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| Small Business Terms Glossary Search for Terms D D&O insurance n:(seedirectors' and officers' insurance) debt n: borrowed funds; money, goods or services owed by one person or organization to another. From a finance/accounting standpoint, debt is money owed to another party (known as a creditor), whether that party is a bank (in which case the debt is a loan), an institutional investor (bonds or notes), or a supplier (supplier-extended credit terms). Accounts payable (A/P) (i.e., outstanding bills, or money owed for goods or services rendered) are not considered debt in accounting parlance. Debt can take the form of loans, bonds, notes, credit cards, equipment financing, and a number of other instruments. debt financing-v: This is financing in which you get a loan from someone or somewhere and go into debt! You are obligated to repay the money at some predetermined interest rate. Debt Instrument. A generic term representing any written promise to repay the debt. Debt Service. The cash required to pay the interest and principal due (usually during one year) on outstanding debt. Debt Service Coverage. The borrower's annual net operating income before debt service and taxes divided by the annual debt service. A measure of how safe the loan is to the lender. debt-to-equity ratio n:finance term, sometimes referred to by shorthand D/E; the ratio of debt toshareholders' equity on a company's balance sheet. D/E is calculated by dividing the sum of the debt on a company's balance sheet (bank loans, notes, etc.) by the sum of the shareholders' equity. The debt-to- equity ratio is a commonly-used measure of the strength of the capital structure of a business answering the important question, "How strong is the company's balance sheet?". Companies with low D/E ratios tend to be considered better credit risks than companies with high D/E ratios. debt-to-total capitalization ratio n:finance term defined as the ratio of debt to total capitalization (debt plus shareholders' equity) on a company's balance sheet. Similar to the debt-to-equity ratio, thedebt-to-total capitalization ratio is a commonly-used measure of the strength of a business's capital structure or balance sheet. It is calculated by dividing the sum of the debt on a company's balance sheet (bank loans, notes, etc.) by the sum of the debt and equity on a company's balance sheet. D/(D+E) = debt-to-total capitalization ratio. debtor n: a person or entity who owes money to another person or entity (a debtor owes money to acreditor or lender). declining market n: the last stage of market development, in which annual industry revenues are in steady decline due to some combination of market saturation, decline in size of the target market, and/or introduction of a replacement product or technology.Example: By 2000, traditional plug-into-the-wall telephone handsets represented a declining market, as the demand for these products was increasingly being displaced by growing demand for both wireless landline handsets and cellular phones. Deed In Lieu Of Foreclosure. The delivery of an asset's title to the lender when the loan is in default. The approach may benefit both parties by avoiding the expenses associated with foreclosure and the stigma of foreclosure. CAUTION. For tax purposes, the transaction is the same as a sale. Deep Discount Bond. A bond where the market price is less than 20% or so of its face value. Like a zero coupon bond, the market price of a deep discount bond will rise faster when interest rates fall and drop faster when interest rates rise than a bond that is selling close to its face value. Deep In, Deep Out Of The Money. A call option whose exercise price is well below the market price of the underlying stock (deep in the money) or well above the market price (deep out of the money). Thus, the premium associated with buying a deep-in-the-money call option is high. Default. The failure of a debtor to comply with a provision of a bond indenture or loan agreement (commonly known as a technical default) or to make timely payment of interest or principal when due. Defeasance. In corporate finance it is generally the discharge of old, low-rate debt without repayment prior to maturity. The corporation replaces it with newly issued securities with a lower face value buy paying higher interest or having a higher market value. The technique can result in tax and balance sheet advantages. Deferred Charge. An expenditure carried as an asset until the amount represents a true expense for the period. For example, if a one-year insurance premium is paid three months before the end of the fiscal year, three months of the premium would be an expense in the year paid, nine months would be an expense of the following year. Thus, 9/12 of the premium would be a deferred charge. In this case it would be represented by an account called prepaid insurance. Deferred income is the opposite situation. For example, six months rent received in advance. Any amount not properly credited to the current period would be represent a liability. Deferred Interest Bond. A bond where interest payments are not made currently, but at a later date. Similar to a zero coupon bond which pays 'interest' and principal at maturity. The interest, in effect, is compounded and paid at maturity. Market prices for such bonds are much more volatile than bonds which pay interest currently. demand n: economics/marketing term; a) the extent to which customers buy, or wish