Financial Glossary
Plain-English definitions for the financial terms every small business owner should know.
A
Accounts Payable (AP)
AccountingMoney your business owes to suppliers and vendors for goods or services received but not yet paid for. AP appears as a current liability on your balance sheet.
Why it matters for your business
Tracking AP helps you manage cash flow timing. If you let payables pile up, you risk late fees or damaged vendor relationships. If you pay too early, you may strain your cash position.
Accounts Receivable (AR)
AccountingMoney owed to your business by customers who have received goods or services but have not yet paid. AR appears as a current asset on your balance sheet.
Why it matters for your business
High AR means you have revenue on paper but not cash in the bank. Slow-paying customers can create cash flow gaps that make it hard to cover payroll and expenses.
Amortization
AccountingThe process of spreading the cost of an intangible asset (like a patent, trademark, or loan origination fee) over its useful life. For loans, it refers to the schedule of payments that gradually reduces the principal balance.
Why it matters for your business
Understanding amortization helps you see how much of each loan payment goes toward interest versus principal. It also affects your tax deductions for intangible assets.
Annual Recurring Revenue (ARR)
MetricsThe total value of recurring revenue normalized to a one-year period. Calculated by multiplying MRR by 12. Used primarily by subscription-based businesses.
Why it matters for your business
ARR gives you a clear picture of predictable, ongoing revenue. Investors and lenders use it to evaluate the health and growth trajectory of subscription businesses.
B
Balance Sheet
AccountingA financial statement that shows what your business owns (assets), what it owes (liabilities), and the owner's stake (equity) at a specific point in time. The fundamental equation: Assets = Liabilities + Equity.
Why it matters for your business
Lenders and investors review your balance sheet to assess financial health. A strong balance sheet with more assets than liabilities signals stability and creditworthiness.
Break-Even Point
FinanceThe point at which total revenue equals total costs, meaning your business is neither making nor losing money. It can be expressed in units sold or dollars of revenue.
Why it matters for your business
Knowing your break-even point tells you exactly how much you need to sell before you start earning a profit. It is the foundation of pricing, budgeting, and growth planning.
Burn Rate
FinanceThe rate at which your business spends cash, typically measured monthly. Gross burn rate is total monthly spending. Net burn rate subtracts revenue from spending.
Why it matters for your business
Your burn rate determines how long your cash will last (runway). If you are pre-revenue or growing fast, tracking burn rate is critical to avoiding a cash crisis.
C
Cash Flow
FinanceThe movement of money into and out of your business over a period of time. Positive cash flow means more money is coming in than going out. Negative cash flow means the opposite.
Why it matters for your business
Cash flow is the lifeblood of any small business. Profitable businesses can still fail if they run out of cash. Managing the timing of inflows and outflows is essential to survival.
Cash Flow Statement
AccountingA financial statement that tracks how cash moves through your business across three categories: operating activities, investing activities, and financing activities.
Why it matters for your business
The cash flow statement reveals whether your business generates enough cash from operations to sustain itself, or if it relies on loans and outside investment.
Churn Rate
MetricsThe percentage of customers who stop doing business with you over a given period. Calculated as: (Customers Lost / Customers at Start of Period) x 100.
Why it matters for your business
High churn eats into growth. If you are losing customers faster than you acquire them, revenue will decline regardless of how much you spend on marketing.
COGS (Cost of Goods Sold)
AccountingThe direct costs of producing or purchasing the goods your business sells. This includes raw materials, direct labor, and manufacturing overhead, but not selling or administrative expenses.
Why it matters for your business
COGS directly determines your gross profit margin. Reducing COGS without sacrificing quality is one of the fastest ways to increase profitability.
Contribution Margin
FinanceThe amount each unit sold contributes toward covering fixed costs and generating profit. Calculated as: Selling Price per Unit - Variable Cost per Unit.
Why it matters for your business
Contribution margin helps you understand which products or services are most profitable and how many units you need to sell to cover your fixed costs.
Current Ratio
FinanceA liquidity measure calculated as: Current Assets / Current Liabilities. It shows your ability to pay short-term obligations with short-term assets.
Why it matters for your business
A current ratio below 1.0 means you may struggle to pay bills due within the next year. Lenders often require a minimum current ratio (typically 1.25 or higher) for loan approval.
