Business terms glossary

Records revenue when it is earned and expenses when they are incurred, whether or not cash has changed hands yet. Financial statements prepared under US GAAP use it.

Records revenue when cash comes in and expenses when cash goes out. It is simpler and common for very small businesses, but it can hide money that is owed or owing.

Generally Accepted Accounting Principles: the accounting rules US companies follow in their financial statements, set by the Financial Accounting Standards Board (FASB). Public companies must use them in their filings with the SEC.

International Financial Reporting Standards, issued by the International Accounting Standards Board (IASB) and used by companies in most countries outside the United States.

A snapshot, on one date, of what a company owns (assets), what it owes (liabilities) and what belongs to its owners (equity). Assets always equal liabilities plus equity.

Revenue minus expenses over a period, such as a quarter or a year, ending in net income. Also called the profit and loss statement, or P&L.

Shows the cash that came in and went out over a period, in three parts: operating, investing and financing activities. It explains why cash changed even when profit did not.

Money customers owe a company for goods or services it has already delivered. It is an asset on the balance sheet.

Money a company owes its suppliers for goods or services it has already received. It is a liability on the balance sheet.

Spreading the cost of a long-lived physical asset, such as equipment or a building, over the years it is used. It is an expense that lowers profit without using any cash in the year it is recorded.

The same idea as depreciation, for intangible assets such as patents or software licenses. The word also describes paying off a loan in scheduled installments.

Every transaction is recorded in at least two accounts, as a debit in one and a credit in another, so the books always balance.

The two sides of every bookkeeping entry. Debits increase assets and expenses; credits increase liabilities, equity and revenue.

The record of one transaction: its date, the accounts it affects, and the debit and credit amounts.

A list of every account balance at one point in time, used to check that total debits equal total credits before financial statements are prepared.

Comparing two records of the same thing, such as a company’s books and its bank statement, and explaining any difference between them.

An independent examination of a company’s financial statements by a CPA firm, ending in an opinion on whether they are fairly presented. US public companies must have one every year.

The policies and checks a company uses to keep its records accurate and its assets safe, such as requiring two approvals for a large payment.

The rules for when revenue counts as earned. Under the current US standard, ASC 606, revenue is recognized as a company delivers what it promised its customer.

The direct cost of making or buying the products a company sold in a period, such as materials and production labor.

Revenue minus cost of goods sold, often shown as a percentage of revenue. It shows how much of each sale is left to pay for everything else.

Gross profit minus operating expenses such as salaries, rent and marketing. It is often close to EBIT.

The bottom line: revenue minus all expenses, interest and taxes for the period.

Current assets minus current liabilities. Positive working capital means a company can cover the bills due within the next year.

Goods a company holds to sell, plus materials and products still being made. It is counted as a current asset.

Two ways to value the inventory a company sold. First in, first out assumes the oldest units sold first; last in, first out assumes the newest did. US GAAP allows LIFO; IFRS does not.

A 2002 US law that tightened financial reporting for public companies, including requiring executives to certify their financial statements and requiring assessments of internal controls.

Earnings before interest, taxes, depreciation and amortization: a rough measure of a company’s operating profit before non-cash charges, widely used to compare companies and in valuation multiples. It is not defined by GAAP.

Earnings before interest and taxes; roughly a company’s operating income.

The cash a company generates from its operations after paying for capital expenditures. It is the cash flow most often used in a DCF.

Money spent on long-lived assets such as buildings, equipment or software. It appears in the investing section of the cash flow statement.

A valuation method that forecasts a company’s future free cash flows and discounts them back to today at a rate that reflects their risk, usually the WACC. The total is an estimate of what the business is worth.

The value today of a project’s future cash flows, minus what it costs. A positive NPV means the project earns more than the return required of it.

The discount rate at which a project’s NPV is zero: in effect, the yearly return the project is expected to earn.

The blended return a company’s lenders and shareholders expect, weighted by how much of each kind of funding it uses. It is the usual discount rate in a DCF.

A dollar today is worth more than a dollar later, because today’s dollar can be invested to earn a return. It is the idea behind discounting.

The rate used to turn money expected in the future into its value today. A riskier cash flow calls for a higher rate.

In a DCF, the value of all the cash flows after the forecast years, usually estimated with a long-term growth rate or an exit multiple. It is often most of the total value.

The value of a whole business to all its investors: equity value plus debt, minus cash, with adjustments for items such as preferred stock. It is used in multiples like EV/EBITDA.

What the shareholders’ stake in a company is worth. For a public company it is the share price times the number of shares outstanding.

A public company’s share price multiplied by its shares outstanding: the stock market’s value of its equity.

Valuing a company by the multiples, such as EV/EBITDA or P/E, at which similar public companies trade. Often called comps.

Valuing a company by the prices paid in past acquisitions of similar companies.

Buying a company with mostly borrowed money, which is repaid from the company’s own cash flows. It is the usual model in private equity.

Companies combining with or buying one another. Investment bankers advise companies on these deals.

A company selling its shares to the public for the first time and listing them on a stock exchange.

A share’s price divided by the company’s earnings per share: how much investors pay for each dollar of profit.

