Self-Employment Steps for Vocational Rehabilitation Counselors: Helping a Consumer Start a Business

Chapter 6:

Financial Plan Definitions

Accounts Payable - Debts owed to another individual or business for goods purchased or services received.

Accounts Receivable (A/R) - Payment owed by a customer for goods purchased or services received. Accounts receivable are income.

Balance Sheet - This financial statement illustrates the business's assets and liabilities on a particular date. It includes cash on hand, accounts receivable and payable, inventory, and equipment. A balance sheet as of the closing date of the Income Statement is provided for an existing business. A new business may be asked to provide an opening balance sheet. In some cases a balance sheet may combine personal and business assets and liabilities or a personal financial statement may be used in lieu of a balance sheet. 

Cash - Cash, checks, or credit cards - hard currency or something that can be converted to hard currency.

Cash Flow or Pro Forma Cash Flow Statement - This is an estimate of how much money will flow in and out of the business during a designated period of time. It helps identify when cash is expected to be received and when it must be used to pay bills and debts. Cash flow statements account only for cash transactions, not for depreciation, accounts payable, and accounts receivable.

Collateral - One or more asset(s) assigned to a lender in return for a loan. The collateral becomes the lender's property if the borrower cannot repay the loan.

Cost of Goods Sold (COGS) - Cost of the merchandise or inventory sold by a business. This includes raw materials, labor, or the price of manufactured goods used in the finished product. It does not include items such as rent or utilities.

Credit Report- The credit report verifies the information on outstanding debts from the consumer's Personal Financial Statement. Most important, a credit report shows the lender how the borrower has paid past debts - payment history indicates his or her future payment commitment. If there are current or recent delinquencies, the consumer may not be able to obtain a business loan until the problems are resolved or a payment history is established with other small loans.

Current Asset - Appears on the balance sheet. A current asset is cash or anything that can be converted to cash within one year such as investments, accounts receivable, inventory, and prepaid expenses.

Current Liability - Appears on the balance sheet. A current liability is a debt a company has agreed to pay within one year such as accounts payable and accrued expenses payable (e.g., taxes, salaries, interest, insurance).

Depreciation - Spreading the cost of a piece of equipment over its life. There are various methods for depreciating a piece of equipment. Depreciation influences financial statements and is used in the income statement.

Expenses - All monies paid out by a business. 

Fixed Asset - Appears on the Balance Sheet. Fixed assets, such as buildings and equipment, are expensive items that generally cannot be converted to cash within a year's time and that have several years of potential use by the business.

Gross Profit or Margin - The difference between an item's selling price and its cost. This figure is important because it is the amount available to cover other business expenses after paying for the product. The income statement includes this.

Selling Price - Cost = Gross Profit

Income - Money received by a business in any given period of time from retail or wholesale sales, sales of services, interest or dividend income, or miscellaneous income.

Income Statement or Profit and Loss Statement - The income statement shows a business's financial activity over a period of time. A lender will typically ask an existing business to provide an income statement for the previous year. A new business may be asked to provide an opening income statement.

Labor - What the owner or employees are paid per-hour or per-piece for producing a product.

Long-Term Liability - This appears on the Balance Sheet. A long-term liability is a large sum of money that is to be paid back over several years.

Net Profit or Loss After Taxes - This is the "Bottom Line" - the actual amount of money the business made or lost. It is the difference between all revenues and the total cost (including taxes) of operating the company. This is used in the Income Statement.

Revenues - Costs = Net Profit or Loss

Operating or Fixed or Overhead Expenses or Costs - Costs not directly related to producing goods or providing services. These include rent, supplies, insurance, administration, and sales. The Income Statement includes these. 

Other Expenses- Non-operating expenses such as interest on a bank loan. This is used in the Income Statement.

Owners' Equity or Net Worth - Appears on the Balance Sheet. This is the difference between current and fixed assets and current and long-term liabilities. 

Assets - Liabilities = Owners' Equity
Personal Financial Statement - This document provides a picture of the business owner's current financial condition. It provides information about personal assets and outstanding loans, current monthly income, and expenses. Most often this is used by a lender to determine if the borrower is able to repay a debt.

Pre-Tax Profit or Loss- Gross profit less total expenses. This figure is used to determine the amount of taxes owed and is used in the Income Statement. 

Gross Profit - Total Expenses = Pre-Tax Profit or Loss

Pro Forma - Financial projections.

Pro Forma Cash Flow Statement - See "Cash Flow Statement."

Profit and Loss Statement - See "Income Statement."

Revenue - Total sales. 

Security - See "collateral."

Sources and Uses of Cash Statement - This form describes sources of money to run a business and how this money will be used.

Total Sales - Revenue from the sale of products or services.

Variable Expenses - These are expenses directly related to producing a product or providing a service. Costs can include labor, shipping, and vehicle expenses. These are used in the Income Statement.

Working Capital - Money used to operate the business until it generates enough cash from sales for paying bills.

July 1998, 1st Revision June 1999, 2nd Revision February 2001