to buy, a company's product or service; b) the aggregate size of the market for a product or service (expressed either in unit sales or dollars). Demand Deposit. The technical name for a checking account or any other type of account where the funds can be withdrawn without prior notice. Demand Loan. A loan with no set maturity date. The loan is payable whenever the lender chooses to call it. demand sensitivity n: (see price sensitivity) depreciate v: finance/accounting term; to write off, or expense, the purchase price of a large expense or asset (e.g., equipment) over the useful life of the item. depreciation n: finance/accounting term; the act of depreciating; the expensing of the purchase price of a physical asset (e.g., a piece of equipment) over the useful life of the asset. Depreciation is not a cash expense, as equipment is paid for up-front or financed, while the cost is expensed over the useful life of the equipment (as opposed to when cash is paid to the vendor). Example: ABC Printing Corp. buys a printing press for $100,000 in cash in 2005. According to accounting standards, this type of production equipment is deemed to have a useful life of 10 years. Consequently, while ABC's cash flow statementfor 2005 shows a cash outflow of the full $100,000 for this purchase, the company's income statementsfor the 10 years starting in 2005 will show a depreciation expenseof $10,000 per year for the same purchase. The effect of this accounting treatment is to show a company, over the useful life of the asset, as being relatively more profitable than it otherwise would since lower nominal expenses or costs lead to higher relative profitability. Depreciation Recapture. When tangible personal property is sold, the tax gain is based on the difference between the asset's adjusted basis and the selling price. Any gain up to the amount of depreciation taken is deemed depreciation recapture and taxed as ordinary income. Example--Madison bought a machine for $10,000. Five years later its adjusted basis is $4,000. Madison sells the asset for $9,000. The gain is $5,000, all of which is depreciation recapture. If Madison sold the asset for $11,000, it would have $6,000 in depreciation recapture (ordinary income) and $1,000 of capital gain. CAUTION. The rules for real property are more complicated. detailed financials n: in-depth financial statements; typically a five -year set of pro forma(that is, predictive or forward-looking) financial statements (balance sheet, income statement and cash flow statement) which includes detailed expense build-up, clearly states the assumptions, and identifies key milestones and when capital will be deployed. dilute v: finance/accounting term; to proportionally reduce; to reduce a person or entity's proportional (i.e., percentage) equity ownership, typically by issuing and selling new equity (stock) to other shareholders. (see also dilution) dilution n: finance/accounting term; the act of diluting; the reduction in proportional (percentage) ownership of each current shareholder of a company that results from the issuance of new shares. For the entrepreneur or startup manager, dilution refers to the extent to which your personal proportional ownership of your company declines when the company issues new shares, whether in the course of raising equity capital (by selling newly-issued shares to investors), or through stock option plans to motivate mployees.Example:If you own 50% of ABC Company, a firm worth a total of $1 million (pre-money valuation), and ABC Co. then sells 500,000 newly-issued shares of stock at $1 each to a new investor (i.e., ABC raises $500,000 in equity capital from that investor), then post-investment, you would own 33.3% of ABC Co., now worth $1.5 million (post-money valuation). Note, in this example, that although you percentage ownership of ABC has declined, your stake maintains the same nominal value: i.e., your former ownership stake of 50% of $1 million = $500,000; while your new stake of 33.3% of $1.5 million = $500,000. Direct Costs. Costs directly related to conversion of raw materials into product. Includes raw materials, direct labor and variable overhead. director n: an individual serving on a company's board of directors; can also denote (but should not be confused with) an individual employee in a company with the title of "director" (e.g., "Director of Product Management," or "Director, Eastern Region Sales"). directors' and officers' insurance n: a.k.a. D&O insurance; a type of insurance policy whose purpose is to protect a company's directors (i.e., members of the board of directors) and corporate officers (i.e., CEO, CFO,Secretary, etc.) from personal liability while discharging their duties on behalf of the company.Example: Because ABC Corp. purchased a D&O insurance policy in 2003, when, in 2004, a disgruntled shareholder sued not only the company but also ABC's individual directors, CEO and CFO, the personal assets of those individual defendants were protected by the company's D&O policy (to the extent of its coverage). Direct Overhead. Costs directly associated with the manufacture of goods. That could include factory lighting, rent, insurance. Indirect overhead could include office expenses, R&D, lighting, etc. Direct Placement. Also known as a private placement, the sale of securities directly to one or more professional investors or institutions, frequently insurance companies. The sale of securities in this fashion avoids many of the fees typically associated