FAQs for Business Reporters
Q – What’s the difference between revenue and income?
A – Revenue refers to money received by the business before expenses, such as the cost of raw materials and wages, are deducted. Income usually means “net” income, which is revenue minus expenses.
Q – What’s the difference between revenue and sales?
A – Sales usually refers to cash receipts from sale of a product or service. Revenue is a broader term that includes sales plus cash receipts from rental payments and interest.
Q – What’s the difference between net income and profit?
A – Nothing, except profit is a more useful word that can be used as a verb, an adverb (profitably), an adjective (profitable) and for more complex concepts – profitable and profitability.
Q – What is profit margin?
A – Profit margin is one of many relative concepts used in business. It usually measures profits as a percentage of revenues. So, profit of $5 on revenues of $100 represents a 5 percent profit margin. An important question is, what is the typical profit margin in the industry of the company you are covering?
Q – What is return on investment (ROI)?
A – ROI is another important relative value. It states the results of an investment in a given period, usually one year. If you invested $100 in a stock at the start of the year and the stock is worth $110 at the beginning of the next year, you have a return on investment of 10 percent. Return on investment in the stock market historically is about 10 percent.
Q – What is APR?
A – The annual percentage rate (APR) represents the interest on a loan over one year, even if you borrow or lend for a shorter or longer period. APR is a standard that permits borrowers and lenders to compare one loan to another.
Q – What’s a fiscal year?
A – Companies and units of government may keep their annual records on a 12-month fiscal period that does not match the calendar year beginning January 1 and ending December 31. Retailers, for example, usually close their fiscal year on January 31, so the full results of the holiday season can be included.
Q – What is capital?
A -- Capital is the money provided to a business, either in the form of equity (such as private venture capital or publicly traded common stock), debt (such as short-term commercial paper and long-term bonds) or profits retained by the business.
Q – What is working capital?
A – Working capital is cash and assets that maybe quickly converted into cash plus short-term borrowing that represent funds to operate the business day to day. Net working capital subtracts short-term liabilities.
Q – What are dividends?
A – Dividends represent money paid by the business directly to shareholders, usually on a monthly, quarterly, or annual basis. Dividends are usually expressed in terms of dollars per share per period. (“XYZ Co. paid a quarterly dividend of $1.10 per share.”) But dividends may be paid in stock, instead of cash. The “total return” to stockholders in a period is the change in the market price of their shares plus the amount they received in dividends, if any, compared to their initial investment.
Q – What is foreclosure?
A – If a homeowner is unable to pay his or her mortgage, the mortgage holder – usually a bank or savings and loan association – make seek a foreclosure order from a court. The order permits the mortgage holder to sell the house and keep the proceeds to satisfy the mortgage debt.
Q – Why should I read the company’s income statement and the balance sheet?
A – They are quite different. The income statement records the results of revenues received and expenses paid by the business in a certain period – typically, a three-month quarter or a year. The balance sheet is a snapshot of a moment in the life of the business, usually taken at the end of a quarter or year. The balance sheet shows the company’s assets – including cash, real estate, equipment, inventories of unsold goods that can be used to generate profits – and liabilities – including debts owed, unpaid salaries owed, unpaid income taxes owed – that eventually will deplete profits. Subtracting liabilities from assets gives the net worth of the business, also known as shareholders’ equity. It’s possible that a company could state positive net income (more revenues than expenses) on its income statement for a particular period and still be insolvent (having more liabilities than assets) according to the balance sheet at the end of the period. You can find clues for stories in the patterns of income statement and balance sheet entries over time plus the other reports required of public companies – the statement of cash flows and changes in shareholders’ equity – and in related footnotes and explanations that accompany financial reports.
Q – What’s the difference between a stock (share) and a bond (debenture)?
A – A stock represents a share of ownership (equity) in the business. A bond represents a loan to the business. If the business fails, bondholders are entitled to any money left before stockholders. But if the business becomes more valuable, stockholders could see the price of their shares rise, while the principal and interest income to bondholders is fixed.
Q – After a company sells stock to the public and collects the proceeds from the sale, how does the rise and fall of the stock trading in the stock market affect the company?
A – As the share price rises and falls in the market, the total equity value of the company rises and falls. A higher equity value makes it easier for the company to borrow or issue more shares for growth. Its credit worthiness is also viewed from the growth of its security in the stock market.
Q – Why do stock prices rise and fall?
A – Stock prices rise when investors become more optimistic about the chances that a given company or group of companies will generate higher profits. Prospects of higher profits increase demand for stocks and raise stock prices. Conversely, when investors turn fearful about the outlook for profits, stock prices fall.
Q – Why do bond prices rise and fall?
A – Bonds, unlike stocks, pay a fixed rate of interest. Bond prices rise and fall inversely to interest rates. Suppose you pay $100 for a bond with a face value of $100, paying 5 percent per year and maturing in 10 years. At the end of 10 years, you are entitled to get back your $100, which is called your “principal.” Five years later, interest rates in the market for 5-year bonds rise to 6 percent. The price of your bond, which has five years left to maturity, will drop below $100 to the point that the buyer of your bond can earn 6 percent through the combination of the 5 percent interest payments and the gain from the price he or she price paid and the $100 face value due at maturity. This combination of fixed interest payment and variable principal value is called the “yield” on the bond.
Q – Why do interest rates rise and fall?
A – The biggest reason is investors’ fear of inflation. Inflation, defined as an increase in the general level of prices in the economy, reduces the value of fixed-income investments by eroding the purchasing power of each dollar of interest and principal. Investors will demand higher interest to compensate them for the loss of purchasing power. That explains why at any given moment interest rates usually are higher on long-term bonds, where the outlook for inflation is more uncertain, than on short-term bonds.
Q -- What’s the difference between a merger, an acquisition and a takeover.
A – The words often are used interchangeably. Legally speaking, an acquisition is a merger but a merger may not be an acquisition. Conventionally, a merger refers to a tax-free combination of companies wherein shareholders of the acquired company receive stock of the acquiring company and there are no tax consequences for the shareholders of the acquired company. An acquisition usually refers to a transaction in which shareholders of the acquired company receive cash or debt securities for their shares and may face capital gains taxes. A takeover can be a merger or an acquisition, although the phrase often applies to hostile takeovers in which management of the acquired firm opposes the deal. Also, a takeover may refer to a change of control of a company, by dissident shareholders, for example. Such a move need not involve a merger or an acquisition.
Q – What’s the difference between a layoff, attrition and voluntary separation?
A – A layoff refers to the temporary or permanent termination of an employee because of economic conditions, rather that poor performance or violation of company policies. Attrition refers to the process by which a payroll is reduced by retirements, death and voluntary departures. Voluntary separation means an employee has left the company on his or her own initiative, sometimes in response to a buyout offer by the company.
Q – What kind of taxes do small businesses pay?
A – Generally, the same kind of taxes that big businesses pay. These include federal, state and local corporate income tax; sales taxes (both as a buyer of goods and as a collector of sales taxes paid by consumers); state and federal unemployment taxes (which finance unemployment compensation programs); workers compensation taxes (premiums for insurance to pay claims by injured workers); Social Security payroll taxes (on behalf of employees); employee taxes (also known as head taxes, collected in many areas), real estate taxes and (in some areas) corporate personal property taxes; franchise taxes (for the right to do business as a corporation within a state or local area) and various state and local fees, depending on the nature of the business.