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Common Business TermsDefinition
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EINEIN stands for: Employer Identification Number. This is the Federal identification number for your business. (Please note, some sole prioprietorships never file an EIN number and may use their social security number instead.)
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Legal Business NameThis is the registered corporate business name (often a coporation or LLC) as shown on your tax returns and other official documents.
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DBA or 'Doing Business As'This is the commonly used name for your business. For example, you could have a business with the legal name 'Philadelphia Tacos LLC' but to the public you are 'Pete's Taco Shop'. In this scenario your DBA would be 'Pete's Taco Shop.'
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Revenue / Total Sales / Gross SalesThis dollar amount is the total money brought in from the sales of your product and services. (Ex. If a taco shop sells $240,000 of product this year, their yearly revenue is $240,000.)
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Profit / Net IncomeThis dollar amount is the revenue (or total sales) minus all of its expenses. (Ex. If a taco shop sells $240,000 of food this year, and spent $184,350 to operate the business - cost of the food, paper goods, labor, utilities, rent etc. the profit for the year is $55,650.)
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Direct Costs / Cost of Goods Sold (COGS)Direct costs are the expenses associated with making a business's product or service. Anything the business purchases and then re-sells or gives to the customer is part of their COGS. (Ex. If a taco shop sells $240000 of product this year, and spent $80000 on ingredients and packaging -food, packaging, napkins, paperbags, etc. - then their direct costs or COGS for that month are $80000.)
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Indirect Costs / Operating CostsIndirect costs are the expenses associated with operating a business, but not the direct costs of producing the product or service. (Ex. If a taco shop sells $240,000 of food this year, and spent $130,000 on rent, marketing, insurance, utilities and other costs NOT directly related to the product or service, then their indirect costs or operating costs for that month are $130,000.)
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Labor Costs (or cost of labor)The cost of labor, another expense, is the total of all employee wages plus the cost of benefits (health insurance, for example) and payroll taxes paid by an employer.
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EmployeeEmployees are hired by the business to perform certain tasks in exchange for wages or a salary. Hours and tasks are set by the employer. Best practice is that each employee has a job description. Payroll taxes (federal, state, local) should be withheld from each employee's earnings and the employee should receive a W2 annually.
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Independent ContractorIndependent contractors are not employees of the business. They can set their own schedule and hours and are self-employed. Businesses typically hire independent contractors to perform jobs and services, but cannot control specifics such as day-to-day schedules. Businesses who hire independent contractors are required to issue 1099s if the contractor is paid more than $600 in a calendar year. Example: A business owner may hire an independent contractor to manage their marketing or social media accounts.
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Profit and Loss (P&L) Statement / Income StatementA profit and loss, also known as a P&L or income statement, is one of the three major financial documents that show the health of a business. Simply put, a profit and loss statement summarizes the revenues, costs, and expenses incurred during a specified period, usually a quarter or fiscal year.
SALES - DIRECT COSTS - INDIRECT COSTS = PROFIT
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Balance SheetA balance sheet is a financial statement that contains details of a business’s assets or liabilities at a specific point in time. It is one of the three core financial statements (P&L statement and cash flow statement being the other two) used for evaluating the performance and health of a business.
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AssetsAssets are things, typically large items of value, that the business owns or that are owed to the business. For businesses that typically apply to The Merchants Fund, these are usually physical, tangible things, such as machinery, tools, vehicles, property, computers, office furniture, or inventory, etc. but would also include cash-on-hand/cash reserves.
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LiabilitiesLiabilities refer to things that the business owes or has borrowed. Examples include loans (banks, credit cards, friends/family), mortgage debt, money owed to suppliers (accounts payable), wages owed to employees/contractors, taxes owed, etc.
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Working CapitalWorking capital is a term used to describe money that is used to cover short-term expenses. For example, if a business received a loan and used that money to pay rent, utility bills, and purchase some ingredients/inventory, they would be using that money as working capital.
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Cash-on-hand
This refers to the cash that is immediately available to the business, typically in a bank checking account.
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Cash Flow StatementIn addition to the P&L and balance sheet, a cash flow statement is the third core financial statement used for evaluating a business's health. The statement shows the cash/revenue coming into the business and the cash/expenses flowing out of the business. A healthy business has positive cash flow, whereas a business with negative cash flow is spending more money than it is making.
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Created by The Merchants Fund (Philadelphia, PA)
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