Business has its own language. Some of the terms date to the 17th and 18th centuries, the time of Scottish economist Adam Smith, author of the epic book on economics, the “Wealth of Nations.”
Without Smith’s seminal work, the world might never have heard of “resource-allocation” theory or the “invisible hand” that purportedly guides the economy based on supply and demand.
To make a successful foray into business academia, students must become as familiar with the jargon of business as they are with their own local sayings. Speaking the language of business must become second nature.
This is especially true for students pursuing a Master of Business Administration (MBA). The high-level business concepts covered during MBA coursework can be complex enough without having to stop and remember the difference between fungibility and elasticity.
Here is a list of 30 business terms that should become familiar to business students, and MBAs in particular:
Accounts receivable – A summary, often recorded through invoices, of the money owed by clients to an organization and due to be paid within a few days, a few weeks or a few months.
Amortization – This accounting term refers to the practice of spreading the cost – either the purchase price or the anticipated depreciation – over a specific number of years to accurately reflect the actual cost of doing business year over year. Example: mortgage payments that gradually increase the amount of money going toward the principal of the loan while decreasing the amount going toward the interest. This accounting method might also be used for tax purposes to measure cost recovery as a purchased asset depreciates in value year over year.
Assets – Property, money or other resources that can provide current or future benefit for a company. Money is considered a current asset, while buildings and equipment are considered fixed assets. Intangible assets refer to patents, copyrights and other resources that have no physical presence.
Audit – A review and evaluation of an organization’s financial statements performed to assess the fiscal health of the organization or the accuracy of information reported on tax returns. Companies conduct the occasional internal audit to uncover potential data entry errors, omissions or other irregularities.
Ballpark – Jargon used in less formal conversation to represent an estimate or an average.
Bear market – A self-sustaining, steady reduction in market value of stocks and other securities. It generally occurs when investors are pessimistic or anticipating major losses across the economy. The resulting sell-off often exacerbates the very condition that investors fear.
Blue sky – Jargon that refers to the most optimistic forecast for a company, industry or the economy. It’s based on hope for the occurrence of the best-case scenario.
Bull market – A condition in which stock values increase over an extended period, with only occasional daily losses or flat periods. Generally, if the value of an index such as the Dow Jones Industrial Average increases by 20% from the day the rise began, it is considered a bull market.
Capital – The money and tangible assets of a company. This can include bank accounts, investment funds, buildings and equipment.
Debt – The outstanding balance owed on a loan, bonds or other financial instruments. Debt can be classified as good or bad. Good debt can give an organization leverage to increase the potential return on an investment. Bad debt that is unpayable can lead to default and ruin.
Demand – The desire and the willingness of a consumer (individual demand) or a group of consumers (aggregate demand) to purchase a good or service. Estimates of demand are used to dictate the materials and labor required to produce the supply required to fill orders.
Depreciation – The allocation of the value of an asset over a period of time, usually several years, to account for value lost as the asset ages or is rendered obsolete. This method of assessing the future value of an asset is used to determine potential tax breaks.
Due diligence – The investigation of an organization or financial opportunity prior to consummation of a deal, sale, trade or merger. This can include an audit of financial documents, a background check on the principals, and the gathering of any other reasonable and relevant information.
Elasticity – A measurement of how demand for a product changes when the price changes.
Equity – Mainly, the degree of ownership after all liabilities and debts have been accounted for. For example, if a homeowner has paid off a mortgage, the homeowner is said to have full equity in the value of the home. In other words, if the home were to be sold, the homeowner would collect the full price of the transaction. If the home were sold before the mortgage was paid, the homeowner would collect the money remaining after the lienholder was paid the remaining amount of the loan.
Fixed costs – A cost that will remain the same, no matter the amount of a good or service is that is produced. This refers to costs such as rent or insurance payments. This measurement is useful for a break-even analysis or for making estimates on increasing the scale of production, because it is predictable.
Fungibility – The ability of one asset to be interchanged with another, similar asset. A fungible asset can be replaced seamlessly, with little or no detriment to the organization.
Hedge fund – A pooled investment vehicle used aggressively to bring about absolute returns to the owners. Hedge fund managers often use quick-return tactics such as short-selling, options trading and borrowing for leverage.
Inflation – A reduction in the purchasing power of currency, indicated by increased costs for goods and services. In general, gradually increasing inflation is a sign of a growing economy. Its opposite, deflation, can be a sign of a weakened economy.
Liquidity – On an individual level, this is the ease and speed with which a purchase can be made. Cash is the most liquid asset, while real estate is considered illiquid. Market liquidity is a measurement of how close the asking price and the bidding price are for a product, service or stock, which indicates how quickly an agreement on sale price can be reached. The further apart the bidding and asking prices, the less liquid a market is considered.
Margin – The difference between the revenue produced by a product or service and the amount of money it costs to produce. In investments, buying on margin refers to paying only a percentage of the cost and borrowing the rest from a broker or a bank.
Perfect storm – Jargon for a condition in which everything that can go wrong for a company or a specific transaction has gone wrong.
Qualitative analysis – The use of intangible, inexact information – often based on social interaction or emotional responses – to determine the effectiveness of a branding message or other value.
Quantitative analysis – The use of mathematically gatherable and measurable data to determine the value of an act or an asset. Data used can include profit reports, debt ratios and more.
Revenue – The amount of money received by a company during a specified amount of time. Income is determined by subtracting costs from gross revenue.
Security – A fungible, negotiable financial instrument that is worth money. This can include stocks, bonds, a debt issued to an individual or another entity. Ownership of a security represents a form of ownership of a share of a company.
Short selling – In terms of the stock market, this is the practice of borrowing and selling shares in the belief that the value of the stock will decrease. The shares then can be purchased back at a lower price at a profit. The risk is that the shares might increase in value, creating a loss for the transaction.
Supply – The amount of a product or a service that is available to consumers. This can be determined by available raw goods or by the amount produced by manufacturers.
Variable cost – A change in costs associated with the amount of a good or service produced.
Yield – The return on an investment, often in conjunction with dividends issued to a company’s shareholders.