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Small Business Terms Glossary Search for Terms P P&L nand adj : (see profit and loss) P.I.T.I. Payments that cover Principal, Interest, property Taxes, and Insurance. paid-in capital n: finance/accounting term; equity investments in a company. The cumulative amount of paid-in capitalfor a company at any given point in time is shown as a line item on the liabilities and shareholders' equity side of the company's balance sheet. Parol Evidence Rule. Provides that the formal, written contract governs the parties. Statements made before the drafting of the policy can not be used in evidence. Participation. Where two or more lenders share in a mortgage loan. Often used on large loans to spread the risk. partnership n: a legal organization structure in which multiple individuals, called general partners, manage the business and are liablefor its debts based on their pro rataownership shares; other individuals known as limited partnersmay invest in the partnership while not being directly involved in management, and are liable only to the extent of their investments. PASS - This is the Procurement Automated Source System managed by the Small Business Administration. Registering with this central referral system of small businesses interested in selling to the government can bring you business with almost no effort. Registration is free. Call 1 800 231 7277. pass-through entity n: accounting/legal term; a legal form of organization that does not pay income taxes at the organization level. Instead, the owners of the organization pay taxes based on their pro rata ownership share of the organization. Examples of pass-through entities include partnerships, LLCs and S corporations. Passive Activity. For taxes, rentals, regardless of participation and trades or businesses where you do not materially participate. Losses are limited to passive income plus a special $25,000 allowance for rental real estate. Passive Loss. Loss from a passive activity, that is, rental or trade or business in which you do not materially participate. Passive Income. Income from a passive activity. In other words, income from rentals or businesses in which you do not materially participate. payables n: (see accounts payable) Payback Period. The length of time it will take for an investor to recoup his cash outlay. Often used as a quick way to analyze an investment, usually in personal property. For example, a new machine will cost you $10,000. It will generate income before depreciation of $3,000 the first year; $4,000 the second year and $3,000 the third year. The payback period is 3 years. patent n: a grant by the United States federal government or a foreign government to an entity (individual inventor, company or organization) giving the entity the exclusive right to produce and sell an invention for a given period of time. Federal patent law identifies the specific rights of a patent holder for different types of patents. v: the act of applying for and receiving a patent for an invention or piece of intellectual property (e.g., "I intend to patent my new invention.") peer-to-peer adj: describing the transfer of data directly from computer-to-computer, or user-t o-user, rather than through a central server. Peer-to-peer networks are difficult to monitor as the traffic does not pass through a server, whereas more traditional file-sharing networks, such as the original Napster, moved files through a server, allowing for monitoring and theoretically, control of file-sharing behavior. Period Costs. Expenses related to a particular accounting period. Performance Bond. A contract of guaranty by a successful bidder to protect the buyer from loss due to the bidder's inability to complete the contract as agreed. Personal Articles Floater. Generally, an endorsement on an insurance policy that provides for all-risk coverage on scheduled (named) valuable personal property. Personal Property. Generally, tangible and intangible assets other than buildings, leasehold improvements, land, etc. The tax law often limits personal property to physical assets such as equipment, furniture, etc. that can be moved without affecting a building or other structure. Personal Property Floater. Generally, an endorsement on an insurance policy that covers all property individually owned no matter where it's located. Personal Property Replacement Cost Endorsement. A provision in an insurance policy that changes the recovery from an actual cash value basis to a replacement cost basis. Placed in service. Strictly a tax term. You can only start depreciating property (or take a Sec. 179 expense election) when the property is 'placed in service.' That means when the property is available for use in its assigned function. For example, you purchase a machine and it's not delivered until 1997. Even though you may have paid for the machine in 1996, you can't begin depreciation until 1997. Similarly, if the machine is delivered in 1996, but the technicians didn't arrive to install and test the machine until 1997, you can't begin depreciation until 1997. Points. Payments to secure a loan, stated as a percentage of the borrowed amount. For example, 2 points is 2% of the loan. Policy Face Amount. The maximum amount payable under an insurance policy, so-called because the amount is printed on the face of the policy. Portfolio Income. Interest, dividends, royalties, and gains from the sale of stocks and bonds as well as other investment activities. Portfolio income is generally not considered passive income. Portfolio income cannot be offset by passive losses except those passive losses remaining after the disposition of a passive activity. portfolio