Dictionary

Financial Literacy Dictionary.

The financial vocabulary buyers, lenders, brokers, and CPAs use during a transaction — defined in plain English.

42 terms in this dictionary

Disclaimer

Provided for educational purposes only. Definitions are simplified and should not be interpreted as accounting, tax, investment, legal, or financial advice. If a financial term is specifically defined in your transaction documents, that definition will control.

Accounts Payable (AP): Money the business owes to vendors, suppliers, contractors, or other creditors for goods and services it has already received.
Accounts Receivable (AR): Money customers owe the business for products or services that have been provided but not yet paid.
Accrual Accounting: An accounting method that records revenue when it is earned and expenses when they are incurred, regardless of when money is received or paid. Most established businesses maintain their books using accrual accounting.
Amortization: The gradual reduction of the value of an intangible asset — or the scheduled repayment of certain loans — over time.
Balance Sheet: A snapshot of what a business owns (assets), owes (liabilities), and the owner's equity at a specific point in time.
Book Value: The accounting value of an asset or a company's net assets after liabilities have been deducted. Book value does not necessarily equal market value.
Break-Even Point: The point at which total revenue equals total expenses — the business neither earns a profit nor incurs a loss.
Burn Rate: The rate at which a business spends cash. Commonly used when evaluating startups or rapidly growing companies.
Capital Expenditures (CapEx): Money spent to purchase, improve, or replace long-term assets such as equipment, machinery, vehicles, or buildings.
Cash Flow: The movement of money into and out of a business. A profitable company can still experience cash flow problems if cash is not collected or managed effectively.
Cash Flow Statement: A financial statement showing how cash moved through the business during a specific period across operating, investing, and financing activities.
Cost of Goods Sold (COGS): The direct costs associated with producing or purchasing the products sold by the business.
Current Assets: Assets expected to be converted into cash or used within one year — cash, accounts receivable, inventory.
Current Liabilities: Obligations expected to be paid within one year — accounts payable, short-term loans, accrued expenses.
Current Ratio: A measure of short-term financial health comparing current assets to current liabilities.
Debt Service: The total amount required to make principal and interest payments on outstanding debt.
Debt Service Coverage Ratio (DSCR): A financial ratio frequently used by lenders to evaluate whether a business generates sufficient income to service its debt obligations.
Depreciation: The accounting process of allocating the cost of a tangible asset over its useful life.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization — one of the most commonly used measures of a company's operating performance.
Enterprise Value: The total value of a business, including debt and excluding excess cash. Often used when comparing acquisition opportunities.
Equity: The owner's ownership interest in the business after liabilities have been deducted.
Equity Value: The value of the owners' interest after accounting for debt and other obligations.
Fair Market Value: The price at which a willing buyer and willing seller would transact when neither is under pressure and both possess reasonable knowledge of the facts.
Fixed Costs: Expenses that generally remain constant regardless of sales volume — rent, insurance, salaries.
Goodwill: The intangible value of a business beyond its physical assets — brand recognition, customer loyalty, reputation, workforce, expected future earnings.
Gross Margin: The percentage of revenue remaining after subtracting the direct cost of producing goods or services.
Gross Revenue: The total revenue generated before any expenses or deductions.
Interest Expense: The cost of borrowing money.
Inventory: Products or materials held by the business for sale or use in operations.
Liquidity: A measure of how easily a business can meet its short-term financial obligations.
Leverage: The use of borrowed money to finance business operations or acquisitions.
Net Income: Often referred to as the 'bottom line' — what remains after all operating expenses, taxes, interest, and other costs are deducted from revenue.
Net Working Capital: Current assets minus current liabilities. In many acquisitions the Purchase Agreement contains its own negotiated definition of working capital.
Operating Expenses: The ordinary costs of running the business — payroll, rent, marketing, insurance, utilities, administrative expenses.
Operating Margin: A measure of profitability showing how much operating profit the business generates from its revenue.
Profit and Loss Statement (P&L): Also known as an Income Statement. Summarizes revenue, expenses, and profit over a specified period.
Return on Investment (ROI): A measure of how much profit an investment generates relative to its cost.
Revenue: Money generated from the sale of products or services before expenses are deducted.
Seller's Discretionary Earnings (SDE): A financial metric commonly used when valuing smaller owner-operated businesses — typically adds back owner compensation, discretionary expenses, interest, taxes, depreciation, and amortization.
Variable Costs: Expenses that generally increase or decrease with sales volume — raw materials, shipping, sales commissions.
Valuation: The process of estimating what a business is worth. May consider earnings, assets, industry multiples, growth potential, market conditions, and risk.
Working Capital: Generally the resources available to operate the business on a day-to-day basis. In business acquisitions, the Purchase Agreement frequently includes a negotiated definition that may exclude certain assets or liabilities — often driving post-closing purchase price adjustments.

Financial Literacy Dictionary.

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