10 Financial and Other Business Terms – 29 August 2017

Other Business Term

How many of these terms do you know?

Basic Terms

Bad Debt – There are two meanings of the phrase bad debt. In financial terms, bad debt is a debt that has not been repaid according to agreement and is not recoverable. For example if a customer receives a product or service then doesn’t pay the bill and “disappears,” that is a bad debt.

In the aftermath of the Great Recession the “fear of debt” has become a big deal for many people, and there are discussions about “good debt vs. bad debt.” More…

Barrier to entry – Something that makes a business hard to start or compete with is called a barrier to entry. This can include: large amounts of capital needed, technical expertise, detailed niche knowledge, intellectual property (IP), regulations and certifications, sticky customers, strong customer relationships and key partners. Getting established in a business with high barriers to entry is good once you are there because it lowers competitive pricing pressures which in turn will increase profitability. More…

Current – In accounting, something that is current can be turned into cash within one year (“current assets”), or needs to be paid within one year (“current liabilities”). The use of the one year period is a longstanding accounting tradition that is appropriate for analyzing the annual financial statements of large companies.  However, seeing items on your accounting statements being called “current” can be confusing for a small business. More…

Other People’s Money – The slang Other People’s Money or OPM refers to the use of funding from any of a wide variety of sources, other than your own personal funds. The bad pun but good advice is “don’t get hooked on OPM.” Far too many startups get hooked on venture capital, for example, rather than focusing on customers and revenue. Customers’ OPM is probably the only good OPM to get hooked on.

SMBs and SMEs – SMB is an acronym that stands for Small and Medium Businesses, and SME stands for Small and Medium Enterprises. These acronyms are used to describe a category of companies by size that are served by particular government programs, debt providers, software developers, and others. There is no magic distinction between “small” and “medium,” nor is there a well defined boundary when a company goes beyond “medium” to “large.” More…

Working Capital – Working capital consists of cash and other short-term financial assets such as accounts receivable that can be used to meet current financial needs such as paying to grow or replace inventory and other accounts payable. More…

Intermediate Terms

Advisory Board – Young companies with high aspirations often start with informal mentors, then add specialized advisors, and develop a more formal advisory board over time. Functionally an advisory board does everything that mentors and advisors can do. However, formalizing the relationship in a defined structure and instituting regular meetings and communications provides a level of mutual seriousness that can elevate the quality of interactions. More...

Burn Rate – Technically speaking a company’s burn rate is their net negative cash flow per unit of time, and typically per month is the unit of time. Equity investors often ask companies seeking investment what their burn rate is. They want to understand both how much longer current cash will last (the “runway”), as well as how much of a financial risk the company will be once they invest. More…

Revenue Per Employee – If you are creating a five year financial projection, test it with some “sanity checks” such as the revenue per employee (RPE) benchmark. The calculation is pretty simple: divide your annual revenue in any given year of the projection by the average, or yearend, number of employees for that year. Don’t worry too much about the exact number. This is a sanity test to make sure you have not projected a dramatically low number of employees in the future for the revenue you plan to achieve.

Business Insider wrote an extensive analysis of large companies and their revenue per employees. Here are a few important takeaways (more)…

Use Of Proceeds – If you are applying for a loan or fundraising for equity you will need to describe your use of proceeds: how will you use the money?  Funders will be looking for very specific descriptions that match categories on either your profit and loss statement or your balance sheet. More…

 

Don Gooding

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