So you own a small business, or you’re thinking about starting one. You’ve got the know-how in your field and the passion for your craft, and you’ve got energy and confidence to spare. But are you savvy when it comes to business lingo? Just because you excel at what you do – whether it’s repairing cars, making chocolates, inventing new gadgets or anything else – doesn’t mean that you automatically have the business expertise you need to turn your talents into success.
One of the first things that might trip you up in your forays into the business world is the terminology. Business terms can be new and foreign to those just getting started with their businesses, and standard dictionaries don’t always help with deciphering the meanings. Since we at Popular Thoughts are all about helping you launch, maintain and grow your business, we’ve compiled a short list of some common small business terms here, along with their definitions. Get to know this glossary (and others out there), and don’t get caught off guard as you wade through the currents of business ownership!
Angel Investing – Angel investors give capital to a start-up company, usually in exchange for equity. Angel investors tend to be well-off individuals, but some of them group themselves into angel networks. They usually invest their own money into the endeavor. Many companies get angel investments as a second-round funding source to keep them going when they’re between the money given to them by friends and family and the money they’ll eventually get from venture capital (see below).
Assets – This is just about anything your business owns that would have value in a transaction. It includes cash, investments, inventory, accounts receivable, office computers/equipment, machines/manufacturing equipment, etc. Assets are generally regarded to be the things that can be used to pay debts, and they can be long-term or short-term in nature (whether long-term or short-term depends on how long they last and what the company accountants decide is the benchmark for measuring the term). For tax purposes, if you buy something for your business and you call it an asset, you can’t deduct that purchase from your taxes, but you can list it under “Assets” on your financials. If you want to deduct a purchase from your taxes, you must label it an “expense,” but then you can’t list it among your assets later.
Brand/Branding – Many people think that your brand is your logo, your product or your tagline. But in reality, your brand is how people perceive you. One of the most important things you can do in your business is control your brand so that all of your potential customers have the same impression and experience with your product or service. Consider the golden arches: when you see them, you probably think of McDonalds, but you may also think of french fries, Happy Meals, smiling kids and Big Macs. Almost everyone has a similar reaction when they see that symbol, and that’s because McDonalds works hard to maintain their brand, keep it consistent, and give everyone the same impression of what they offer.
So how do you handle your branding? First, when you have a logo and/or tagline, keep them consistent in all of your interactions. Don’t randomly change the colors of your logo, the font of your web pages, the phrasing of your tagline, etc. Keep your messaging and color scheme consistent across the board. Next, protect your branding with Service Mark (SM) or Trade Mark (TM) protection- you can learn more about that here. Also, determine usage guidelines for your brand so that, if someone else wishes to put your logo on their website or in an advertisement, you have a ready list of rules for the use of your stuff (for example, you might want to require a certain amount of white space around your logo, you may want to insist that your logo not be stretched out of shape or changed in color, etc.).
After you’ve got your protections and guidelines in place, the key thing to remember about branding is that you and your company ARE the brand. In the end, it’s not your product or service that will define your customers’ experiences; it’s their interaction with you and your business. Keep in mind that you represent your company at all times, even while off-duty, and remind any staff members of this, as well. Put customer service guidelines into place for all to follow, and be sure that everyone at the company understands the need to maintain consistent quality standards in the product/service, the usage rules for the logo/tagline, and the need for positive interaction with consumers. This above all will help you to associate your brand with good things in the minds of your customers.
Business plan – This is pretty much what it sounds like: the written plan for how you’ll start and run your business. It generally needs to include a vision (where you’d like to see the company eventually), what’s needed to get there, what the chosen markets are like, what the current status of the business is, and what the results are projected to be. The business plan is essentially a “who, what, why, how and when” for the proposed company, so when writing yours, be sure not to ramble, get emotional or go off on tangents. Keep it clear, to-the-point and organized, from “why I’m starting this company” to “this is where I intend the company to be in a year.”
C Corp/S Corp – These are the two main forms of corporations in the U.S. S Corps tend to be small businesses and family-owned companies. Most major (read: large) companies in the U.S. are C Corps. A main difference between the C Corp and the S Corp is that, with the S Corp, profits go right back to the business owners directly, while in C Corps, the profits are taxed separately first.
