a business lexicon for artists
ACCOUNTS PAYABLE, in accounting, is a current liability and refers to unpaid bills (open invoices, consigned goods, etc.) due to suppliers and others in the trade.
ACCOUNT RECEIVABLE, in accounting, is a current asset representing money due for services performed or merchandise sold on credit terms (open account).
ACCRUAL BASIS is an accounting term wherein revenue and expenses are recorded in the period in which they are earned or incurred regardless of when cash is received or disbursed. This is the accounting basis that generally is required by the IRS to be used by artists and craftspeople for income tax purposes.
AGING refers to methods of tracking past due invoices in accounts receivable based on the dates the billings were issued. Accounts aging can also be used in accounts payable to monitor one’s payment history to suppliers.
AIR WAYBILL is a bill of lading and contract between the shipper and the carrier (airline) for delivery of goods to a specified location. It doubles as a shipping document.
AMORTIZATION a) is the gradual reduction of a debt by means of equal periodic payments sufficient to meet current interest and liquidate the debt at maturity, and b) the process of spreading the cost of an intangible asset over the expected useful life of the asset. For example: a company pays $10,000 for a patent; it will amortize the cost over the 16-year useful life of the patent.
ASSET is anything owned by an individual or a business which has value.
BACKLOG is the value of unfilled orders, sometime referred to as the Order Book. Whether the backlog is rising or falling is an indication of future sales activity.
BAD DEBT is an open account balance (accounts receivable) that has proven to be uncollectible.
BALANCE SHEET is an itemized statement listing the total assets and liabilities of a business to portray its net worth at a given moment of time.
BILLINGS, in accounting, are sales for which invoices have been issued.
BILL OF LADING is the contract between the owner of the goods and the shipper to move the goods to a specified destination.
BILL OF MATERIALS is an itemized list of raw materials, components, and memo items, e.g., subcontractor costs, to be used in the production of a product.
BOOKKEEPING is the systematic recording of transactions affecting a business.
BOTTOM LINE, in accounting, is simply net income after taxes. In general usage it is an expression as to the end results of something, e.g., the final decision, summary or result (What’s the bottom line?).
BREAK-EVEN is the volume point at which revenues and costs are equal -- a combination of sales and costs that will yield a no profit/no loss operation.
BUDGET is an itemized listing of expected revenue (income) along with estimated costs and expenses that will be incurred in obtaining that income during a given period of time. A budget is typically for one business cycle, such as a year.
BUSINESS PLAN is a mostly financial description of a business (normally over a 1-5 year period). A basic business plan will include: the product(s) and/or service(s), a description of the market, a competitor analysis, backgrounds of the key people involved, expected financing needs, and the financial rewards that will be attained if the business plan is implemented successfully. A well-prepared business plan is both a useful management tool that will help guide a business and is a vital sales tool that will increase a company's chance of obtaining a financial commitment to fund the business.
CAPITAL, in economics, are the means of production: studio space, materials, equipment, etc. In finance, capital is the money and other financial assets of a business used in the conduct of that business.
CAPITAL ASSET is a long-lived asset that is not purchased or sold in the normal course of business. Examples include land, buildings, furniture, machinery, equipment and booth fixtures.
CASH BASIS OF ACCOUNTING is an accounting basis in which revenue and expenses are recorded in the period they are actually received or expended. Typically used by service businesses, the cash basis usually is not available to arts and crafts businesses for income tax purposes.
CASH FLOW is the amount of cash generated by a business less the amount of cash consumed in the conduct of the business.
CASH IN ADVANCE is when full payment is due before the merchandise is shipped.
CHAPTER S or SUBCHAPTER S is a corporate entity that allows the business to distribute all profits and losses to its shareholders, who then claim that income/loss on their personal tax returns; thereby avoiding the payment of corporate taxes and the need to distribute taxable dividends.
CHART OF ACCOUNTS is a list account names and numbers arranged in the order in which they normally appear in the financial statements, typically: Assets, Liabilities, Owners' Equity, Revenue, Costs and Expenses.
CHECK is a draft drawn against a bank, payable upon demand to the person/entity named in the draft.
CIF (COST, INSURANCE AND FREIGHT) is an old maritime shipping term; all shipping and handling costs are paid by the shipper, and included in the price. Title to the goods does not pass until delivery to the buyer. On a modern invoice we would designate the shipping and handling as prepaid and charge only the cost of the items.
COD is an acronym for CASH ON DELIVERY, a terms-of-sale expression meaning cash changes hands at the same time the goods change hands in a sales transaction.
