The language of finance, translated for people who run businesses.
Business owners shouldn’t need an MBA to understand their own finances. This glossary is written the way I’d explain these terms across a desk—plainly, with context, and focused on what actually matters to you.
Money your business owes to vendors and suppliers. If you bought materials on net-30 terms, that balance sits in AP until you pay it. It’s a short-term liability on your balance sheet.
Why it matters: If AP grows faster than revenue, you may be stretching your vendors too thin—and they notice.
Money owed to you by customers who haven’t paid yet. You did the work, sent the invoice, and now you’re waiting. AR is an asset, but only if people actually pay.
Why it matters: High AR with slow collections is one of the most common reasons profitable companies run out of cash.
A method that records revenue when it’s earned and expenses when they’re incurred—regardless of when cash changes hands. It gives a more accurate picture of your business, but it can also mask cash flow problems.
Why it matters: Most businesses over $5M should be on accrual. It’s also what buyers and lenders expect to see.
Read the full article →Spreading the cost of an intangible asset (like a patent, software license, or goodwill from an acquisition) over its useful life. Think of it as depreciation’s quieter cousin.
Why it matters: In acquisitions, goodwill amortization can significantly affect your reported earnings for years.
A snapshot of what your business owns (assets), what it owes (liabilities), and what’s left over (equity) at a single point in time. It’s the financial equivalent of a family photo—everything in one frame.
Why it matters: Lenders and buyers look at your balance sheet before your income statement. It tells them how solid the foundation is.
The level of revenue where your business covers all its costs—fixed and variable—and makes exactly zero profit. Everything above that line is margin.
Why it matters: If you don’t know your break-even, you can’t price intelligently or plan for growth.
A financial plan that projects your income and expenses for a future period. Not a wish list—a decision-making tool. A good budget tells you what you can afford to do and when.
Why it matters: The companies that grow well almost always have a budget they actually use, not one that lives in a drawer.
Read the full article →Money spent on long-term assets—equipment, vehicles, buildings, major software systems. Unlike operating expenses, CapEx gets depreciated over time rather than expensed in one year.
Why it matters: Heavy CapEx without matching revenue growth is a warning sign. Light CapEx when your equipment is aging is another one.
The layers of financing used to fund a business or acquisition, from senior debt at the top (safest, lowest return) to owner equity at the bottom (riskiest, highest return). Understanding the stack means understanding who gets paid first if things go sideways.
Why it matters: If you’re buying or selling a business, the capital stack determines deal structure, risk, and who has leverage.
Read the full article →A method that records revenue when cash comes in and expenses when cash goes out. Simple to understand, and it matches what your bank account actually shows.
Why it matters: Works fine for small businesses, but it can hide the true profitability of a growing company.
Read the full article →The actual movement of money in and out of your business. Not the same as profit. You can be profitable on paper and still run out of cash if your receivables are slow and your payables are fast.
Why it matters: Cash flow is what keeps the lights on. Profit is an opinion; cash is a fact.
A business structure where the company is a separate legal entity that pays its own income taxes. Profits are taxed at the corporate level, and again when distributed to shareholders as dividends (the “double taxation” everyone warns about).
Why it matters: C-Corps make sense for certain situations—especially if you’re raising outside capital or planning to go public. For most owner-operated businesses, they’re not the default choice.
Read the full article →The person responsible for the financial strategy of a business—not just the bookkeeping or tax filing, but the big-picture decisions: where to invest, when to borrow, how to grow sustainably, and when to exit. A consulting CFO does this work without being a full-time employee.
Why it matters: Most businesses between $5M and $75M need CFO-level thinking but can’t justify (or don’t want) a full-time hire.
Read the full article →The direct costs of producing or delivering what you sell—materials, labor, shipping. Not your rent, not your marketing. COGS is subtracted from revenue to get gross profit.
Why it matters: If COGS is climbing as a percentage of revenue, your margins are shrinking even if sales look healthy.
