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Guide to Start a Business

Chapter 10 - Business Term Definitions

An appraisal is a written document by a professional appraiser stating the value of an asset – an estimate of the amount for which the asset could be sold.


Articles of Incorporation are documents filed with Corporate Registries, Justice, by the founders of a corporation. They legally establish the corporation as a business. The Articles of Incorporation provide such information as the corporation’s name, the incorporator, amount of authorized shares and number of directors. Rules governing the internal management of the corporation are described in the Bylaws drawn up by the founders or officers.


Assets are things owned by a business or an individual that can be used to benefit the business. Assets are divided into four categories: current assets (for example, cash or accounts receivable); long-term investments (for example, stocks, bonds of real estate); property, plant and equipment (for example, land or buildings); and intangible assets (for example, patents).


A balance sheet is a financial statement of an individual or firm showing assets, liabilities and net worth on a given date, usually the end of a month. A balance sheet shows the state of affairs at a given point in time.


A benchmark is a standard or point of reference in measuring or judging the current value or success of your company in order to determine your future business plans.


Individuals elected by shareholders to establish corporate management policies.


The level of sales dollars required to cover all costs during an accounting period.


A business plan acts as a guidebook outlining where a business will be in one to five years. The two main uses are for guidance in decision-making by the owner-manager and for presentation to a funder when applying for a loan.


Capital is the money or property owned or used in a business to produce more wealth. In a start-up business, capital is the amount of money invested by the owner before borrowing from others. Capital is often referred to as equity or net worth.


A capital asset is a long-term asset with a life exceeding one year. Capital assets are not usually bought or sold in the normal course of conducting the business.

A capital budget is a plan or amount of money to be used for financing purchases of capital assets in the future.

A capital requirement is the permanent financing needed for the normal operation of a business. It is used to finance fixed assets and working capital.

A cash flow projection is a prediction of future in and out-flows of money, forecasted sources of cash and forecasted uses of cash.

A cash flow statement displays the amount of money coming into the business over a period of time compared to the amount of money going out.

Assets pledged in return for loans.


A document that identifies the services to be performed, the provider, the recipient, the amount of payment, the date of completion and other provisions and clauses.


A business that is separate and distinct from the persons who own it. A corporation can own property, engage in contracts, incur debts, pay taxes, sue or be sued.

A corporation:

  • Can expand ownership by sale of additional shares of stock.
  • Can easily transfer ownership through the sale of shares of stock.
  • Continues to exist beyond the life of individual owners.
  • Has centralized management in a Board of Directors, president, secretary and treasurer.
  • Generally, a shareholder in a corporation has limited liability whereby owners can only lose the amount invested.

The cost of the goods or services offered for sale, such as materials, labour or inventory.


A person or company to whom money is owed.

Current assets include cash or other assets that are likely to be converted into cash, usually within a year, through sale, exchange or expense during the normal course of business. Examples include cash, inventory and accounts receivable.

Current liabilities include debts, loans, trade credits or other obligations due for payment within one year.


A debt is an amount owing by individuals or corporations.


A person or a company who owes money to a creditor.


A director is a member of the Board of Directors. It is also a title for one who directs; one who controls the operation of a business.


A risk-reduction strategy that involves adding various products, different services and markets to your company.


A dividend is a payment of earnings (in money or equivalent) to shareholders for each share of stock as declared by the Board of Directors.


A distribution network is made up of all the steps from the supplier to the consumer. A strong and efficient distribution network is one of the most important assets a manufacturer can have, and is the biggest deterrent that faces the new competitors.


Economics studies the system of producing, distributing and consuming wealth, and evaluates contributing factors such as labour, finance, management, capital and taxation.


An entrepreneur is a person who takes on the risks of starting a new business or purchasing an existing business.


Money you personally invested in the company plus the profits you reinvested. Equity is calculated by subtracting liabilities from assets.


An executive summary is a brief overview of a document that highlights the important facts, issues and conclusions. The executive summary is usually at the front of the document.


Expenses are the sum of the cost of goods and services purchased during a given period of time. Expenses are sometimes referred to as “the cost of doing business”.


A fixed expense is any expense that does not change with the amount of sales or production (for example, rent, real estate taxes, insurance, office staff or interest).


When you buy a franchise, you are called a franchisee and have the right to market a product or provide a service, as granted by the proprietary owner (franchisor). The contract defining the terms and conditions between franchisor and franchisee is called a franchise agreement. Often a franchise is exclusive for a specified area.


Gross margin is the relationship between gross profit and net sales.

Gross margin = (Gross Profit/Net Sales) x 100%

Income is the money received by a business in a given period of time as a result of operating the business. Income is also called revenue.