CONSIGNMENT is when goods are offered for sale on behalf of an artist without the retailer actually purchasing or taking title to the goods. Only when there is a subsequent sale does the artist receive any payment.
COOPERATIVE ADVERTISING is a joint advertising program under which costs are shared; e.g. by an artist and a gallery that distributes the artist’s work.
COST is the amount of money that must be paid to take ownership of something; also known as expense or purchase price.
COST OF GOODS SOLD (COGS) is a figure representing the cost of buying raw materials/supplies and producing finished goods. Included are materials incorporated into the work, subcontracting costs and direct labor.
CREDIT MEMORANDUM can be either a) a form or document given by the bank to a depositor as notification that the depositor's balance is being increased due to some event other than a deposit, e.g. interest income on a money market account; or b) a document used by a seller to notify the buyer that the seller is crediting (reducing) the amount of the buyer's outstanding balance to the seller due to errors or other factors requiring adjustments.
CREDITORS are suppliers/vendors to whom a debt is owed.
CURRENT ASSETS are those assets that are expected to be converted into cash or consumed during the normal operating cycle of the business (usually one year). Such assets include cash, accounts receivable, inventories, and prepaid expenses.
CURRENT LIABILITIES are liabilities to be paid within one year of the balance sheet date.
DAYS' INVENTORY shows the average length of time items are in inventory, i.e., how many days a business could continue selling using only its existing inventory. It is a rough measure of efficiency linked to how quickly inventories turn over.
DAYS SALES OUTSTANDING (DSO) is the average collection period on accounts receivable for sales revenue.
DBA is an acronym for DOING BUSINESS AS and refers to a business entity (sole proprietorship, partnership, corporation) conducting its business under another name.
DEBIT MEMORANDUM can be either a) a form or document given by the bank to a depositor as notification that the depositor's balance is being decreased due to some event other than the payment of depositor originated check, e.g. bank service charges; or b) a document used by a buyer to notify a seller that the buyer is debiting (reducing) the amount of the buyer's outstanding balance to the seller due to errors or other factors requiring adjustments; also referred to as a charge-back.
DEPRECIATION is the amount of expense charged against earnings by a company to write off the cost of a fixed asset over its useful life, giving consideration to wear and tear, obsolescence, and salvage value.
DIRECT COST is that portion of overall cost that is expended in actually producing work for sale and is included in the calculation of COST OF GOODS SOLD, e.g. labor and inventory.
DUN is when you demand payment from a debtor: a dunning letter.
DUNNING NOTICE is a statement of account to a creditor itemized open account balances. Typically a request for payment is included.
EQUITY is the owners’ stake in a business and is measured by adding the value of all assets and subtracting all debts.
EXPENDITURE is a cost incurred in the normal course of business to generate revenues.
EXPENSES are the costs incurred in running and maintaining a business.
FACTORING is the practice of buying accounts receivable at a discount, e.g., if somebody owes you $10,000 payable within a year, a factor may pay you $9,000 for the debt. You receive $9,000 cash quickly, but at the cost of the $1,000 discount.
F.A.S. (FREE ALONG SIDE) is an old maritime shipping term meaning that the seller’s price includes all shipping and handling charges to the embarkation port, i.e., alongside the vessel and ready for loading. All shipping and handling charges from there on are for the account of the buyer. Title to the goods passes at the dock. There is no modern equivalent for the arts and crafts industry.
FISCAL YEAR is the accounting year for a company, but it is not necessarily a calendar year (January through December). However, it does cover twelve months
FIXED ASSETS are those long-lived assets used the normal conduct of a business, and which will not normally be converted into cash during the ensuring fiscal period. For example, furniture, fixtures, land, machinery and buildings are all fixed assets.
FIXED COSTS are operating expenses incurred without regard to levels of production and/or sales. Fixed costs remain relatively constant and do not vary with volume. Examples of fixed costs are: rent, insurance and interest expenses.
FIXED EXPENSES are those expenses that must be paid each month and do not fluctuate with the sales volume. See FIXED COSTS above.
F.O.B. (FREE ON BOARD) is an old maritime shipping term meaning that the seller’s price includes all shipping and handling charges including stowing the goods in the vessel’s cargo hold prior to ocean transport. All shipping and handling charges from there on are for the account of the buyer. Title to the goods passes at the time of loading. On a modern invoice we would add shipping and handling charges as a line item on the invoice. In practical terms, an FOB box on a sales/purchase order or invoice would be filled in with the origination or destination city origination meaning the buyer pays the shipping and handling and destination meaning the seller absorbs it.
GENERAL LEDGER is the accounting record reflecting all the financial activity of a business. Also known as the BOOKS OF ACCOUNT.