Customer Acquisition Cost (CAC)
MetricsThe total cost of acquiring a new customer, including marketing spend, sales team costs, and related overhead. Calculated as: Total Acquisition Spending / Number of New Customers.
Why it matters for your business
If your CAC exceeds the revenue a customer generates, you are losing money on every sale. Tracking CAC helps you evaluate marketing efficiency and set sustainable growth budgets.
D
Debt-to-Equity Ratio
FinanceA measure of financial leverage calculated as: Total Liabilities / Total Equity. It shows how much of your business is funded by debt versus owner investment.
Why it matters for your business
A high ratio means heavy reliance on borrowed money, which increases risk. Lenders and investors use this to assess whether your business can handle additional debt.
Depreciation
AccountingThe gradual reduction in the value of a tangible asset (equipment, vehicles, buildings) over its useful life. It is recorded as an expense on your income statement.
Why it matters for your business
Depreciation reduces your taxable income without requiring a cash outlay in the current period. Choosing the right depreciation method can significantly affect your tax bill.
Dividends
FinancePayments made to business owners or shareholders from the company's profits. In small businesses, these are often called owner draws or distributions.
Why it matters for your business
How you pay yourself affects your tax liability. The balance between salary and dividends (especially in S-Corps) can save or cost you thousands in self-employment taxes.
DSCR (Debt Service Coverage Ratio)
FinanceA measure of your ability to repay debt, calculated as: Net Operating Income / Total Debt Service. A DSCR of 1.0 means you earn exactly enough to cover debt payments.
Why it matters for your business
SBA lenders typically require a DSCR of 1.25 or higher. If your DSCR is too low, you will not qualify for most business loans. It is one of the first numbers lenders check.
E
EBITDA
FinanceEarnings Before Interest, Taxes, Depreciation, and Amortization. A measure of operating profitability that strips out financing and accounting decisions.
Why it matters for your business
EBITDA is the standard metric for valuing small businesses. Buyers and investors use an EBITDA multiple to determine what your business is worth.
Equity
FinanceThe owner's stake in the business after all liabilities are subtracted from assets. Also called owner's equity or net worth. Equity = Assets - Liabilities.
Why it matters for your business
Equity represents your real ownership value. Growing equity over time means your business is building wealth. Negative equity is a warning sign of financial distress.
F
Fixed Costs
AccountingExpenses that remain constant regardless of how much you produce or sell. Examples include rent, insurance, loan payments, and salaried employee wages.
Why it matters for your business
Fixed costs must be covered whether you sell one unit or one thousand. Understanding your fixed cost base is essential for break-even analysis and pricing decisions.
G
Gross Margin
FinanceThe percentage of revenue remaining after subtracting COGS. Calculated as: (Revenue - COGS) / Revenue x 100. Also called gross profit margin.
Why it matters for your business
Gross margin shows how efficiently you produce or deliver your product. Low gross margins leave little room to cover operating expenses and still turn a profit.
Gross Profit
FinanceRevenue minus the cost of goods sold (COGS). It represents the profit earned from your core business activities before operating expenses, taxes, and interest.
Why it matters for your business
Gross profit is the first layer of profitability. If gross profit is thin or negative, no amount of cost cutting elsewhere will make the business viable.
I
Income Statement
AccountingA financial statement (also called a profit and loss statement or P&L) that shows revenue, expenses, and profit over a specific period. It answers the question: did you make or lose money?
Why it matters for your business
The income statement is the most common way to evaluate business performance. Lenders, investors, and tax authorities all rely on it to understand your profitability.
Inventory Turnover
OperationsA ratio that measures how many times you sell and replace your inventory over a period. Calculated as: COGS / Average Inventory Value.
Why it matters for your business
Low turnover means cash is tied up in unsold stock. High turnover indicates strong sales or effective inventory management. Optimizing turnover frees up working capital.
IRR (Internal Rate of Return)
FinanceThe discount rate at which the net present value (NPV) of all cash flows from an investment equals zero. It represents the expected annualized return on an investment.
Why it matters for your business
IRR helps you compare different investment opportunities on an equal basis. A project with an IRR higher than your cost of capital is generally worth pursuing.
L
LLC (Limited Liability Company)
Legal & EntityA business structure that provides personal liability protection to its owners (called members) while offering flexible tax treatment. An LLC can be taxed as a sole proprietorship, partnership, or corporation.