Net income available to common shareholders divided by the number of common shares outstanding.

A share of a company’s profits paid to its shareholders, usually in cash, when the board of directors decides to.

Using borrowed money to fund a business or an investment. It magnifies both gains and losses.

A company’s total debt divided by its shareholders’ equity: a measure of how much it relies on borrowing.

Net income divided by shareholders’ equity: how much profit a company earns on its owners’ money.

The gain from an investment divided by its cost, shown as a percentage.

How easily an asset can be turned into cash without losing value, or how easily a company can pay the bills due soon.

Current assets divided by current liabilities. Above 1 means a company’s short-term assets cover its short-term bills.

The mix of debt and equity a company uses to fund itself.

A spreadsheet model that links a company’s income statement, balance sheet and cash flow statement, so a change in one assumption flows through all three. It is a core skill in finance interviews.

A presentation investment bankers prepare for a client or a prospective client, with market analysis, valuation and ideas for a deal.

The investigation a buyer or investor makes before a deal, checking a company’s finances, contracts, legal position and operations.

A share of ownership in a company.

A loan to a company or a government that pays interest, usually at a fixed rate, and repays the amount borrowed when it matures.

The income an investment produces, as a percentage of its price. A bond’s yield moves in the opposite direction to its price.

One hundredth of a percentage point (0.01%). A rate that rises from 4.00% to 4.25% has risen 25 basis points.

A fund that holds a basket of investments, such as the stocks in an index, and whose shares trade on an exchange like a stock.

A fund that pools investors’ money into a portfolio run by a manager. Its shares are bought and sold at the fund’s value at the end of each trading day.

A fund that follows a market index, such as the S&P 500, instead of picking individual investments.

Spreading money across many investments, so that one doing badly does less damage to the whole.

Investing money on behalf of clients, such as pension funds, endowments or individuals, for a fee.

Firms that buy companies, or stakes in them, that do not trade on a stock exchange, aim to improve them, and sell them later, often several years on.

Investment in young, fast-growing companies in exchange for a share of ownership, accepting that many will fail in the hope that a few grow very large.

A pooled investment fund for wealthy and institutional investors that can use a wide range of strategies, including borrowing and short selling.

Selling a borrowed security in the hope of buying it back later at a lower price. It makes money when the price falls and loses money when it rises.

A contract whose value depends on something else, such as a stock, a commodity or an interest rate. Options, futures and swaps are derivatives.

The right, but not the obligation, to buy (a call) or sell (a put) an asset at a set price on or before a set date.

An agreement to buy or sell something at a set price on a future date, traded on an exchange.

A bull market is a long rise in prices. A bear market is a fall, commonly defined as a drop of 20% or more from a recent high.

The part of an investment bank that buys and sells securities for clients and makes markets in them.

Someone legally required to act in another person’s best interest, such as a trustee or a registered investment adviser.

A firm that buys and sells securities for its customers (as a broker) and for itself (as a dealer). In the US it must register with the SEC and join FINRA.

The Financial Industry Regulatory Authority, which oversees US broker-dealers and runs the securities industry’s qualification exams, including the SIE and the Series 7.

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The US Securities and Exchange Commission: the federal agency that regulates securities markets and what public companies must disclose.

The total value of the goods and services produced in a country over a period: the usual measure of the size and growth of an economy.

A general rise in prices over time, so that each dollar buys less. In the US it is often measured by the Consumer Price Index.

A measure of the average change in the prices urban consumers pay for a basket of goods and services, published monthly by the US Bureau of Labor Statistics.

A significant, widespread decline in economic activity lasting more than a few months. In the US, the National Bureau of Economic Research dates when they begin and end.

The interest rate banks charge each other for overnight loans. The Federal Reserve sets a target range for it to steer the economy.

What a central bank does with interest rates and the money supply to keep prices stable and employment high.

A government’s decisions on taxes and spending, used to influence the economy.

The basic model of prices: a price settles where the quantity buyers want equals the quantity sellers offer.

How much the quantity people buy changes when the price changes. Demand is elastic when a small price change causes a large change in quantity.

The value of the best alternative you give up when you choose something.

Being able to produce something at a lower opportunity cost than someone else. It is the main reason trade can benefit both sides.

A tax on imported goods.

The price of one currency in terms of another.

Product, price, place and promotion: the main decisions in a marketing plan, together called the marketing mix.

The specific group of customers a product is meant for.

Dividing a market into groups with similar needs or traits, such as age, location or buying behavior, so each group can be reached in its own way.

How a brand wants customers to see it compared with its competitors.

A list of an organization’s strengths and weaknesses (inside it) and its opportunities and threats (outside it).

A number a team tracks to see whether it is meeting a goal, such as monthly sales, customer churn or website sign-ups.

What it costs on average to win one new customer: sales and marketing spending divided by the number of new customers.

The total profit a business expects to earn from one customer over the whole relationship. Also called LTV.

The share of people who take a desired action, such as buying or signing up, out of everyone who had the chance.

The number of clicks on an ad or a link divided by the number of times it was shown.

