Financial terms can seem overwhelming when you’re starting or growing your business. Yet understanding these terms is vital for making confident decisions, working effectively with your accountant or bookkeeper, and assessing your company’s overall health.
Use this guide as a quick reference. If you’d like help applying any of these concepts to your own business, our Business Strategists are here to support you. Book a free consultation with us!
Accounts Payable (AP)
Accounts payable are the bills your business needs to pay as part of its normal operations. These are listed as liabilities on the balance sheet until settled.
Accounts Receivable (AR)
Accounts receivable are debts owed to your company, usually from sales on credit. It is an asset that appears on the balance sheet until customers pay their invoices.
Accrual‑Based Accounting
An accounting method that recognizes revenues and expenses when earned or incurred, regardless of when the cash is exchanged. Most businesses operate this way.
Accumulated Depreciation
Total depreciation of an asset over its lifetime. This number reduces its book value over time.
Acid Test
A quick measure of a company’s ability to cover immediate liabilities, calculated by subtracting accounts receivable and inventory from short‑term assets and then dividing by short‑term liabilities.
Acquisition Cost
Additional expenses associated with gaining a new customer.
Balance Sheet
A snapshot of a company’s financial position at a point in time, listing assets, liabilities, and owner’s equity.
Breakeven Analysis
The point where revenues cover expenses, yielding neither a profit nor a loss. Learn to calculate your breakeven point.
Burden Rate
Additional employer costs beyond salaries, such as benefits, taxes, and insurance.
Capital Assets (Fixed Assets)
Long‑term assets like equipment and buildings that are used for more than one year.
Capital Expenditure
Spending used to acquire or maintain fixed assets.
Capital Input
Investment of new money into a business, increasing the owners’ stake and risking its growth.
Cash
Cash generally means money available in bank accounts or physical currency, representing liquid resources available to the business.
Cash Basis
An accounting method that only records cash when received or spent, ignoring invoices until money changes hands.
Cash Flow
The movement of money into and out of a business over a set period, capturing actual liquidity.
How to Calculate Cash Flow:
Cash Received – Cash Spent = Net Cash Flow
Cash Flow Budget
A projection that captures anticipated cash inflows and outflows over a set period.
Cash Flow Statement
A financial statement that shows actual cash inflows and outflows over a period (usually a month or quarter).
Cash Sales
Transactions conducted with cash, credit cards, or cheques — as opposed to sales made on credit.
Cash Spending
Expenses paid immediately, rather than deferred.
Commission
A payment (often a percentage) made for making a sale.
Compound Annual Growth Rate (CAGR)
The annual growth rate required for an investment to move from its starting point to its end point if profits were reinvested every year.
Contribution and Contribution Margin
Contribution is the difference between total sales and total variable costs. Contribution margin is expressed per unit or across a product line.
Cost of Goods Sold (COGS) / Cost of Sales
Direct expenses associated with making or acquiring goods or services.
Current Assets / Current Liabilities / Current Debt
Short‑term assets and debts, typically expected to be used or settled within a year.
Debt and Equity
The combined liabilities and equity listed on the balance sheet, representing the total financing available to the business.
Depreciation
The accounting practice of spreading the cost of long‑term assets across their useful life.
Dividends
Profits paid out to owners.
Earnings (or Profit)
Revenues less expenses, calculated for a specific period.
Earnings Before Interest and Taxes (EBIT)
A measure of earnings that excludes interest and tax payments.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
A measure of overall business performance that excludes financing, tax, and depreciation expenses.
Effective Tax Rate
The actual rate you pay in taxes compared to your total income.
Equity Financing
Capital received in exchange for a portion of ownership.
Expenses
Costs associated with running a business. These can be operational, fixed, or variable.
Fiscal Year
The 12‑month period used for accounting and reporting, which doesn’t necessarily match the calendar year.
Fixed Cost / Fixed Liabilities
Costs that remain the same regardless of sales or production levels (e.g., rent), and long‑term debts with defined terms (usually longer than five years).
Floating Liabilities
Short‑term debts secured by an underlying, variable‑value asset, such as accounts receivable.
Gross Margin / Gross Margin Percent
The difference between total sales and cost of goods sold, expressed in dollars or as a percentage.
Income Statement (Profit and Loss)
A financial statement that summarizes revenues, expenses, and profits or losses over a period.
Interest Expense
Costs of financing or borrowing money.
Liabilities / Long‑Term Liabilities
Short‑term debts are due within a year, while long‑term liabilities are debts due after five years.
Net Cash Flow
The change in cash position over a period.
Net Profit / Net Worth
The total earnings after all expenses and taxes have been paid. Net worth is total assets minus liabilities.
Operating Expenses
Costs associated with running the business day‑to‑day, such as salaries and utilities.
Opportunity Cost
The cost of choosing one option over another.
Paid‑In Capital
Cash invested in the company by its owners.
Payables / Payroll / Payroll Burden
Short‑term debts for goods and services, employee compensation, and associated benefits and taxes.
Profit Before Interest and Taxes (EBIT)
Same as Earnings Before Interest and Taxes.
Profit or Loss Statement
Same as an income statement.
Receivables / Receivables Turnover
Amounts owed to the company by customers and the measure of how quickly those debts are collected.
Retained Earnings
Earnings kept in the business after dividends have been paid.
Return on Assets (ROA) / Return on Investment (ROI) / Return on Sales (ROS)
Ratios that measure profitability compared to assets, equity invested, or sales.
Short‑Term Assets / Short‑Term Liabilities
Items expected to be used or settled within one year.
Sunk Cost
Expenses that have already been incurred and cannot be recovered.
Surplus or Deficit
Terms used by nonprofits for “profit” or “loss.”
Tax Rate Percent
The percentage of income owed in taxes.
Unit Variable Cost
Cost associated with producing one unit of a good or service.
Unpaid Expenses
Expenses that have been incurred but not yet paid.
Variable Cost
Costs that rise and fall based on production or sales activity.
Venture Capital
Investment in early‑stage ventures, usually in exchange for equity.
Working Capital
Available cash and short‑term assets required to operate the business.
Need help?
If you’d like to review any of these terms in the context of your business, our Business Strategists can help.