Why it matters for your business
An LLC separates your personal assets from business debts and lawsuits. It is the most popular structure for small businesses because of its simplicity and protection.
LTV (Lifetime Value)
MetricsThe total revenue you can expect from a single customer over the entire duration of your relationship. Also called Customer Lifetime Value (CLV or CLTV).
Why it matters for your business
LTV tells you how much a customer is really worth. When compared to CAC, it reveals whether your business model is sustainable. A healthy ratio is LTV of at least 3x your CAC.
M
MACRS (Modified Accelerated Cost Recovery System)
TaxThe IRS-approved depreciation method for most business assets. MACRS assigns assets to specific recovery periods (3, 5, 7, 15, 27.5, or 39 years) and uses accelerated depreciation schedules.
Why it matters for your business
MACRS lets you deduct more of an asset's cost in the early years, reducing taxable income sooner. Choosing the right recovery period directly affects your tax strategy.
Markup
FinanceThe amount added to the cost of a product to determine its selling price, expressed as a percentage of cost. Calculated as: (Selling Price - Cost) / Cost x 100.
Why it matters for your business
Markup determines your pricing. A common mistake is confusing markup with margin. A 50% markup yields a 33% margin, not 50%. Getting this wrong can erode profits.
Monthly Recurring Revenue (MRR)
MetricsThe predictable revenue your business earns each month from active subscriptions or contracts. Calculated by summing all recurring revenue in a given month.
Why it matters for your business
MRR provides a stable baseline for financial planning. It makes it easier to forecast cash flow, set growth targets, and demonstrate business health to lenders.
N
Net Margin
FinanceThe percentage of revenue that remains as profit after all expenses, including COGS, operating expenses, interest, and taxes. Calculated as: Net Profit / Revenue x 100.
Why it matters for your business
Net margin is the bottom line. It tells you how much of every dollar in revenue you actually keep. Even high-revenue businesses can fail if net margins are razor thin.
Net Profit
FinanceThe amount of money remaining after all expenses have been deducted from total revenue. Also called net income or the bottom line.
Why it matters for your business
Net profit is the ultimate measure of business success. It funds growth, owner compensation, and debt repayment. Consistent net profit is required for long-term survival.
NPV (Net Present Value)
FinanceThe difference between the present value of future cash inflows and the initial investment cost. A positive NPV means the investment is expected to generate value above its cost.
Why it matters for your business
NPV helps you decide whether a capital investment (new equipment, expansion, acquisition) is worth the upfront cost by accounting for the time value of money.
O
Operating Expenses (OpEx)
AccountingThe costs of running your business that are not directly tied to producing goods or services. Includes rent, utilities, marketing, salaries, software, insurance, and office supplies.
Why it matters for your business
Operating expenses eat into gross profit. Keeping OpEx lean relative to revenue is key to a healthy bottom line. Review these regularly to find savings opportunities.
Overhead
AccountingOngoing business expenses that are not directly attributable to creating a product or service. Overhead includes rent, utilities, administrative salaries, and insurance.
Why it matters for your business
High overhead reduces your ability to compete on price and survive downturns. Understanding your overhead rate helps you price jobs accurately, especially in construction and services.
P
Partnership
Legal & EntityA business structure where two or more individuals share ownership, profits, and liabilities. General partnerships share everything equally unless specified in an agreement.
Why it matters for your business
In a general partnership, each partner is personally liable for all business debts, including those created by other partners. A formal partnership agreement is essential to avoid disputes.
Profit Margin
FinanceThe percentage of revenue that becomes profit. Can refer to gross margin, operating margin, or net margin depending on context. Calculated as: Profit / Revenue x 100.
Why it matters for your business
Profit margin is the single most important number for a small business owner. It determines how much you keep from every sale and whether your pricing strategy is working.
Q
Quarterly Taxes
TaxEstimated tax payments made four times per year (April 15, June 15, September 15, January 15) by self-employed individuals and business owners who expect to owe $1,000 or more in taxes.
Why it matters for your business
Missing quarterly tax payments results in IRS penalties and interest. Setting aside 25-30% of net income each quarter prevents a painful surprise at tax time.
Quick Ratio
FinanceA stricter liquidity measure than the current ratio. Calculated as: (Current Assets - Inventory) / Current Liabilities. Also called the acid-test ratio.
Why it matters for your business
The quick ratio shows whether you can meet short-term obligations without selling inventory. This is especially important for businesses with slow-moving stock.