company n: term used by venture capitalistsand other private equity firms to describe companies in which they own equity; a company in an investor's investment portfolio. positioning nand v: marketing term; the perception that a company attempts to create in the minds of its targeted customers regarding that company's product or service offering relative to competitors' offerings; the attribute or attributes associated with a company or product relative to competitive companies or products in the same market. Also, marketing activities associated with creating a company's or product's positioning.Example: A strong positioning statement should clearly and succinctly address the following:"For______ [your target customers or market segment], ... _______ [your product or brand] ...is/provides/enables _______ [your product's or service's most important benefits] ...because _______ [reason why]. Unlike ______ [your primary competitors], _______[your brand] does _______ [highlighting your brands primary competitive differentiation, i.e., what makes you better]." post -money valuation n: the value or nominal worth of an entire company immediately after afinancing round. A company's post-money valuationis equal to the pre-money valuation(i.e., the value set immediately prior to the financing round) plus the amount of money raised in the financing round. (see also: pre-money valuation) power of attorney- n: An agreement authorizing someone (generally an attorney) to act as your agent. This agreement may be general (complete authority) or special (limited authority). Power of Sale. A clause in a mortgage or similar instrument that gives the lender the power to sell the property in case of a default. The property must generally be sold at auction, but the lender does not have to go through a court proceeding to do so. PPM n: (see private placement memorandum) PR n: (see public relations) pragmatist n: one who makes practical decisions; in the parlance of Geoffrey A. Moore's Crossing the Chasm, the early majority and late majority customers for a given category of products or services (i.e., those mainstream customers who represent the vast majority of all potential buyers) are pragmatists; they make purchase decisions based on their perception of the product's practical utility and benefit, references and testimonials from fellow pragmatists, and their perceptions of emerging industry standards. pre-money valuation n: the financial value or worth established for a company immediately prior to afinancing round. The pre-money valuation plus the dollar amount raised in the financing round equals thepost-money valuation. preferred lenders- n: Banks which have a special written agreement with the SBA which allows them to make a guaranteed SBA loan without prior SBA approval. preferred stock n: equity, or stock, that offers owners different, preferential rights to those of common stock owners. In a liquidity event, the preferred stock owners are typically paid before the common stock owners. price n: the amount of money a business charges customers per unit for a product or servicev: to set the formal, listed price of a product or service Price At The Time of Delivery. A term used in sales contracts when market prices are so volatile that a vendor will not give a firm price or use an escalator clause but will only agree to charge the price charged other customers for similar purchases on the day he ships or delivers the goods. Price Protection. An agreement by a vendor with a purchaser to grant the purchaser any reduction in price which the seller may establish prior to, or within a certain time after, shipping of the purchaser's order. price the round v: (see lead the round) price sensitivity n: economics/marketing term, a.k.a. price sensitivity of demand, or demand sensitivity; the degree to which unit demand for a business's products or services (i.e., the market's desire to buy) falls when prices are raised, or rises when prices are reduced. Example:a) We're fortunate that the market for Product A has low price sensitivity: when we raised prices by 20 percent, we sold the same number of units the following quarter. [In this case, the market can also be described as price insensitive; i.e., demand doesn't change appreciably with a change in price.] b) When we lowered the price of Product B by 5%, we stimulated an immediate 25% increase in unit sales, showing that market to be highly price sensitive. Prime Costs. Direct labor and material costs. principal n: finance term; principal amount n: finance term; a.k.a. face value, or face amount;in the case of debt, the amount a borrower promises to repay at or by a specific maturity date. private banking n: full-service banking and financial services offered generally to high-net-worth individuals by larger commercial banks and financial institutions. Also known as private client services. private client services n: (see private banking). private equity n: equity capital invested in a private company. The three primary sectors of the private equity market are traditional private equity, or LBO (leveraged buy-out), venture capital and real estate. Private Letter Ruling. These are written pronouncements from the IRS interpreting the Internal Revenue Code with respect to a specific set of facts and circumstances. Letter rulings arise from a taxpayer's request to interpret the law, usually before engaging in a transaction. For example, when two corporations decide to merge, they typically request a letter ruling to insure the transaction will be tax free. The ruling applies only to the taxpayer requesting it and cannot be cited as precedent. However, letter rulings often give