Finance Terms & Definitions
Proceeds from selling your product that are recorded on your Income Statement as they are earned. For example when you deliver the service, you create revenue for the company.
Often interchanged with Revenue. But sales may also refer to your activity in closing customer orders and may be something you report prior to actually delivering service. For example you have Sales and then you deliver product and that delivery creates Revenue.
An acronym for Cost of Goods Sold. These are the costs related directly to delivering the product to your customer such as inventory and labor for providing the service. It would not include the sales or operating costs of the business.
An acronym for Operating Expenses. These are not expenses directly related to delivering a product such as inventory but they are costs related to sales, marketing, and operating the overall business such and management labor, facilities expense and so on.
An acronym for Earnings Before Interest Taxes Depreciation and Amortization. You would calculate this by taking your operating income and adding any of the expenses in the definition back to your operating income.
When you purchase a piece of larger equipment, you do not report the expense of the asset on your Income Statement. Instead you report it as an asset and you depreciate the value of the asset over the useful life of the asset. The act of Depreciating the asset over its life creates an expense for each period during the asset’s life and that amount is Depreciation and reported on your Income Statement.
P & L
An acronym for Profit and Loss Statement and reflects your revenues, expenses, and net income from your operations over a specific period, usually a fiscal year. Also called an Income Statement.
The 12 month (typically 12 months) period in which you consider the beginning and ending dates of the operating year for your business. It is often Jan 1st to Dec 31st, but it can be begin and end on any 12 month interval. Special note that some companies have 13 or varying months for a fiscal year but this is not typical.
Often used when referring to a specific accounting method. But when used in a conversation about your financial results it typically refers to the act of including revenue or expenses for a specific period in your income statement even though you haven’t received the invoice from your vendor or invoiced your customer yet because the work or service activity occurred in the period even though the cash transaction hasn’t occurred yet.
Similar to depreciation, instead of allowing an asset to create expense in your P&L you will amortize the value of the asset over its useful life and report Amortization expense in your P&L for the relevant operating period. The asset will not be a tangible asset or one that you can touch. It will be an asset that is Intangible such as a customer list, intellectual property, or goodwill.
This is the asset that is created when you purchase another company. The value of the purchase price above the net fair market tangible value of the company becomes goodwill. For example if the net tangible value of the company is $100 but you’re willing to pay $120 because you see value in other things aside from the company’s assets such as their position in the market, their brand, or their customer base, the amount you pay above the fair value of the net assets will be recorded as goodwill. In this example $20 is goodwill.
A / R
An acronym for Accounts Receivable. This is the value of invoices that are outstanding from customers reported on your balance sheet.
A / P
An acronym for Accounts Payable. This is the value of invoices that are outstanding from your vendors which you still owe and is reported on your balance sheet.
An acronym for Days Sales Outstanding. This represents a proxy for how quickly you are collecting invoices from your customers. It is calculated by dividing your account receivable balance at the date being measured by your average revenue per day, which is calculated by dividing your revenue for the period being measured in the P&L by the number of days being measured in the P&L.
This is technically your total Current Assets less your Total Current Liabilities. But when people refer to working capital they are typically referring to the amount of money it takes to support your business on a day to day business. For example you often have to purchase inventory before you can sell it and once you invoice a customer you must wait to collect it. The cash required to support this process would be considered working capital.
Stock sold to an investor that has preferred rights over a common stock holder. Preferred stock holders are also owners of the company. Typical rights a preferred stock holder would have would be to receive their investment back prior to common stock holders receiving income, interest, dividends, special voting rights, the ability to block certain decisions from being made, and many other types of rights. A company will only have this type of equity instrument if it is a corporation.
Stock sold to an investor or held by the founders or original owners of the company. It’s typically measured in number of shares of common stock in the company. A person or entity that holds common stock is an owner in the company and has certain rights to vote and make decisions on the company’s behalf. A company will only have this type of equity instrument if it is a corporation.
A warrant is the right to purchase a share of stock in the company. If a person or entity holds a warrant then they have the right to purchase a set number of shares of company stock for a specific price during the term of the warrant, which is typically some number of years before the warrant and the rights expire.
A projection or outlook for the company and its expected financial performance for a specific time period. A forecast is the company’s best guess at how the company will perform for a specified period and it may be updated as frequently as management feels necessary.
Unlike a forecast which is an outlook for how the company is expected to perform, a budget is a projection for the company typically for a 12 month period in which management will measure its performance against the budget. It is typically what management aspires to achieve for a set period and unlike a forecast isn’t updated routinely.
Retained earnings are the total accumulated losses or income for a business over its life. Retained earnings are reported on your balance sheet and can be negative or positive though certainly the goal is for them to be positive.
An acronym for software as a service. This refers to a model of selling software to your customers where you typically will host the software and charge them a monthly service fee to us eth software.
ARR or ARC
An acronym for annual recurring revenue or annual recurring charge. This term refers to the amount of annual billings you charge a customer on an ongoing basis for the services you are providing. Best way to think about this is if you were to quit selling any new customers today how much would you be able to continue to invoice your customers every year for services and maintenance based on what is provided today. This is usually driven by a long term customer contract.
NRR or NRC
An acronym for non-recurring revenue or non-recurring charge. This refers to the charges you invoice that are one time in nature and do not repeat.
An acronym for average revenue per unit. The unit can be whatever you define; a widget in your business, a customer, and event. The metric is simply saying this is the average revenue I receive per transaction or metric that I measure my business success with.
An acronym for annul contract value. When you sign a new customer contract if there is a value for that customer in its first year of business with you this would be a good metric to describe the amount.
An acronym for the total contract value. This is the value you will receive from the customer under the entire contract term. If you sign a customer contract and you expect them to pay you $100 per year and the contract is for three years then the TCV is $300.
This could be used in many conversations, such as how you leverage a sales force or a customer to grow your business. But typically when used in finance leverage refers to debt. When you take on debt in your company you increase your leverage. So there are a number of financial metrics and calculations based on the leverage in a business relative to its income and assets and this speaks to the overall health of the business. A little leverage is good – a lot of leverage is bad and risky.
This is actually referring to an IRS guideline. But when you hear this term used in the finance world it is typically referring to an independent analysis performed on your company to determine the value of the company and is most often used to price a private company’s common stock for use in offering stock options to its employees.
Essentially means the value of a company. More specifically if you were trying to calculate an enterprise value it would be the fully diluted shares of the company multiplied by the current market price per share of stock plus the debt minus the cash in the business. For private companies it’s typically derived in a less scientific way and doesn’t normally discuss the debt and cash impacts to the calculation unless you are in a final negotiation to sell the business.
An acronym for initial public offering and refers to the activity of a company’s move from being a privately held to a publicly held company. But there are acres of discussions available on this topic, no need for that discussion here.
An acronym for a private investment in a public company. This refers to an event where a publicly traded company accepts a new equity investment but it’s not marketed as a public offering and instead simply accepted from a private investor.
Above the line
Refers to the activity in your income statement that is included in operating income.
Below the line
Refers to the activity in your income statement that is included in income and expenses reported below your operating income on the income statement.