R
Retained Earnings
AccountingThe cumulative net income your business has kept (retained) rather than distributing to owners as dividends. It appears in the equity section of your balance sheet.
Why it matters for your business
Retained earnings fund future growth without taking on debt. A growing retained earnings balance shows a business that reinvests profits to build long-term value.
Revenue
FinanceThe total income generated from selling goods or services before any expenses are deducted. Also called the top line, gross sales, or total sales.
Why it matters for your business
Revenue is the starting point for all financial analysis. Without sufficient revenue, no amount of cost management will make a business profitable.
ROI (Return on Investment)
FinanceA measure of the profitability of an investment, calculated as: (Net Profit from Investment / Cost of Investment) x 100. Expressed as a percentage.
Why it matters for your business
ROI helps you compare the efficiency of different investments and decide where to allocate limited capital. Every dollar spent should generate a measurable return.
Runway
FinanceThe amount of time your business can continue operating at its current burn rate before running out of cash. Calculated as: Cash on Hand / Monthly Net Burn Rate.
Why it matters for your business
Runway tells you how much time you have to become profitable, raise funding, or cut costs. Most advisors recommend maintaining at least 6 months of runway.
S
S-Corp (S Corporation)
Legal & EntityA tax election (not a business structure) that allows a corporation or LLC to pass income directly to shareholders, avoiding double taxation. Shareholders who work in the business must pay themselves a reasonable salary.
Why it matters for your business
S-Corp status can save significant money on self-employment taxes. Profits above your reasonable salary are distributed as dividends, which are not subject to FICA taxes.
SBA (Small Business Administration)
FinanceA U.S. government agency that supports small businesses through loan guarantee programs, counseling, and contracting opportunities. SBA does not lend directly but guarantees loans made by partner banks.
Why it matters for your business
SBA-backed loans offer lower down payments, longer repayment terms, and competitive interest rates compared to conventional loans. They are often the best financing option for small businesses.
SDE (Seller's Discretionary Earnings)
FinanceA valuation metric that represents the total financial benefit to a single owner-operator. Calculated as: Net Profit + Owner Salary + Owner Benefits + Non-Cash Expenses + One-Time Expenses.
Why it matters for your business
SDE is the standard earnings metric for valuing small businesses with under $1M in earnings. Buyers use an SDE multiple to determine what they will pay for your business.
Section 179 Deduction
TaxAn IRS tax provision that allows businesses to deduct the full purchase price of qualifying equipment and software in the year it is placed in service, rather than depreciating it over time.
Why it matters for your business
Section 179 can dramatically reduce your tax bill in the year you make major purchases. For 2024, the deduction limit is $1.22 million, making it valuable for equipment-heavy businesses.
Self-Employment Tax
TaxThe Social Security and Medicare tax that self-employed individuals pay on their net earnings. The current rate is 15.3% (12.4% Social Security + 2.9% Medicare) on net self-employment income.
Why it matters for your business
Self-employment tax is separate from income tax and often catches new business owners off guard. It applies to 92.35% of net earnings and can significantly increase your total tax burden.
Sole Proprietorship
Legal & EntityThe simplest business structure where one person owns and operates the business. There is no legal distinction between the owner and the business entity.
Why it matters for your business
While easy to start, a sole proprietorship offers zero liability protection. Your personal assets (home, savings, car) are at risk if the business is sued or cannot pay its debts.
U
Unit Economics
MetricsThe revenue and costs associated with a single unit of your business model, whether that is one product sold, one customer served, or one transaction completed.
Why it matters for your business
If your unit economics are negative, scaling only amplifies losses. Before investing in growth, confirm that each unit generates profit after all direct costs.
V
Variable Costs
FinanceExpenses that change in proportion to your production or sales volume. Examples include raw materials, shipping costs, sales commissions, and credit card processing fees.
Why it matters for your business
Variable costs directly affect your contribution margin and break-even point. As sales increase, variable costs rise, but they also drop when sales slow, providing a natural buffer.
W
Working Capital
FinanceThe difference between current assets and current liabilities. It represents the cash available to fund day-to-day operations. Calculated as: Current Assets - Current Liabilities.
Why it matters for your business
Insufficient working capital means you cannot pay suppliers, make payroll, or cover unexpected expenses. It is the most common reason small businesses experience financial distress.
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