Entrepreneurship Unit 4 Vocab

Break Even Point

Break Even Point

The volume of sales that must be made to cover all the expenses of the business.

Net Income

Equal to Gross Income minus Operating Expenses. The taxes a business pays are calculated using the Net Income amount.

Net Worth

This is the amount by which the assets of the business exceed the liabilities. Similar to equity.

Start-Up Costs

The one-time expenses paid to establish a business. Many entrepreneurs have to borrow the money to pay for things like equipment + supplies, furniture + fixtures, vehicles, remodeling electrical + plumbing, legal + accounting fees, licensing fees, employee training, initial salaries, etc.

Capacity

The companies ability to repay a loan based on the incoming and outgoing cash flows.

Gross Income

This is equal to the Total Income (Sales) minus the Cost of Goods Sold.

Balance Sheet

This is a report of the final balances of all assets, liabilities, and owners equity at the end of a period. The equation Assets = liabilities + equity is found on this document.

5 C’s of Credit to Qualify for a Loan

• Character: a borrowers reputation, experience, and ethical values.

• Capacity: ability to repay loan. Based on incoming and outgoing cash flow.

• Capital: money to operate a business

• Collateral: security in the form of assets you pledge to a lender

• Conditions: conditions of the environment in which the business operates.

Interest

The cost to use money for a certain amount of time.

ROI

A comparison of the money earned (or lost) on an investment to the amount of money invested.

Income Statement

This is a summary of a companies profit or loss during any one given period of time, such as a month, quarter, or one year.

Fixed Expenses

Expenses that do not change with the number of units sold or produced.

ex. Loan payments, insurance premiums, property tax, rent.

Variable Expenses

Expenses that DO change with units sold or produced.

ex. Materials, shipping + handling, commissions, advertising.

Cost of Goods Sold

The cost of the inventory that will be sold in a business. Service-only businesses do not have this type of expense. This is equal to opening inventory + purchases - closing inventory.

Operating Expenses

These are expenses necessary to operate a business such as salaries, lease, advertising, insurance, office supplies, utilities, etc.

Assets

These represent things of value that a person or company owns or has in its possession or something that can be received and can be measured objectively.

Liabilities

These are what a person or company owes to others, creditors, supplies, tax, authorities, employees, etc. They are obligations that must be paid under certain conditions and time frames. ex. Loan payment, accounts payable, etc.

Equity

These represent retained earnings and funds contributed by its shareholders, who accept the uncertainty that comes with ownership risk in exchange for what they hope will be a good return on their investment. This is also called “net worth” on an individual balance sheet.

Sources of Capital

• Personal Savings

• Equity Capital: cash raised for a business in exchange for an ownership stake in the business.

• Equity: ownership in a business.

Forms of Equity Financing:

• Friends, family, and partners

• Private investors (crowdfunding)

• Loans (SBA)

• Venture Capitalists, Angel Investors

• Bootstrapping

• Funding, grants, or subsidies from the states

Bootstrapping

A situation in which an entrepreneur starts a company with little capital, relying on money other than outside investments.

Venture Capitalist

These are investors representing a company that is investing in the business. They invest in the business but don’t make any decisions. They are for expanding businesses.

Angel Investors

These are investors using their personal money for new businesses. They invest in businesses but don’t make any decisions.

Lenders Consider

• Economic conditions

• Potential for growth

• Amount of competition

• Location

• Form of ownership