Business Finance Terms, Finally Explained in Plain English

You are halfway through a meeting when someone says, “Sure, the P&L looks fine, but what’s our net burn doing to runway?” Everyone nods. You nod too. And quietly, you have no idea what just happened.

Here is the secret: business finance has maybe sixty words that do ninety percent of the work. Once you know what they mean, the fog lifts. The nodding becomes real.

This is your plain-English map of those words. Skim it once to see the whole landscape, then come back any time a term trips you up.

Why this matters

Money language is gatekeeping by accident. The ideas underneath are usually simple, but they get wrapped in acronyms that make smart people feel lost in their own business.

When you actually understand these terms, three things change:

• You make better decisions. You can tell whether a price, a hire, or a marketing spend is healthy instead of guessing.
• You sound credible. Investors, banks, and partners take you more seriously when you speak their language fluently.
• You stop getting surprised. Most cash crises are not bad luck. They are terms someone did not understand until it was too late.

You do not need an accounting degree. You need these definitions and a real example for each.

The money you have versus the money you’ve earned

Start here, because this is where most confusion lives. Profit is an opinion; cash is a fact.

• Revenue (Top Line) is the total money you charge customers before any costs. It is the first line of your income statement.
• Cash is the actual money in your bank account right now. It is the only thing that pays salaries and rent.
• Cash Flow is the movement of money in and out over a period. Positive means more came in than went out.
• Accounts Receivable (Receivables) is money customers owe you but haven’t paid yet. It is earned revenue that isn’t cash yet.
• Accounts Payable (Payables) is money you owe others but haven’t paid yet, like supplier invoices sitting in your inbox.

Here is the trap in one sentence: Accrual Accounting records revenue when you earn it and costs when you incur them, not when cash actually moves. The opposite is cash accounting, which only counts money when it changes hands.

Why does that matter? Imagine you sell $50,000 of work in March but the client pays in June. On paper, March looks like a great, profitable month. Your bank account, meanwhile, is empty and payroll is due. That gap between earned and collected is exactly why a “profitable” business can go broke.

The three statements that tell your whole story

Every business, from a lemonade stand to a public company, is described by three reports.

Income Statement (P&L)

The Income Statement, or Profit & Loss, shows revenue, costs, and profit over a period. It answers one question: did we make money? The bottom line is Net Income (also called net profit or the bottom line), which is what’s left after every single cost, including operating expenses, interest, and taxes.

Balance Sheet

The Balance Sheet is a snapshot at a single moment of what you own, what you owe, and what’s left for owners.

• Assets are everything your business owns that has value: cash, inventory, equipment, money owed to you.
• Liabilities are everything you owe: loans, unpaid bills, taxes due.
• Equity is the owners’ stake, what’s left after subtracting liabilities from assets.

It always balances on this rule: Assets = Liabilities + Equity.

Cash Flow Statement

The Cash Flow Statement tracks where cash actually came from and went, split into operating, investing, and financing activities. If the P&L tells you whether you earned money, this one explains why your bank balance changed.

Costs, margins, and what each sale is really worth

This is the cluster of terms that decides whether your business is a money machine or a leaky bucket.

• COGS (Cost of Goods Sold) is the direct cost of producing what you sell: materials, payment fees, the server hosting a customer, the freelancer who did the work. These costs rise with every sale.
• Gross Profit is revenue minus COGS, the money left over to cover everything else.
• Gross Margin is that gross profit expressed as a percentage of revenue. It is the headline measure of how profitable each sale is. Software businesses often want 70% or more; retail runs far lower.
• Operating Expenses (OpEx) are the costs of running the business that aren’t tied to a single sale: salaries, marketing, rent, software.

Now the cost types underneath:

• Fixed Cost stays the same no matter how much you sell, like rent and salaries. You pay it even at zero sales.
• Variable Cost rises and falls with sales, like materials and shipping. Sell nothing, pay nothing.
• Contribution Margin is revenue from a sale minus its variable costs, the amount each unit “contributes” toward covering fixed costs and profit.

A quick example. You sell a $40 candle that costs $15 in wax and packaging. Your contribution margin is $25. If your fixed costs (rent, your salary) are $5,000 a month, you need to sell 200 candles just to cover them. That is your Break-even Point: the sales level where revenue exactly covers costs, with zero profit and zero loss. Below it you bleed; above it you earn.

This sets up Operating Leverage, one of the most powerful ideas in business: once fixed costs are covered, extra sales drop mostly to profit. High fixed costs plus high margins means explosive profit growth past break-even, and steep losses below it.

Margin versus markup (the mix-up that costs real money)

These two get confused constantly, and the confusion quietly destroys profit.

• Markup is how much you add on top of cost, as a percentage of the cost.
• Margin is profit as a percentage of the selling price.

Same item, two numbers: a $50 product sold for $100 is a 100% markup but a 50% margin. The dollars are identical; only the denominator differs. If you think you’re making “50% markup” when you mean margin, you are pricing far too low.

The accounting words that sound scarier than they are

• Depreciation spreads the cost of a physical asset (a machine, a laptop) across the years it’s useful, instead of expensing it all in year one.
• Amortization does the same for an intangible asset, like software or a patent. It is depreciation’s cousin.
• EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. In plain terms, it’s a rough proxy for the cash profit from your core operations, with financing and accounting effects stripped out.
• Working Capital is current assets minus current liabilities, the short-term cash cushion that keeps daily operations running. Much of it gets tied up in receivables and inventory.

