Glossary of Terms

Every important term in this guide, in plain English. Skim it now to see the landscape; come back whenever a word trips you up.

Accounts Payable (Payables)

Money you owe to others (suppliers, vendors) but haven't paid yet. Their invoices sitting in your inbox.

Accounts Receivable (Receivables)

Money customers owe you but haven't paid yet. Your invoices that haven't cleared. It's "earned" revenue that isn't cash yet.

Accrual Accounting

Recording revenue when you earn it and costs when you incur them — not when cash moves. It's why a profitable business can have an empty bank account. The opposite is cash accounting.

Amortization

Spreading the cost of an intangible asset (like software or a patent) across the years it's useful, instead of expensing it all at once. The cousin of depreciation.

ARPU (Average Revenue Per User)

Total revenue divided by number of customers. Tells you what an average customer is worth per period.

ARR (Annual Recurring Revenue)

The yearly value of your recurring (subscription) revenue. Usually MRR × 12. The headline number for subscription businesses.

Assets

Everything your business owns that has value: cash, inventory, equipment, money owed to you. The left side of the balance sheet.

Balance Sheet

A snapshot of what you own (assets), what you owe (liabilities), and what's left over for owners (equity) at a single moment in time. It always balances: Assets = Liabilities + Equity.

Break-even Point

The level of sales where total revenue exactly covers total costs — you make zero profit but zero loss. Below it you bleed; above it you earn.

Budget

Your plan for how much you intend to spend and earn over a period. A set of targets you hold yourself to.

Burn Multiple

Net cash burned divided by net new ARR added. It answers "how much money did we burn to grow $1 of revenue?" Lower is better; under 1 is excellent.

Burn Rate

How fast you're spending cash, usually per month. The speed at which your runway shrinks.

CAC (Customer Acquisition Cost)

The total sales and marketing money spent to win one new customer. Spend $10,000 to get 100 customers → CAC is $100.

CAC Payback Period

How many months of a customer's profit it takes to earn back what you spent acquiring them. Shorter means you recover your money faster.

Cap Table (Capitalization Table)

The list of who owns what slice of your company — founders, investors, employee options. Updated every funding round.

Cash

Actual money available in your bank account right now. The only thing that pays salaries and rent. Profit is an opinion; cash is a fact.

Cash Flow

The movement of actual money in and out of your business over a period. Positive means more came in than went out.

Cash Flow Statement

The financial statement that tracks where cash actually came from and went — split into operating, investing, and financing activities. It explains the change in your bank balance.

Churn

The rate at which customers (or revenue) leave you over a period. 5% monthly churn means you lose 5% of customers each month. High churn quietly kills growth.

COGS (Cost of Goods Sold)

The direct costs of producing what you sell — materials, the server hosting a customer, payment fees, the freelancer who did the work. Costs that rise with each sale.

Contribution Margin

Revenue from a sale minus the variable costs of that sale. What each unit "contributes" toward covering your fixed costs and profit.

Cost of Capital

The price you pay to use someone else's money — interest on a loan, or the ownership you give up for equity. Money is never free; this is its cost.

Cost-Plus Pricing

Setting price by taking your cost and adding a markup. Simple, but it ignores what the customer would actually pay.

Decoy Effect

A pricing trick where adding a deliberately worse-value option makes another option look like a bargain, nudging buyers toward it.

Default Alive / Default Dead

"Default alive" means that at your current growth and burn, you'll reach profitability before the cash runs out. "Default dead" means you won't — without raising more or changing course. Every founder should know which they are.

Depreciation

Spreading the cost of a physical asset (a machine, a laptop) across the years it's useful, rather than expensing it all in year one.

Dilution

The shrinking of your ownership percentage when new shares are issued (e.g. to investors or employees). You may own a smaller slice of a much bigger pie.

EBITDA

Earnings Before Interest, Taxes, Depreciation and Amortization. A rough proxy for cash profit from core operations, stripping out financing and accounting effects.