So why would anyone want to have a C Corp? One big C Corp advantage is that it’s got the biggest protection for the owners against personal liability. A C Corp is a totally separate entity that pays taxes, and the owners are in the best position to protect their personal assets should the C Corp have trouble. A C Corp is generally the best choice for companies that are going public (or are planning to), or companies that want to grow significantly and/or raise large amounts of money.
S Corps generally have limits on how many owners there can be (these limits vary by state but tend to hover around 25 owners). Also, only individuals can hold stock in an S Corp – no corporations can be stockholders in these small companies. Neither of these limitations exists for a C Corp.
When choosing to incorporate, weigh the options and get advice from a lawyer and CPA on which option is right for you. In most cases, the S Corp is the best choice for a small business owner.
Cash flow – Cash in a business means how much money your company has in the bank, and cash flow refers to how that bank amount changes. Being “cash flow positive” means that the balance at the end of the month is higher than it was at the beginning, while “cash flow negative” is the opposite. Many businesses start out cash flow negative as they spend money to build the business, get needed equipment and advertise their goods. Ultimately, of course, you want to be cash flow positive on a regular basis so that your company can grow and you can make money.
Click-through rate – You know those ads that appear on webpages? The click-through rate is a measure of how many times someone actually clicked on one of those ads, compared with the number of times the ad appeared (the appearances are known as “impressions”). So if the ad showed up 100 times, and viewers clicked the ad four of those times, that’s a 4% click-through rate. Click-through rates tend to be pretty low, so don’t be discouraged if you run an online ad campaign and see very low numbers.
Conversion rate – How many people do what you want them to do when they visit your website? That’s basically the definition of the conversion rate. Whatever the measurable action is that you want them to do – buy something, sign up for something, download a file, watch a video, etc. – the conversion rate counts how many people do that thing and how that compares to the total site visitors. So if you get 100 visitors to your site, and five of them buy your product, that’s a 4% conversion rate.
DBA (Doing Business As) – This term means that the person running the business is using a different name for the business than his or her own name. It’s also called a “fictitious business name.” If your name is John Smith, but you want to open a company called Lemonade and Mangoes (a name that certainly does not match your name at all), you’d need a DBA to show that you legally own the business so that you can get bank accounts in the company’s name and do other business-related things. Getting a DBA is fairly easy to do on a county level and usually involves a registration fee and perhaps a notice in the newspaper (all of which tends to run under $100 total).
Fiscal year – This is your accounting year, which doesn’t have to match the calendar on your wall. Your fiscal year can start in any month and go a full year from there. To keep it from getting too confusing, accountants number fiscal years by the year in which they end, so if you have a business with a fiscal year that starts and ends in March, then March 2011 would be the end of Fiscal 2011.
Limited Liability Company (LLC) – LLCs are one way to set up a company. They’re similar to S Corps (both have advantages in how profits are treated for taxes and in how personal liability for the company owners is limited), but they can be harder to set up. Usually, the LLC has to be lacking two of the following that define a corporation: continuity of life, limited liability, free transferability of ownership interest, and centralized management. Check with your attorney if you think an LLC might be the best company structure for you.
Mission Statement – Most companies have one of these. This is essentially a short statement that defines what the company does, what the business philosophy is, and how it intends to deal with customers. Mission statements are often the butt of jokes for being overblown, wordy, obvious or incomprehensible – there are even mission statement generators out there (like this one) that poke fun at how “corporate” and interchangeable many mission statements are. Still, it never hurts to have one; you may want to include your employees in crafting a mission statement that encapsulates your company’s purpose.
Sole proprietorship – Businesses don’t get any simpler than this. A sole proprietorship is a business in which you don’t do anything to create a legal entity separate from yourself. You can operate the business under your own name or under another name (in which case you’d need the DBA defined above), but either way, the business is just you. This means that you bear personal liability for the company; if the company has debts or losses, you are personally responsible for those.
Venture capital – This is money that is invested into a company in the early stages, usually by a venture capital (VC) firm or group. The money invested tends to be from a fund that’s managed professionally by the firm. Generally, the companies that receive venture capital are high-risk but also high-potential. In return for their investment, the VC gets equity in your company, and it often gets a major ownership stake and decision-making power in the company. VC is sometimes a good choice for a young company that has a new technology to offer and that isn’t yet to the point of being able to get bank funding or other loans to grow the company. VC isn’t for everyone; explore your options thoroughly when considering funding sources, since many small business owners chafe at the idea of turning over decision-making power to a VC in exchange for the needed funds.