GENERAL PARTNERSHIP is two or more partners jointly and severally responsible or liable for the debts of the partnership.
GROSS PROFIT is net sales minus cost of sales. Also known as GROSS MARGIN.
GROSS PROFIT MARGIN ON SALES (GPM) is one of the key performance indicators. The gross profit margin indicates whether the average markup on work is sufficient to cover expenses and make a profit. It shows the relationship between sales and the direct cost of work produced. The gross profit margin should be stable over time.
GROSS RECEIPTS is the total revenue received prior to the deduction of any allowances, discounts, credits, etc. Also known as GROSS SALES.
INCOME is money received as a result of effort (work), or from return on investments.
INDIRECT COST is that portion of total costs that is not expended in producing work.
INSTALLMENT SALE is selling work and receiving the sales price as a series of payments over a period of time, instead of all at once at the close of the sale.
INVENTORY is any supplies, components, raw materials or other type goods -- made or purchased -- used in the production of saleable product.
INVENTORY TURN or TURNOVER measures the efficiency of the business in managing inventories, i.e., how many inventory turns the business has per year and whether that is getting better or worse.
INVOICE is an itemized list of goods specifying the price, shipping date, shipping method and the terms of sale.
JOB TICKET is a production control tool detailing the materials and processes to be sequentially employed in the production of a product.
KITING, when used in the context of banking, refers to the practice of depositing and drawing checks at two or more banks and taking advantage of the “float” the time it takes for the second bank to collect funds from the first bank.
LEDGER, in accounting terms, is the books of account; there may be several ledgers.
LEGAL ENTITY is a person or organization that has legal standing to enter into contracts and may be sued for failure to perform as agreed, e.g., a child under legal age is not a legal entity, while a corporation is a legal entity since it is a person in the eyes of the law.
LIABILITY, in insurance, is a term referring to risks and possible financial exposure. There are three forms of liability coverage that artists need to be aware of: general liability, which covers any kind of bodily injury to non-employees except that caused by automobiles and professional malpractice; product liability, which covers injury to customers arising as a direct result of goods purchased from a business; and public liability, which covers injury to members of the public while they are on the premises.
LIABILITY, in accounting, is a bill from a supplier, a loan, an expense or any other form of claim on the assets of the business that must be paid or otherwise honored.
LIMITED PARTNER is a partner in a venture who has no management authority and whose liability is restricted to the amount of his/her investment.
LONG TERM DEBT is all senior debt with a term in excess of one year. It includes bank debt, mortgages and capital lease obligations.
LONG-TERM LIABILITIES are the liabilities of a business that are due in more than one year.
LOSS, in accounting, is when costs and expenses exceed revenues, i.e. work is sold for less than its total cost.
MARKUP is the amount added to the cost of goods in order to produce the desired profit.
MATERIALS are physical goods (and their cost) used in the manufacture of a product, often separated into DIRECT MATERIALS (that which goes directly into the product such as clay into ceramics, or lumber into woodturnings) and INDIRECT MATERIAL (that which is used in maintaining the studio environment such as cleaning supplies or oil for quenching in metalworking operations.
MISCELLANEOUS INCOME is any income realized that is not directly related to the normal conduct of the business.
NET, in general, is the figure remaining after all deductions have been made from the starting, or gross, amount.
NET 30 is a terms-of-sale expression meaning that payment is due 30 days from date of invoice.
NET PROFIT is a business’ total earnings less the costs and expenses of doing business. It may be shown before or after taxes. Also known as NET INCOME. For a business to be viable in the long run, profits must be generated.
NET PROFIT MARGIN (NPM) measures profitability as a percentage of revenues after taking into account all revenues, costs and expenses.
NET SALES is gross sales less any discounts, allowances, returns, freight, etc.
NET WORTH is the difference between Total Liabilities and Total Assets. Also known as OWNERS’ EQUITY.
OPEN ACCOUNT is a non-guaranteed payment arrangement, e.g., Net 30. Goods are sold and delivered without payment. Future payment for delivered goods is dependent on the good faith of the buyer.
OPEN TO BUY is the dollar amount budgeted by a retailer for inventory purchases for a specific time period.
OPERATING EXPENDITURES is the amount used during a particular period directly in support of day-to-day operations such as wages, maintenance, office supplies, utilities, etc.
OPERATING EXPENSES is all selling and general & administrative expenses.
OPERATING INCOME is revenue less cost of goods sold and related operating expenses that are applied to the day-to-day operating activities of the company. It excludes financial related items, i.e., interest income, dividend income, interest expense, extraordinary items, and taxes.
