Finance glossary
The numbers a company runs on.
40 terms, each with what it means, how to calculate it, a worked example, and where it misleads.
Cash & working capital
Accounts payable aging (AP aging)
An accounts payable aging report groups unpaid supplier bills by how long they are past due, so you can see what you owe, to whom, and how late.
Each open bill is placed in a bucket by days past its due date: current, 1–30, 31–60, 61–90 and over 90 days.
Accounts receivable aging (AR aging)
An accounts receivable aging report groups unpaid customer invoices by how long they are past due, so you can see which money is at risk of never arriving.
Each open invoice is placed in a bucket by days past its due date: current, 1–30, 31–60, 61–90 and over 90 days.
Cash burn and runway
Net burn is how much more cash a business spends than it takes in each month; runway is how many months its cash would last at that rate.
Net burn = Cash out − Cash in (per month); Runway = Cash on hand ÷ Net burn
Cash conversion cycle (CCC)
The cash conversion cycle is the number of days between paying for inventory or inputs and collecting cash from the customers who buy them.
CCC = Days inventory outstanding + Days sales outstanding − Days payable outstanding
Current ratio
The current ratio compares what a business can turn into cash within a year with what it owes within a year.
Current ratio = Current assets ÷ Current liabilities
Days inventory outstanding (DIO)
Days inventory outstanding is the average number of days a business holds inventory before it is sold.
DIO = (Inventory ÷ Cost of goods sold for the period) × Days in the period
Days payable outstanding (DPO)
Days payable outstanding is the average number of days a company takes to pay its suppliers after receiving their bills.
DPO = (Accounts payable ÷ Cost of goods sold for the period) × Days in the period
Days sales outstanding (DSO)
Days sales outstanding is the average number of days it takes a company to collect payment after a sale on credit.
DSO = (Accounts receivable ÷ Revenue for the period) × Days in the period
Free cash flow (FCF)
Free cash flow is the cash a business generates from operations after paying for the equipment and other long-term assets it needs to keep running.
Free cash flow = Operating cash flow − Capital expenditures
Operating cash flow
Operating cash flow is the cash a business’s normal operations bring in or use in a period, before investing and financing activity.
Operating cash flow = Net income + Non-cash charges (such as depreciation) − Increase in working capital
Quick ratio
The quick ratio, also called the acid-test ratio, compares a business’s most liquid assets with what it owes within a year, leaving out inventory and prepaid expenses.
Quick ratio = (Cash + Marketable securities + Accounts receivable) ÷ Current liabilities
Working capital
Working capital is the money tied up in running the business day to day: current assets such as cash, receivables and inventory, minus the current liabilities due within a year.
Working capital = Current assets − Current liabilities
Profitability
Break-even point
The break-even point is the level of sales at which revenue exactly covers all costs, so the business makes neither a profit nor a loss.
Break-even units = Fixed costs ÷ (Price − Variable cost per unit); Break-even revenue = Fixed costs ÷ Contribution margin ratio
Contribution margin
Contribution margin is what each sale leaves over after every cost that rises with that sale, available to cover fixed costs and profit.
Contribution margin = (Revenue − Variable costs) ÷ Revenue
Cost of goods sold (COGS)
Cost of goods sold is the direct cost of producing or buying what a business sold in a period, such as materials, stock purchases and direct labour.
COGS = Beginning inventory + Purchases − Ending inventory
EBITDA
EBITDA is earnings before interest, taxes, depreciation and amortization: a measure of operating profit before financing, tax and non-cash charges.
EBITDA = Net income + Interest + Taxes + Depreciation + Amortization
Gross margin
Gross margin is the share of revenue left after paying the direct costs of delivering what you sold.
Gross margin = (Revenue − Cost of goods sold) ÷ Revenue
Net profit margin
Net profit margin is the share of revenue left as profit after every expense, including interest and taxes.
Net profit margin = Net income ÷ Revenue
Operating margin
Operating margin is the share of revenue left after the cost of goods sold and all operating expenses, before interest and taxes.
Operating margin = Operating income ÷ Revenue, where Operating income = Revenue − Cost of goods sold − Operating expenses
Growth & SaaS
Annual recurring revenue (ARR)
Annual recurring revenue is the yearly value of a company’s recurring subscription revenue at a point in time, usually MRR multiplied by twelve.