important insight into the way the IRS would rule under similar circumstances. Despite the filing fee and legal costs involved in obtaining a ruling, if the tax consequences are substantial, a ruling is often advisable. Private Limited Partnership. A partnership that does not have to be registered with the SEC, but can have no more than 35 accredited partners. private placement n: a fundraising process in which the company raising the money markets and sells securities (debt or equity) directly to a small group of investors either institutional investors, venture capitalists or angel investors for investment rather than resale purposes. From a legal perspective, aprivate placement is a securities offering that is not subject to registration requirements under the Securities Act of 1933. private placement memorandum n: also referred to by its abbreviation (PPM); the prospectus used in conducting a private placement; the marketing and legal document written by a company (or its attorney or investment banker) for the purpose of raising money (either equity or debt) through a private placement. A company provides a PPM to prospective investors, generally accredited investors, who use the PPM as a tool to evaluate the investment opportunity. pro forma adj:financial/accounting term; forward-looking, or predicting future financial performance. n:"pro formas" is a way of informally referring to pro forma financial statements. pro forma financial statements n:financial statements intended to represent the future financial performance of a company; often prepared to represent the predicted financial performance of company after a certain hypothetical or expected future event occurs. For example, if a company is planning to acquire another firm or to raise new capital, it will prepare pro forma financial statements to represent what the combined entity will look like in terms of anticipated financial structure and future performance. pro rata adj:finance/legal term; reflective of proportional shares or ownership. An individual's or entity's pro ratashareis their due or proportional share. The term pro ratashare is often used when discussing ownership, financing, and fundraising.Example: If you own 50% of a company, your pro ratashare of the profits will be 50%. If the company were to raise $2 million in its next financing round and you were asked to invest yourpro ratashare, you would invest $1 million (or 50 percent of $2 million). If you didn't invest at least $1 million, your ownership stake of 50% would be diluted (proportionally reduced). Pro Rata Liability Clause. When more than one insurance company covers a property, the clause provides a formula for sharing liability among the companies. Probate Property. Assets owned by the decedent in his or her name alone or as tenant in common on the date of his or her death that pass by will or the laws of intestacy to another party. product line n: a range of related products marketed by the same company, typically under a common brand name.Example: Nokia's cell phone product line includes a range of models of various sizes, with various levels of functionality, and at various price points. Apple's iPod product line includes digital music players in a range of sizes, storage capacities and prices, in addition to a selection of add-on products such as covers, carriers, head phones and speakers. product launch n: the orchestrated introduction of a new product (or version of a product) to the market; the events surrounding making the product available for purchase for the first time. Depending on your company's distribution channel, a comprehensive product launch could entail a number of elements and activities, possibly including: advertising campaign, direct marketing campaign, public relations campaign, brochures and sales literature, point-of-sales displays, product demonstrations, sales training, call-center training (both pre-sales and post-sales support), inventory stocking in the distribution channel, etc. product manager n: (see product management) product management n: the cross-disciplinary business function that entails taking responsibility for a product from initial conception through development to ultimate product launch and lifecycle management. In its broadest interpretation, product management encompasses oversight of the following aspects of a product: a) identifying target markets and customers and their unmet needs; b) translating those unmet needs into market requirements and associated product specifications to guide the business's engineering/product development function; c) overseeing product development and testing; d) working with marketing and sales to successfully launch the product or service once it is complete; and, e) tracking the product's success in the market, understanding changing customer needs and perceptions, and recommending ongoing product enhancements, new models, product line extensions, etc. In some businesses, product management is a stand-alone business function, whereas in other companies, it is organizationally a part of either the marketingor product development (engineering) function. product marketing n: the element of the marketing function within a business that entails identifying and analyzing target markets, researching and defining customer requirements, and developing product specifications for the engineering or product development function of the business. Product marketing is a hybrid activity that straddles the marketing and product management functions of a business, and as such, it can be found organizationally in either group within a company. product risk n: one of the four categories of venture risk, sometimes