (as in, "The company has a line of credit of $50,000..."; the act of borrowing (as in, "We purchased the item on credit..."). Credit Enhancements. Using third-party guarantees such as a cosigner, the pledging of assets, an insurance company bond, or a letter of credit to provide additional security for a loan. credit report- n: A listing of an individual or company's history of repaying past loans and other liabilities. credit risk n: finance term; from a lender's perspective, the degree of risk (i.e., the likelihood, or probability) that a borrower will fail to repay the principal and interest of his/her loan according to the schedule stipulated in the loan agreement. Also used to refer to the borrower itself from a creditor's (lender's) perspective (as in, "ABC Corp. is a good credit risk..." or, "Acme Corp. is a poor credit risk..." creditor n: finance/accounting and/or legal term; a person or entity who is owed money; lender. critical success factor n: a factor that must be addressed by a business in order to succeed. Startup businesses that clearly identify and address all their critical success factors have a much higher likelihood of surviving and prospering in the long run. Cross-Purchase Plan. A plan by which each stockholder or partner in a closely held business agrees to purchase the interest of a departing stockholder or partner. Usually funded by life insurance on the lives of the other stockholders or partners. (Note, cross-purchase agreements can become unwieldy when more than four owners are involved.) crossing the chasm v: a term coined by Geoffrey A. Moore in his seminal work on marketing for technology startups, "Crossing the Chasm"; a phrase referring to the challenging strategic and marketing process by which technology startups transition from selling their products and/or services to innovators and early adoptersto selling to the early majority, a.k.a. pragmatists; this transition ("crossing the chasm") entails a dramatic shift in mentality for the startup, best understood by reviewing Moore's book. current assets n: finance/accounting term; cash and other assets that are expected to be converted to cash or sold or consumed within one year in the ordinary course of business. Accounts receivable andcashare two types or classes of current assets. current liabilities n: finance/accounting term; liabilities such as debtsthat are expected to repaid within one year in the ordinary course of business. Accounts payableare a type current liability. Current Yield. The yield of a bond or similar instrument, taking into account only the current interest and the price paid. Computed by dividing the annual interest by the purchase price. Example--You purchase a bond for $900 (with a face amount of $1,000) that pays $40 twice a year. The current yield is 8.89% ($80 divided by $900). The current yield is not a true indication of the return on your investment if the purchase price is not the same as the face amount. In the example above, your total return would be greater because at maturity you'll receive $100 more in principal than you paid for the bond. The return will be affected not only by the face amount to be paid at maturity, but also by the time to maturity. customer funding n: a business arrangement between a vendor and its customer wherein the customer agrees to provide the vendor with some level of up-front funding in advance of delivery of the product or service. The intention of such arrangements is usually to partially or wholly fund a vendor's product development. The vendor benefits by receiving earlier cash flow that can help fund product development and obviate the need for as much external funding (reducing shareholder dilution). The customer, on the other hand, often benefits from such arrangements by getting an early look at a new product or technology, experiencing the ultimate benefits of the product sooner than it otherwise would, having disproportionate influence over the product's features and delivery schedule, and possibly special discounts off the eventual list price. |
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