with public offerings. Disappearing Deductible. An insurance policy where losses below a certain amount are excluded. Those above a certain amount are paid in full and those in between are paid a multiple of the loss. discontinuous innovation n: technological, product or service innovation in an industry or market that requires end-users to change behavior, and thereby tends to suddenly and dramatically change the dynamics of the industry, including possibly changes in competitive dynamics, industry revenue size and growth rate and pricing. (See examples under continuous innovation) Discount. This term can have a number of meanings, depending on the context. When used in connection with a loan, it's where the bank deducts its interest payment before giving the loan proceeds to the borrower. For example, where $100 is borrowed at 10% for one year, the borrower receives only $90. For bonds, it's the difference between the current market price and the face amount of the bond. Discounted Cash Flow. The application of a factor, based on the cost of the firm's capital or prevailing interest rates (with a possible adjustment for risk), to the cash inflows and outflows from a project or investment. Also called net present value analysis. discount rate n: finance/accounting term; rate used to discount cash flows to determine the present value of future expected cash flows. In finance, it is accepted that $1 today is worth more than $1 tomorrow. A company's discount rate allows it to determine how much $1 tomorrow (or one year from now, or ten years from now) is worth today. Discount Yield. The yield on a security sold at a discount. U.S. treasury bills are sold at a discount. The face amount is returned to the investor at maturity. The annual yield is computed by dividing the discount by the face amount, then multiplying by the number of days in the year (360) and dividing by the number of days to maturity. For example, a note purchased for $950 that returns $1,000 at maturity 11 months later. The note pays no interest; instead, your entire return is determined by the amount of the discount ($50 in this example). Banker's acceptances, commercial paper, and other short-term instruments frequently use this approach to compensate the buyer. Disintermediation. When individuals (or other entities) take money out of savings accounts and put the funds in money market accounts. distribute v: to sell; to take a product or service to market. In certain industries, distribute can also denote the act of serving as an intermediary between producers of a product and retailers or sellers of that product. (see also distribution and distribution channels) distribution n: the act of distributing, or moving a business's goods (products) to market for ultimate sale to end-user customers. In some industries, distribution means the same as sales. (see alsodistribute and distribution channels) distribution channel n: the mechanism or method by which a business brings its products to market, or distributes its products to its target customers and generates sales. A given business may have multiple distribution channels.Examples: For a consumer product, for instance, alternative distribution channels might include traditional retail stores, telesales, direct mail, infomercials, or web-based sales. For a business- to-business product, alternative distribution channels might include direct sales (company- employed sales reps calling on end-user business customers), telesales (the same, but by telephone), or selling through distributors or manufacturers' representatives. distributor n: a) a company that specializes in distributing other companies' products i.e., has contractual relationships with one or more vendors (producers of the original products) under which thedistributorhas certain rights, responsibilities and restrictions related to marketing and selling the vendors' products to the ultimate end-users. b) In some industries that have multi-tier distribution systems e.g., the steel industry, as well as many retail sectors the term distributoris alternatively used to describe a company that serves an intermediary role between a products' original producers and the companies that actually sell to end-users; these intermediaries typically purchase products from multiple vendors, provide warehousing and transport to the retailers.Examples: a) When American producers of software decide to market their products internationally, they need to choose, for each foreign country they choose to enter, whether to set up company offices ("go direct") or, alternatively, to sign up a distributorto represent their products in that country. Going direct has the advantage of enabling the vendor to retain all end- user revenue (no need to pay distributor commissions). On the other hand, going through a distributor in a foreign country may offer the benefit of faster time-to-market, established customer relationships, and working with a partner familiar with local language and business customs. b) Book publishers typically do not sell their products directly to bookstores; rather, they sell todistributors whose intermediary role is to purchase, warehouse and ship multiple publishers' titles to independent retailers and chain bookstores. Dividend Exclusion. Regular (not S) corporations can exclude from income 70% of dividends received. If the corporation owns 20% or more of the stock of the other corporation, it can exclude 80%. A 100% exclusion is provided for 80% plus owned