Pricing: the levers most owners never pull

Pricing is the fastest way to change profit, and it’s mostly psychology and structure.

• Cost-Plus Pricing takes your cost and adds a markup. It’s simple, but it ignores what the customer would actually pay.
• Value-based Pricing sets price by the value the customer gets, not what it costs you to make. It’s the most profitable approach, and the hardest.
• Price Tiering offers good, better, and best versions so different customers self-select, capturing more total revenue than a single price.
• Price Anchoring shows a higher reference price first so your real price looks reasonable by comparison.
• The Decoy Effect adds a deliberately worse-value option to make another option look like a bargain.

You have felt all of these. The $12 popcorn that exists mainly to make the $10 popcorn feel sensible? That’s a decoy and an anchor working together.

The startup and subscription vocabulary

If you run a recurring-revenue business, this is the dialect investors expect you to speak.

Revenue you can count on

• MRR (Monthly Recurring Revenue) is the predictable subscription revenue you collect each month, the heartbeat of a subscription business.
• ARR (Annual Recurring Revenue) is the yearly value of that recurring revenue, usually MRR times 12.
• ARPU (Average Revenue Per User) is total revenue divided by number of customers, what an average customer is worth per period.
• Churn is the rate at which customers or revenue leave. Five percent monthly churn means losing 5% of customers every month. High churn quietly kills growth.

What a customer costs and returns

• CAC (Customer Acquisition Cost) is the total sales and marketing spend to win one new customer. Spend $10,000 to get 100 customers, and your CAC is $100.
• LTV (Lifetime Value) is the total profit you expect from one customer over their entire relationship with you.
• LTV:CAC Ratio divides the two and answers: for every $1 spent winning a customer, how many dollars come back? The classic healthy benchmark is 3:1.
• CAC Payback Period is how many months of a customer’s profit it takes to earn back what you spent acquiring them. Shorter is safer.

Survival and efficiency

• Burn Rate is how fast you’re spending cash, usually per month.
• Gross Burn is total monthly spend before counting any revenue. Net Burn is spend minus revenue, your true monthly cash loss, and the number that actually drains you.
• Runway is how many months until you run out of cash: cash in the bank divided by net monthly burn. Your survival countdown.
• Default Alive / Default Dead asks whether, at your current growth and burn, you’ll reach profitability before the cash runs out. “Alive” means yes; “dead” means not without raising more or changing course.
• Burn Multiple is net cash burned divided by net new ARR added. It answers “how much did we burn to grow $1 of revenue?” Lower is better; under 1 is excellent.
• Magic Number is new revenue per dollar of sales-and-marketing spend. Above roughly 0.75 suggests you can profitably spend more to grow.
• Rule of 40 is a health check: revenue growth rate plus profit margin should total at least 40%. It balances growing fast against making money.

Ownership and fundraising

• Equity here means the shares you give investors for cash.
• Cap Table (Capitalization Table) lists who owns what slice of the company, updated every funding round.
• Dilution is the shrinking of your ownership percentage when new shares are issued. You may own a smaller slice of a much bigger pie.
• Pre-money Valuation is what your company is agreed to be worth just before new investment; Post-money Valuation is pre-money plus the new money raised.
• Cost of Capital is the price of using someone else’s money, whether interest on a loan or ownership given up for equity. Money is never free.

Planning words: budget, forecast, model

• Budget is your plan for what you intend to spend and earn, a set of targets you hold yourself to.
• Forecast is your honest expectation of what will actually happen, updated as reality unfolds. The budget is the plan; the forecast is the truth.
• Financial Model is a spreadsheet linking your assumptions (price, customers, costs) to projected revenue, profit, and cash, so you can ask “what if?” before betting real money.
• Unit Economics is the profit and loss of a single sale or customer, isolated from everything else. If one unit loses money, scaling just loses it faster.

Common misconceptions

A few myths trip up nearly everyone:

• “We’re profitable, so we’re safe.” Profit is not cash. You can be profitable and still miss payroll if customers pay late.
• “Higher revenue means a healthier business.” Not if each sale loses money. Bad unit economics get worse, not better, at scale.
• “Margin and markup are the same.” They are not, and confusing them leads to underpricing.
• “Cutting price is the easy way to win customers.” Price is your most powerful profit lever. A small discount can erase your entire margin.
• “Raising money is a win.” Money has a cost, and every round dilutes you. Funding buys runway, not success.

How to use this glossary

You don’t have to memorize all sixty terms. Do this instead:

1. Read it once, start to finish. You’ll absorb more than you expect just from seeing how the terms connect.
2. Find the five that touch your business today. A subscription founder lives in MRR, churn, CAC, LTV, and runway. A retailer lives in COGS, margin, markup, and working capital.
3. Apply one term to your real numbers this week. Calculate your actual gross margin or break-even point. The term sticks the moment it describes your own money.
4. Bookmark this page. When a word trips you up in a meeting or a spreadsheet, come straight back.
5. Use the words out loud. Say “what’s our net burn?” in a real conversation. Fluency comes from use, not from study.

Conclusion

If you remember one thing, make it this: profit is an opinion, but cash is a fact. Almost every term here ladders back to that single truth, and the businesses that respect it are the ones that survive long enough to win.

The vocabulary is the easy part. The harder, more interesting question is what to do with it: which lever to pull when growth stalls, when to spend, when to hold. That’s where these words stop being definitions and start being decisions, and it’s where the real craft of running a business begins.