ARR = MRR × 12
Burn multiple
The burn multiple measures how much cash a company burns to add each dollar of new annual recurring revenue.
Burn multiple = Net burn for the period ÷ Net new ARR for the period
CAC payback period
The CAC payback period is the number of months it takes for a new customer’s gross profit to repay what it cost to acquire them.
CAC payback = CAC ÷ (Monthly revenue per new customer × Gross margin)
Customer acquisition cost (CAC)
Customer acquisition cost is the average sales and marketing spend needed to win one new customer.
CAC = Sales and marketing spend for the period ÷ New customers won in the period
Customer churn rate
Customer churn rate is the share of customers at the start of a period who cancel or stop paying during it.
Churn rate = Customers lost in the period ÷ Customers at the start of the period
Customer lifetime value (LTV)
Customer lifetime value is the gross profit a business expects to earn from an average customer over the whole time they stay.
LTV = (Average monthly revenue per customer × Gross margin) ÷ Monthly customer churn rate
LTV to CAC ratio (LTV:CAC)
The LTV to CAC ratio compares the gross profit a customer is expected to bring in over their lifetime with the cost of acquiring them.
LTV:CAC = Customer lifetime value ÷ Customer acquisition cost
Monthly recurring revenue (MRR)
Monthly recurring revenue is the predictable subscription revenue a business expects to bill every month, normalized to a monthly amount.
MRR = Sum of monthly subscription charges for all active customers (annual plans ÷ 12)
Net revenue retention (NRR)
Net revenue retention is the share of recurring revenue from existing customers that a business keeps over a period, after upgrades, downgrades and cancellations.
NRR = (Starting MRR + Expansion − Contraction − Churned MRR) ÷ Starting MRR
Rule of 40
The Rule of 40 says a healthy software company’s revenue growth rate plus its profit margin should add up to at least 40%.
Rule of 40 score = Revenue growth rate (%) + Profit margin (%), usually EBITDA margin, sometimes free cash flow margin
Planning & reporting
Accrual vs cash accounting
Accrual accounting records revenue when it is earned and expenses when they are incurred; cash accounting records them only when money actually comes in or goes out.
Under accrual, an invoice counts in the period the work is done and the bill in the period the cost is incurred; under cash, each counts in the period it is paid.
Budget vs actual
Budget vs actual compares what happened in a period with what was planned, line by line, to show where the business is ahead of or behind its plan.
Variance = Actual − Budget (and Variance % = Variance ÷ Budget)
Driver-based forecasting
Driver-based forecasting builds a forecast from the few operational numbers that cause the results, such as leads, conversion rate or price, instead of typing in each line.
Each forecast line is calculated from its drivers (for example, leads × conversion rate × average order value), so changing one driver updates every line that depends on it.
Revenue per employee
Revenue per employee is the revenue a business earns for each full-time equivalent employee over a period.
Revenue per employee = Revenue for the period ÷ Average full-time equivalent employees
Rolling forecast
A rolling forecast is a forecast that always looks the same number of months ahead, extended by one period each time a period closes.
When a month closes, its actuals replace the forecast for that month and one new month is added at the far end, so the horizon never shrinks.
Variance analysis
Variance analysis explains the gap between actual results and what was expected, by measuring it and breaking it into the causes behind it.
Variance = Actual − Budget; for revenue, Volume variance = (Actual units − Budget units) × Budget price and Price variance = (Actual price − Budget price) × Actual units
Marketing
Cost per lead (CPL)
Cost per lead is the average amount spent on marketing to generate one new lead in a period.
CPL = Marketing spend ÷ New leads
Marketing efficiency ratio (MER)
Marketing efficiency ratio is total revenue divided by total marketing spend: a blended view of what all marketing returns, without relying on attribution.
MER = Total revenue ÷ Total marketing spend
Return on ad spend (ROAS)
Return on ad spend is the revenue earned for every dollar spent on advertising.
ROAS = Revenue attributed to ads ÷ Ad spend
Industry
Average repair order (ARO)
Average repair order is the average revenue an auto repair shop earns per repair order in a period.
ARO = Total repair order revenue ÷ Number of repair orders
Occupancy rate
Occupancy rate is the share of a property’s available units, or square feet, that are leased and occupied at a point in time.
Occupancy rate = Occupied units ÷ Total available units
Stop calculating them by hand.
Dear CFO keeps your statements, forecasts and metrics current from the systems you already run.