referred to as technology risk; the likelihood that a new venture will fail to produce the envisioned product in the planned timeframe due to unanticipated technology and/or product development challenges, or that productize v: to take a capability a new service, product or product feature that the company has provided to a single customer or a few customers on a custom basis, and turn it into a standard, fully- tested, -packaged, -supported and -marketed product offering of the company. profit and loss n: often referred to by its acronym, P&L; a) shorthand for a profit and loss statement, an alternative name for an income statement; b) informal name for a business unit or strategic business unit, a stand-alone business within a larger company that is managed and accounted for separately (see business unit)adj : referring to a profit and lossstatement prompt payment act- n: A federal law that requires federal agencies to pay interest to companies on bills not paid within 30 days of invoice or completion of work. promote v: to market a product or service to a target market or customer set. (see also: marketing communications) promotion n: a) the act of promoting, or marketing to a target market or customer set; b) a specific marketing campaign or offer. (see also: marketing communications) Example:The free toaster promotion was deemed a great success, having attracted thousands of new customers to try our product. prospect n: prospective customer; an individual or entity who has expressed potential interest in purchasing a given product or service, and has been screened or qualified by the sales team to verify that they are serious in a near-term purchase (i.e., they have the necessary budget set aside, they have a current need or interest, and they are not predisposed to a competitive solution) v: to seek out, contact and qualify prospective customers for a given product or service proxy n: the written authorization given by one individual to another to cast a vote. Shareholders may sign a corporate proxy giving authorization to another person to vote for them in a shareholder vote.Proxy is also a general term describing one who has the authority to represent or replace someone else, or anything that is a suitable replacement for another thing. psychographic profile n: marketing term; combination of psychology and demographics that make the marketing responses of those groups different from those of other groups. Understanding a group's psychographic profile and its relationship to its neighbors is a critical component of high tech marketing. public relations n: often referred to by its abbreviation, PR; Publicly Traded Partnership. A partnership whose interests are traded on an established securities market or are readily tradable on a secondary market. Purchase Money Mortgage. A mortgage made by the seller to a buyer. Often a junior mortgage used in connection with the sale of investment property or a business where the buyer can't meet the full purchase price through his own and borrowed funds. Q qualify v: to interact with a sales suspect (an individual or entity who has expressed preliminary interest in a company's product or service) with the purpose of determining whether or not they are a serious customer with budget, serious intent to buy in the near-term, and without an ingrained preference for a competitive product. A prospective customer who has been successfully qualified is sometimes referred to by the sale organization as a qualified prospect. Qualified Terminable Interest Property (QTIP). Property that qualifies for the marital deduction provided the property passes from a decedent to a surviving spouse, the surviving spouse has a qualified income interest for life in the property and the executor of the decedent's estate makes an irrevocable election to qualify the QTIP property for the marital deduction. R rapid-growth market n: stage of market development where competitors are scaling rapidly to meet growth in customer demand (often in excess of 50%/year); Vendors have crossed the chasm and are selling to early majority (pragmatist, or mainstream) customers; competition around customer references, emerging industry standards, and service; IPOs occur REO. An abbreviation for real estate owned. Used to identify properties that have been foreclosed on and carried on the balance sheet of a lender. Rate of Return on Assets. In real estate parlance, the net operating income from a property divided by the price of the property. Real Estate Investment Trust. A special corporation that is generally not taxed under federal law. The trust (REIT) must invest funds in real property. Income is taxed to the shareholders. Recapture. See Depreciation Recapture, above. Recharacterization Rules. Generally, rules which reclassify passive income as nonpassive. This type of income should not be reported on Form 8582 and cannot be offset by passive activity losses except those passive losses remaining after disposition of a passive activity. receivables n: accounting term; informal vernacular for accounts receivable Refine stage n: the fourth stage of the Venture Value Chain. In the Refine stage, companies should focus on creating consistently cash-flow positive, self-funding operations. The company should be managed for predictable growth in revenue and profitability. Public companies such as General Electric, Microsoft and Wal-Mart are masters of Refining. These companies consistently grow revenues (sales growth, or top-line growth) and profitability (earnings growth). Mastering the Refine stage can lead to higher valuations in the Liquidity stage, the final stage of the Venture Value Chain. Reformation. The act