corporations. Dividend Payout Ratio. The ratio of the annual dividend to the earnings of a company. Stable, mature companies (such as utilities) typically have a high payout ratio. domain knowledge n: knowledge about a specific industry, technology and/or market, typically based on extensive experience in that industry or technology arena. Domain knowledge which can take the form of technological expertise, understanding of product trends, familiarity with key industry players and influencers, and/or knowledge of industry-specific terminology and business practices is a critical success factorfor entrepreneurs and startup teams. drop shipment-v: A shipment directly from the manufacturer to the end user. due diligence n: legal/finance term; the process employed by potential investors or their agents of investigating a business deal or the target of an investment or acquisition; often involves exhaustive fact- checking and review of all historical and current financial and legal records. Due diligenceis performed prior to closing the business transaction in question; often, the two parties to a transaction will sign a letter of intent(LOI) or memorandum of understanding(MOU) for a deal, stipulating that a final agreement and closing of the deal is subject to the buyer's completion of due diligence on the seller, to the buyer's satisfaction. due diligence notebook n: notebook containing all documents critical for investor decision making. (see Venture Communication Pyramid) DUNS (Data Universal Numbering System)-n: A database maintained by Dun and Bradstreet that is used by the Government to identify each contractor and their location(s). This number is required to register with the Central Contractor Register (CCR) that is used by the government's electronic commerce/electronic data interchange (EC/EDI) system called FACNET. You can obtain a DUNS number at no cost by calling Dun and Bradstreet at 800-333-0505. E E&O insurance n: (see errors and omissions insurance) EIN n: (see Employer Identification Number) early adopter n: a term coined by Geoffrey A. Moore in his seminal work on marketing for technology startups, Crossing the Chasm; individuals or organizations that enthusiastically embrace (try and buy) new technologies or tech-based products before the vast majority of potential buyers consider it. In Moore's version of the technology adoption lifecycle,after innovators, early adoptersbuy into new technology products very early in the product or technology's lifecycle. In contrast to Moore's innovators,early adopters are not technologists, but people who understand and appreciate the benefits of the new technology and apply those benefits to what they do. In your world, the early adopters always have the new gadgets before they hit the mainstream. early majority n: a term coined by Geoffrey A. Moore in his seminal work on marketing for technology startups, Crossing the Chasm. When analyzing the market for a given product, the early majorityis comprised of pragmatists, customers who to buy a new product only once it's proven, established and well-supported. Early majoritycustomers typically follow after more risk-seeking and less-demanding customers known as innovators and early adopters. The early majoritytypically understands technology, but unlike early adopters, who often buy based on a fascination with the technology and newness of the product makes purchase decisions based on the practicality, economic benefit and reliability of the technology. Moore's chasm is the gap between the early adopters and the early majority customers, who are far more numerous, but, unlike early adopters, expect evidence of widespread adoption, proven performance, reliability and excellent service or support. early market n: the market for technology products purchased by visionary customers (Geoffrey A. Moore's innovatorsand early adopters). Products in the early market stage are either fads that will eventually fail, or will become accepted by the mainstream market(pragmatists) as technology standards. Earnings Form- Business interruption insurance where the payment is a specified amount only when the loss is caused by an insured peril. EBITDA n: finance/accounting term; acronym referring to earnings before interest, taxes, depreciation and amortization; sometimes referred to more generally or less precisely as operating profit or pre-tax profit. EBITDA is also used as a quick measurement of cash flow, in that it measures earnings (profit, or the excess of revenues over expenses) prior to taking into account the non-cash expenses of depreciation and amortization. economic buyer n: marketing term, typically used in business-to-business markets; describes the individual, decision-maker or group within the customer organization who controls the budget and writes the checks for new product purchases. elevator pitch n: Imagine you walk onto an elevator and encounter the one person you want to invest in your company. You have just a minute or two to sell your business to him or her a brief moment to explain why your company is going to make a difference. Smart entrepreneurs develop their concise company summary ahead of time, and actually rehearse it. Embezzlement. Theft or use of money or property by an individual in whose care the money or property had been entrusted. Employer Identification Number n: often referred to by its abbreviation (EIN), a.k.a. Federal Employer Identification Number (FEIN), or tax ID; a unique number issued to a company, when it