An income statement is a detailed statement of income, expenses and taxes for a business, revealing the net income of the business over a period of time.


Inventory is the goods a business has on-hand to sell (in the case of a retailer) or to produce for sale (in the case of a producer). Producers have inventory in three categories: raw materials, work-in-progress and finished goods. “Taking inventory” means to count the amount of inventory on-hand.

An investment is the use of capital to create more money as a financial gain.


The amount owed to another by a business or an individual.


A lien is a claim against property. When the debt is repaid or the contract is completed, the lien is removed. If the money is not repaid or the contract is not completed, the lien can be used to seize the property.

A long-term liability is due in a year or more (for example, a mortgage, note or bond).

Moving goods and services from the seller to the consumer is all part of marketing. It involves advertising, publicity, promotion, pricing, sale and distribution of the goods and services.

Market demand is the amount of a product or service people are willing to buy at a given price.

A marketing plan is the part of a business plan that explains how you plan to sell your product or service. It can also be a stand-alone document.

Market research examines the size, characteristics and potential of a product or service to help you determine what people want and need.

Market share is the percentage of industry sales that are made by a single company or are attributable to an individual product.

Your mission statement may describe your activities, the purpose of your business, your business philosophy, beliefs and values, and/or the relationship you want with employees and customers. The statement should give the reader an idea of what is important to the business and what you expect the business to become over the next three to ten years.

A net asset is the difference between a company’s total assets and its total liabilities. It is also referred to as owner’s equity or net worth.

On an income statement, you calculate the difference remaining after all expenses have been deducted from income. When the result is positive, it is called net profit and, when the result is negative, it is called net loss.

Notes to financial statements clarify the information provided in the financial statements. For example, notes to financial statements describe accounting policies, significant events, which occurred after the statement date, and further details on items in the financial statements.

An operating budget is an itemized statement of income, expenses, debt service and cash flow during a future period (a projection of the profitability of a business).

A business having more than one owner, in which all owners are liable and jointly manage the business.

Limited Partnership
A partnership having limited partners who cannot act on behalf of the partnership and usually have limited liability up to the amount invested in the partnership.

Limited Liability Partnership
A partnership where partners have limited liability similar to that a limited partnership or shareholders of a corporation, but can also directly manage the business.

Things of value that you own are your personal assets. These could include a home, cash, an automobile or investments.

Personal net worth is the total value of all possessions (personal assets minus all debts, such as a mortgage, loans and revolving credit accounts).

Personal liability is a person’s obligation to satisfy a business debt using their personal assets. Shareholders in a corporation are usually required to sign personal guarantees, making them personally liable for the debts of the corporation.

Preferred shares identify ownership in a corporation, but generally do not include voting rights. This is in contrast to common shares, which involve ownership and voting rights. Preferred shares have prior claim on dividends, earnings and assets over common shares. The dividend paid on preferred shares is usually a pre-determined amount.

A pricing strategy is developed by evaluating market potential to establish the price of goods and services which results in the greatest profit.

A projected income statement is an approximation of income, expenditures and profit for a period of time in the future.

A recession is a downturn in economic activity. It is a time generally lacking in prosperity and in growth of business activity. Recessions can be global, national, regional, local or even individual.

Red tape is a common term applied to the requirements and excessive or unnecessary paperwork that causes delays and increased costs.

Retained earnings are earnings that are kept in the company and not distributed to shareholders through dividends.

Return on investment is a measure of profitability of the business expressed as a percentage. This measure is most important to the owner, because it can be compared with other investments.

ROI = (Net Profit/Total Equity) x 100%

A royalty is a payment of an agreed amount of money for the right to use a given property (for example, a patent or copyrighted material).

Sales volume is the total amount of revenue from sales of goods and services received during a given period (or expected to be received in the case of projections). Sales volume can also refer to the quantity of goods sold.

A shareholder is a person or organization that owns one or more shares of stock in a corporation.


Shareholders’ equity is the collective ownership in a corporation calculated by subtracting total liabilities from total assets.


A sole proprietor is an individual person who is in business by them self. A proprietor is frequently used in start-up businesses because it is easy to organize and flexible to operate. Sole proprietors are considered self-employed and are fully responsible for all debts and obligations related to the business.

Statistics are facts or data that have been assembled, classified and tabulated to present numerical information about a given subject.

A wholesaler is a business that sells goods or services in large quantities and at lower prices to someone other than consumers. Wholesalers sell to retail businesses, jobbers, merchants, manufacturers, industrial firms, commercial, businesses and institutions.

Working capital equals current assets less current liabilities. This measure serves as an indication of the amount of readily available funds that can be used in operations of the business. Working capital finances day-to-day business operation and allows bills to be paid while awaiting payment on receivables.