The total amount of principal and interest payments you owe on your loans in a given period. Lenders use “debt service coverage ratio” (DSCR) to determine if your business generates enough cash to comfortably cover those payments.
Why it matters: Banks typically want to see a DSCR of 1.25x or higher. Below that, you’re too close to the edge.
Allocating the cost of a physical asset (equipment, vehicles, buildings) over its useful life. You bought a $100,000 machine—you don’t expense it all in year one. You spread it out.
Why it matters: Depreciation reduces taxable income without costing you cash today. That’s why it gets added back in EBITDA calculations.
The investigative process before a business transaction—usually an acquisition. The buyer digs into financials, legal records, contracts, customer concentration, employee agreements, and anything else that could reveal hidden risk.
Why it matters: Deals fall apart in due diligence more than anywhere else. If your books aren’t clean, a buyer will either walk or discount heavily.
Read the full article →Earnings Before Interest, Taxes, Depreciation, and Amortization. It strips out financing decisions, tax strategies, and non-cash charges to show the core operating profitability of a business. It’s the number buyers use to value your company.
Why it matters: When someone says your business is worth “4x,” they mean 4x your EBITDA. Getting that number right—and growing it—is probably the highest-leverage thing you can do before a sale.
Read the full article →What’s left after you subtract liabilities from assets. It’s the owner’s residual claim on the business. In simple terms: if you sold everything and paid off all your debts, equity is what you’d walk away with.
Why it matters: Growing equity year over year means you’re building real wealth, not just running a job.
Preparing your business to be sold, transferred, or wound down—ideally on your terms and timeline. It involves cleaning up financials, reducing owner dependency, locking in key employees, and building transferable value.
Why it matters: The owners who sell well started preparing years before they were ready to leave. Every year you wait, the exit gets harder.
Read the full article →The three core reports—income statement, balance sheet, and cash flow statement—that together tell the story of your business. Each one shows something the others don’t.
Why it matters: If you only look at one of the three, you’re flying with instruments missing.
A forward-looking estimate of where your business is headed financially—revenue, expenses, cash needs—based on current trends and planned activity. Unlike a budget (which is a target), a forecast gets updated as conditions change.
Why it matters: A rolling forecast lets you see problems 90 days out instead of finding them in your rearview mirror.
Read the full article →The premium paid above the fair market value of a company’s identifiable assets during an acquisition. It reflects intangible value—brand reputation, customer relationships, workforce quality—that doesn’t show up on a balance sheet.
Why it matters: If you’re buying a business, goodwill is what you’re paying for the things you can’t touch. Make sure they’re real.
Revenue minus cost of goods sold. Gross margin is that number expressed as a percentage. It tells you how much money you keep from each dollar of sales before overhead, payroll, and everything else.
Why it matters: Gross margin is the first number I look at. If it’s declining, nothing downstream is going to fix it.
Using borrowed money to fund business operations or growth. A “leveraged” business has more debt relative to equity. Some leverage accelerates growth; too much puts you at the mercy of your lenders.
Why it matters: The right amount of leverage depends on your industry, your cash flow, and your appetite for risk. There’s no universal number.
How quickly you can convert assets to cash without significant loss. Cash is perfectly liquid. Real estate is not. A business with strong liquidity can weather surprises; an illiquid one gets cornered.
Why it matters: In a downturn, liquidity is survival. In a growth phase, it’s optionality.
A business structure that protects the owner’s personal assets from business debts and lawsuits. It’s flexible on taxes—can be taxed as a sole proprietorship, partnership, S-Corp, or C-Corp depending on your election.
Why it matters: Most small businesses start as LLCs for a reason. But as you grow, the tax election matters more than the entity type.
Read the full article →The difference between what something costs and what it sells for, expressed as a percentage. There are several kinds—gross margin, operating margin, net margin—each peeling back another layer of costs.
Why it matters: Revenue without margin is just activity. Margin is what actually builds a business.
A valuation shorthand, usually expressed as a multiple of EBITDA or revenue. “The business sold for 5x” means the buyer paid five times annual EBITDA. Multiples vary widely by industry, size, and growth trajectory.