is first established, by the U.S. Internal Revenue Service (IRS); as with an individual's Social Security Number, the EIN is required for a startup company to engage in many basic business transactions such as opening a bank account, hiring employees, etc. Endorsement. A written agreement modifying a standard insurance policy to meet certain conditions or to complete a policy. end user n: also end-user; the ultimate customer; the individual or entity that actually uses your product or service. Entity. A partnership, corporation, LLC, S corporation, trust, estate, or joint venture of any kind recognized for tax purposes. entrepreneur n: an individual who starts, or participates in the founding and launch, of a new company; a founder or cofounder. escrow- n: Temporary monitary deposit with an independent third party by agreement between two parties. The escrow money is released when certain agreed conditions have been met. equity n: financial term; ownership in a corporation, generally in the form of common stock orpreferred stock; in a business organized as an LLC(limited liability company), equity ownership takes the form of member interest. equity financing- n:This involves "selling" a portion of your company to an outside investor. You have no obligation to repay the funds. In general, venture capital firms provide this type of funding. ERP n: acronym for enterprise resource planning, a major category of application software or systems used by companies to plan and coordinate operations such as human resources, inventory control, or production logistics. errors and omissions insurance n: also E&O insurance; a type of insurance designed to protect a company and its principals and employees from legal liability stemming from claims (lawsuits, etc.) concerning the commission of errors and/or omissions in the conduct of business. Escalation. 1. Additional rent payments owed by a tenant based on the increase in the costs of operating the building. See Base, above. 2. A clause in a purchase contract providing for upward adjustment of the contract price if specified contingencies occur. ESOP (Employee Stock Ownership Plan)- n: A plan where employees have a vested interest (stock ownership) in the company Excess Liability Insurance. A policy that covers losses that exceed those covered under another policy. For example, your regular policy covers losses up to $300,000. You purchase an excess liability policy that covers losses from $300,000 to $2,000,000. In effect, an excess liability policy is one with a very high deductible. Also known as an umbrella policy. exchange ratio n: financial term, referring to convertible securities such as convertible preferred stock and convertible bonds; the ratio at which the new securities are issued in exchange for the old securities when the convertible security holder exercises his/her conversion right. executive summary n: a two- to five-page write-up describing a company for the purposes of whetting the appetite of potential investors, key recruits and/or strategic partners. An executive summary is a highly-distilled version of the business plan or investor presentation that tells your company's story in very few words (and pictures or diagrams). A strong executive summary should briefly address the following topics (similar to the topical coverage for your investor presentation): a) the business your company is in (e.g., "... a web-based enterprise software for independent retailers...", or "...a biotech company focused on drug discovery for treating esophageal cancer..."); b) the stage of company development (e.g., "...incorporated in Delaware in [date], targeting having demonstrable product prototype by [date]..."); c) the target market/customers; d) the customers' unmet need, and how they are addressing that need today; e) your company's proposed solution to that unmet need (product and/or service); f) competition and your competitive differentiation (how your solution is demonstrably better, faster, cheaper, cooler, or otherwise more desirable to your target customers); g) established strategic alliances; h) management team; i) financial summary (results to-date and forecast out at least 3 years); j) capitalization (invested capital to-date) and amount of capital the company is current hoping to raise. exit n or v: in the world of entrepreneurship and venture finance, exit refers to a liquidity event, in which owners of illiquid stock in a privately-held company whether they be founders, employees, or investors achieve liquidity for their stock holdings (i.e., a market develops for their shares where no market previously existed) due to one of two occurrences: a) the company "goes public" through an initial public offering or IPO; or b) the company is sold to another company, either for cash or for the publicly- traded stock of the acquiring company. (see also: shareholder exit, liquidity, and liquidity event) exit strategy n: a privately-held company's plan to achieve liquidity or a financial exit for its shareholders. Experience Rating System. Insurance premiums in such a system are based on the insured's past experience. Extra-Expense Insurance. A policy that pays for any extraordinary expenses incurred to keep a business in operation after a loss caused by an insured peril. Extra Risk. An insured that does not fall within the standard risk range. Insurance can only be obtained for a higher than normal premium or with less coverage. |
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