OVERHEAD is the costs associated with providing and maintaining a manufacturing or working environment. For example: renting the building, heating and lighting the work area, supervision costs and maintenance of the facilities. It includes indirect labor and indirect material.
OWNERS EQUITY see SHAREHOLDER'S EQUITY and NET WORTH.
PACKING SLIP is a document inserted in the shipment detailing many of the elements of the sale, as does the invoice. It may or may not contain pricing information.
PARTNERSHIP is an unincorporated business that has more than one owner.
PAYMENT is the satisfaction of a debt or claim; it’s usual form is money paid to fulfill an obligation, but barter is a legitimate form of payment, too.
PETTY CASH is an account where a small amount of cash is stored for use in purchasing or reimbursing inexpensive out-of-pocket expenditures.
PREPAID EXPENSES are amounts that are paid in advance to a vender or creditor for goods and services. Typically, insurance premiums are paid in advance of the policy, as are show fees.
PRICE POINTS are the range of prices for work. A retailer may say that her average price point is $50, and work in her gallery ranges from $20 to $300. There have been many marketing studies regarding price points and consumers’ eagerness/reluctance to purchase at given “points.”
PRODUCTIVITY is a measured relationship of the quantity and quality of units produced and the labor required to produce them over a given period of time.
PROFITABILITY is company's ability to generate revenues in excess of the costs incurred in producing those revenues.
PROFIT AND LOSS STATEMENT (P&L) is also known as an INCOME STATEMENT. It shows the business’ revenues, costs and expenses over a specified period of time. The difference between the total revenues and the total costs and expenses is net income. A key element of this statement, and one that distinguishes it from a balance sheet, is that the amounts shown on the statement represent transactions over a period of time while the items represented on the balance sheet show information as of a specific date (or point in time).
PRO-FORMA INVOICE is basically a price quote. It is written as a regular invoice, and, in effect, says: “This is the purchase price and terms we are offering. Send payment and we’ll ship it.”
PURCHASE ORDER is a written authorization for a vendor to supply goods or services at a specified price over a specified time period. Acceptance of the purchase order constitutes a purchase contract and is legally binding on the parties. Generated by the buyer.
RECEIPT OF GOODS is a terms-of-sale expression meaning that payment is due when the buyer receives the order.
REVENUE is the dollar amount of annual sales, including returned merchandise and discounts, i.e., it is the top monetary figure from which costs and expenses are subtracted to determine net income.
SALES ORDER is a written authorization for a vendor to supply goods or services at a specified price over a specified time period. Acceptance of the sales order constitutes a purchase contract and is legally binding on the parties. Similar to a PURCHASE ORDER but generated by the seller.
SHAREHOLDER'S EQUITY is total assets minus total liabilities. It is the same as EQUITY, NET WORTH and STOCKHOLDER’S EQUITY.
SHORT TERM ASSET is an asset that will be converted into cash within the normal operating cycle (usually one year), e.g., accounts receivable and inventory.
SHORT TERM LIABILITY is a liability that will come due within one year or less.
SOLE PROPRIETOR is an individual who owns a business as opposed to stock in a corporation. A sole proprietor pays no corporate income tax but has unlimited liability for his/her business debts and obligations.
STATEMENT OF ACCOUNT is a dunning notice to a creditor listings open transactions and stating terms and conditions of those transactions. Used in business as a formal reminder of promises to pay.
TERMS OF SALE is an integral part of the sales process and describes how the seller is to be paid. The least risk methods of payment are Pro Forma or COD; the most risk occurs when the buyer receives the goods with a promise to pay in the future (open account status).
TRADE PAYABLE, also known as accounts payable, is an amount owed to a vendor for goods and services received.
TURNOVER, in accounting, is the number of times an asset is replaced during a financial period; often used in terms of inventory turnover or accounts receivable turnover.
VARIABLE COSTS are those costs associated with production that fluctuate directly with the level of production, e.g., the raw materials or studio labor required to produce the work.
VARIABLE EXPENSES are those expenses that typically change in relation to changes in the level of production or sales volume.
WAYBILL is a bill of lading and contract between the shipper and the carrier for delivery of goods to a specified location. It is a shipping document.
WIP is an acronym for Work in Process/Progress. It refers to inventory that has value added from labor or additional processing.
WORKING CAPITAL TURNOVER (WCT) shows how efficiently working capital is employed in the business, i.e., it measures how efficiently the business is using its cash. WCT measures the amount of revenue generated by Working Capital (WC). In the arts and crafts industry, the key components of WC are accounts receivable and inventory.
WORKING CAPITAL (WC) is the difference between current assets and current liabilities, and reflects how much cash is tied up in running the business.
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