Why it matters: Understanding what drives multiples up or down is the key to maximizing what your business is worth when you exit.
Read the full article →The bottom line. Revenue minus all expenses—COGS, overhead, interest, taxes, depreciation, everything. It’s what’s left over, and it’s what the IRS cares about.
Why it matters: Net income matters for taxes and retained earnings, but it can be misleading as a measure of business health. A business can show low net income and still be very well-run.
Current assets minus current liabilities. It measures your ability to cover short-term obligations with short-term resources. Think of it as your financial breathing room.
Why it matters: Acquirers scrutinize working capital closely. A shortfall often becomes a purchase-price adjustment at the closing table.
The day-to-day costs of running your business that aren’t directly tied to producing your product or service—rent, utilities, insurance, marketing, administrative salaries.
Why it matters: OpEx is the place where costs creep without anyone noticing. Regular reviews keep it honest.
When a business can’t function without the owner’s daily involvement. The owner is the top salesperson, the key relationship holder, the only decision-maker. The business runs because they show up.
Why it matters: Owner-dependent businesses sell at steep discounts—or don’t sell at all. That’s not an asset. That’s a job.
Read the full article →Also called the income statement. It shows revenue, costs, and expenses over a period of time—monthly, quarterly, or annually. It answers: “Did the business make money during this period?”
Why it matters: The P&L is the report most owners look at first, but it only tells part of the story without the balance sheet and cash flow statement alongside it.
A projection or hypothetical version of financial statements—often used to show what a business would look like after a planned change (acquisition, new location, cost restructuring).
Why it matters: Lenders and investors want to see pro forma projections. A good one shows you’ve thought through the numbers, not just the dream.
The salary an S-Corp owner must pay themselves that the IRS considers fair for the work they actually do. It can’t be suspiciously low just to avoid payroll taxes—the IRS watches for that.
Why it matters: Get this wrong and you’re inviting an audit. Get it right and you save meaningfully on self-employment taxes.
Read the full article →The total income generated from selling goods or services before any costs are subtracted. Also called the “top line.” Revenue is where the story starts, but it’s never where the story ends.
Why it matters: Revenue growth without margin improvement is a treadmill. You’re running faster but not getting anywhere.
The most common Small Business Administration loan program, frequently used for business acquisitions. The SBA doesn’t lend directly—it guarantees a portion of the loan through an approved lender, which reduces the bank’s risk.
Why it matters: SBA 7(a) loans are how most people finance a business acquisition when they don’t have millions in cash.
Read the full article →A tax election (not a business structure) that lets business income pass through to the owner’s personal return, avoiding corporate-level tax. The trade-off: owners must pay themselves a reasonable salary and follow stricter rules than an LLC.
Why it matters: For many businesses in the $500K–$10M range, the S-Corp election can save significant money on self-employment taxes. But it has to be done right.
Read the full article →A valuation metric for smaller businesses (typically under $5M revenue). It starts with net income and adds back the owner’s salary, benefits, and discretionary expenses. It shows what a new owner could expect to earn.
Why it matters: For owner-operated businesses, SDE is often more meaningful than EBITDA because the owner is the management team.
The total amount of taxes a business owes—income tax, payroll tax, sales tax, estimated quarterly payments, and more. It varies by entity type, state, and how the business is structured.
Why it matters: Tax surprises are the number-one cash flow killer for growing businesses. Knowing your obligations before they’re due is non-negotiable.
Read the full article →An estimate of what your business is worth. It can be based on earnings multiples, asset values, discounted cash flows, or comparable transactions. The right method depends on your industry, size, and purpose for the valuation.
Why it matters: Most owners dramatically overestimate (or underestimate) what their business is worth. A sober valuation is the starting point for any serious exit or growth conversation.
Read the full article →See Net Working Capital above. In everyday conversation, “working capital” means the cash and near-cash you have available to run daily operations.
If there’s a financial term you’ve heard but never quite understood, ask me. I’ll add it here and explain it in plain English.
Ask a CFO →