of changing the terms of a contract to meet the original intentions of the parties. Registered Bond. See Bearer Bond, above. Release Price. The amount that must be repaid on a development loan when a property under a blanket mortgage is sold. Renewable and Convertible Term. Term life insurance that is both renewable for an additional period without evidence of insurability and convertible into a permanent or whole life policy. A policy may contain one or both clauses. Replacement Cost. The cost of replacing a property with one having similar amenities and functionality, but not identical improvements. Reporting Forms. Commercial property insurance where the insurer requires periodic reports on the value of the inventory to ensure coverage is adequate and the premiums commensurate with the risk. Reproduction Cost. The cost of reproducing the improvements on a property so as to duplicate the original property. reseller n: (see VAR or value-added reseller) Residual Value. The value at the end of a term. In leasing, it's the value, either fair market value or some stated value, at the end of the lease. In finance and accounting, it's the fair market value at the end of the equipment's design or economic life or life in the business. resolution n: (see board resolution) restructuring n: the significant makeover of an existing company typically involving the closing of plants, firing of employees, reworking the company capital structure, bringing in new management and relocating operations. Typically restructuring occurs return on equity n: abbreviated ROE, indicator of profitability of a company. Net income less preferred dividends over common equity, expressed as a percentage. return on cash equity (contributed or invested equity) n: indicator of profitability of a company. Net income less preferred dividends over cash equity (contributed or invested equity) equity, expressed as a percentage. Cash equity equals the sum of all cash equity invested in the company in all of its financing rounds. Revenue Ruling. This is an official IRS interpretation of the Internal Revenue Code or Regulations on a specific issue. The ruling may have been prompted by a Technical Advice Memorandum, taxpayer request, court decision, etc. As opposed to a Private Letter Ruling, a revenue ruling usually has broader implications and can be cited by the IRS or taxpayers as precedent. Revenue rulings carry less weight than IRS regulations. Revocable Beneficiary. In the case of an insurance policy, the policyholder, in the case of a trust, the grantor, has the right to change the beneficiary at any time. Revocable Trust. A trust, generally to hold income producing property, that may be changed or revoked at the will of the grantor. The grantor (person creating trust and transferring property to it) receives and is taxable on any income from the property, but the property passes directly to the beneficiaries on the death of the grantor. The assets pass to the beneficiaries without going through probate. While not part of probate, since the trust is revocable, the assets are part of the decedent's taxable estate. Revolving Credit. In commercial lending, an agreement between the creditor and debtor allowing the borrower to draw down funds up to a stated maximum for a stated period. In addition to interest on the outstanding amount, the lender usually charges a fee to make the funds available. Any amount repaid allows the borrower to draw down additional funds up to the maximum. RFP n: sales and marketing acronym for request-for-proposal. Right of Survivorship. In jointly held property, the right of one owner to automatically take title to the property on the death of the other owner. Risk Transfer. The shifting of risk from one party to another. The purchase of insurance is one example of transferring risk. Since there is an opportunity for tax evasion in risk transfer, the IRS may scrutinize such transactions. Roll Down. The act of moving from one option position to a different one having a lower exercise price. Roll Forward. The act of moving from one option position to a different one having a later expiration date. Roll Up. The act of moving from one option position to a different one having a higher exercise price. Round Trip Trade. The purchase and sale of a stock, commodity, etc. in a very short period of time. round n: (see financing round) Rule of 72. Formula for determining the time it will take for your money to double for a certain compound interest rate. Divide 72 by the interest rate in percent; the result is the number of years. For example, 72 divided by 10% equals 7.2. The actual number of years it will take your money to double at 10% is about 7.28 years. run rate n: annualized revenue; the result of extrapolating recent financial results for a period shorter than one year (e.g., results for the most recent quarter or half year) to represent a full-year period; that is, the result of annualizing recent results. This method is often used to characterize the performance of early-stage, high-growth businesses, since annualizing the revenue run rate of a company based on its latest quarter may be far more impressive (and arguably more representative) of the company's current status than the potentially far smaller revenue number from its last full fiscal year.Example: Whereas a startup has produced revenue of $800,000 in the past twelve months, $500,000 of that amount has been generated in the most recent quarter. By annualizing the last quarter's results (i.e., multiplying that quarter's results times 4), the company can claim it is generating revenue at a $2 million run rate. |
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