Equity

The owners' stake in the business — what's left after subtracting liabilities from assets. Also the shares you give investors in exchange for cash.

Financial Model

A spreadsheet that links your assumptions (price, customers, costs) to projected revenue, profit and cash — so you can ask "what if?" before betting real money.

Fixed Cost

A cost that stays the same regardless of how much you sell — rent, salaries, software subscriptions. You pay it even at zero sales.

Forecast

Your best estimate of what will actually happen, updated as reality unfolds. A budget is the plan; a forecast is the honest expectation.

Gross Burn

Total cash you spend each month, before counting any revenue coming in. Your raw monthly outflow.

Gross Margin

Gross profit as a percentage of revenue — what's left after COGS, before other costs. The headline measure of how profitable each sale is. Software wants 70%+, retail far less.

Gross Profit

Revenue minus COGS. The money left from sales to cover everything else and (hopefully) leave a profit.

Income Statement (P&L)

The "Profit & Loss" statement showing revenue, costs and profit over a period. It answers "did we make money?"

Liabilities

Everything your business owes: loans, unpaid bills, taxes due. The right side of the balance sheet.

LTV (Lifetime Value)

The total profit you expect to earn from one customer over their whole relationship with you. The reward for acquiring them.

LTV:CAC Ratio

Lifetime value divided by acquisition cost. It answers "for every $1 we spend winning a customer, how many dollars do we get back?" 3:1 is the classic healthy benchmark.

Magic Number

A SaaS efficiency metric: new revenue generated per dollar of sales-and-marketing spend. Above ~0.75 suggests you can profitably spend more to grow.

Margin

Profit expressed as a percentage of the selling price. "We make 30% margin" means 30 cents of every sales dollar is profit. Not to be confused with markup.

Markup

How much you add on top of cost, as a percentage of the cost. A $50 item sold for $100 is a 100% markup but a 50% margin — same dollars, different denominator.

MRR (Monthly Recurring Revenue)

The predictable subscription revenue you collect each month. The heartbeat of a subscription business.

Net Burn

Cash spent minus cash earned each month — your true monthly cash loss after revenue helps. This is what actually drains your runway.

Net Income (Net Profit / Bottom Line)

What's left after every cost — COGS, operating expenses, interest and taxes. The final profit line at the bottom of the P&L.

Operating Expenses (OpEx)

The costs of running the business that aren't tied directly to producing a sale — salaries, marketing, rent, software. Everything between gross profit and net profit.

Operating Leverage

The effect where, once fixed costs are covered, extra sales drop mostly to profit. High fixed costs + high margins = explosive profit growth past break-even (and steep losses below it).

Post-money Valuation

What your company is worth right after an investment lands — pre-money valuation plus the new money raised.

Pre-money Valuation

What your company is agreed to be worth just before new investment comes in. It sets how much ownership the new money buys.

Price Tiering

Offering good / better / best versions at different prices so different customers self-select, capturing more total revenue than a single price would.

Price Anchoring

Showing a higher reference price first so the price you actually want to sell at looks reasonable by comparison.

Revenue (Top Line)

The total money you charge customers for your products or services, before any costs. The first line of the P&L.

Rule of 40

A health check for growth companies: your revenue growth rate plus your profit margin should add up to at least 40%. It balances "grow fast" against "make money."

Runway

How many months until you run out of cash at your current burn rate. Cash in the bank ÷ net monthly burn. Your survival countdown.

Unit Economics

The profit and loss of a single sale or single customer, isolated from the rest of the business. If one unit loses money, scaling just loses it faster.

Value-based Pricing

Setting price based on the value the customer gets, not on what it costs you to make. The most profitable way to price — and the hardest.

Variable Cost

A cost that rises and falls with how much you sell — materials, shipping, transaction fees. Sell nothing, pay nothing.

Working Capital

Current assets minus current liabilities — the short-term cash cushion that keeps day-to-day operations running. Tied up in receivables and inventory.