Improving a website so it ranks higher in search engines’ unpaid results.

Paying for ads in search engine results, such as Google Ads.

The revenue earned from advertising divided by what the ads cost.

The stages a customer passes through, from first hearing about a product to buying it. Fewer people remain at each stage.

The value a well-known brand adds to a product beyond what the product itself does.

Business-to-business companies sell to other companies; business-to-consumer companies sell to individuals.

Software, such as Salesforce or HubSpot, that keeps track of a company’s customers, contacts and sales opportunities.

A company’s sales as a percentage of all the sales in its market.

Every step that gets a product from raw materials to the customer: suppliers, manufacturing, warehousing, transport and delivery.

Moving and storing goods efficiently, including transport, warehousing and inventory.

Buying the goods and services a business needs, from finding suppliers to negotiating with them and paying them.

Making or ordering goods only as they are needed, to keep inventory low.

A way of running operations that cuts waste — anything that does not add value for the customer. It grew out of Toyota’s production system.

A data-driven method for reducing defects and variation in a process. Practitioners earn belts, from Yellow to Black.

How many times a company sells and replaces its inventory in a period: cost of goods sold divided by average inventory.

The time between placing an order and receiving it.

The list of parts and quantities needed to make one product.

A company hired to handle another company’s warehousing, shipping or both.

Software, such as SAP or Oracle, that runs a company’s core processes — from accounting to inventory — in one system.

Standard trade terms, published by the International Chamber of Commerce, that say who pays for shipping and insurance and where the risk passes from seller to buyer.

The reason a customer should buy from you instead of a competitor: the problem you solve and the benefit you deliver.

Something that lets a company outperform its rivals, such as lower costs, a stronger brand or a patent.

A framework for judging how attractive an industry is, from five pressures: rivalry among competitors, the threat of new entrants, the threat of substitutes, and the bargaining power of buyers and of suppliers.

Anyone affected by a company’s decisions, including its employees, customers, suppliers, investors and community.

A goal-setting method: an ambitious objective, plus a few measurable results that show progress toward it.

The work a project will and will not deliver. Scope creep is when that work grows without more time or budget to match.

A way of managing projects in short cycles, often called sprints, that delivers working pieces often and adjusts to feedback. Scrum is the most widely used agile framework.

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A bar chart of a project schedule, showing when each task starts and ends and which tasks depend on others.

Comparing your processes or results against competitors or the leaders in an industry.

An interview, common in consulting, in which the candidate works through a business problem out loud, such as sizing a market or explaining why profits fell.

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Estimating how big a market is by building up from reasonable assumptions, such as population, the share who buy and how often they buy. A common case-interview question.

Finding, recruiting and hiring employees.

Bringing a new hire into a company: paperwork, training and introductions to the team.

Everything an employee receives for their work: salary or wages, plus benefits such as health insurance and retirement plans.

The US federal law that sets the minimum wage, overtime pay and child labor rules. The US Department of Labor’s test for when an internship at a for-profit company can be unpaid comes from it.

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Under the FLSA, non-exempt employees must be paid overtime for hours over 40 in a workweek. Exempt employees, mostly salaried professionals and managers who meet set tests, are not.

The principle, enforced by laws such as Title VII of the Civil Rights Act, that employment decisions may not be based on race, color, religion, sex, national origin, age, disability or genetic information.

A regular evaluation of an employee’s work against their goals, usually with feedback and sometimes a decision about pay.

Using data about employees — hiring, performance, turnover — to make better HR decisions.

The rate at which employees leave an organization and have to be replaced.

A screen of charts and numbers that shows key measures at a glance, often built in Tableau or Power BI.

A spreadsheet tool, in Excel or Google Sheets, that summarizes a large table by grouping and totaling its rows.

Excel functions that find a value in a table and return a matching value from another column. XLOOKUP is the newer, more flexible one.

Structured Query Language, used to ask questions of a database: selecting, filtering, joining and summarizing data.

A statistical method that estimates how one variable changes with others, such as how sales change with price and advertising.

How closely two variables move together, on a scale from -1 to 1. Correlation alone does not show that one causes the other.

Comparing two versions of something, such as a web page or an email, by showing each to a random group of people and measuring which performs better.

Showing data as charts and graphs so its patterns are easy to see.

Extract, transform, load: copying data from its sources, cleaning and reshaping it, and loading it into a database or data warehouse for analysis.

A property’s yearly net operating income divided by its value or price: a quick measure of return in commercial real estate.

A property’s rental and other income minus its operating expenses, before loan payments and income taxes.

A company that owns or finances income-producing real estate and, to keep its special tax status, must pay out at least 90% of its taxable income to shareholders as dividends.

A professional estimate of a property’s market value, usually required by a lender before a mortgage.

Deciding whether to take on a risk and at what price, such as an insurer pricing a policy or a bank arranging a sale of securities.

The amount paid for an insurance policy.

The amount a policyholder pays toward a claim before the insurance starts paying.

A professional who uses math and statistics to measure risk, mostly for insurers and pension plans. In the US, actuaries qualify through exams from the Society of Actuaries or the Casualty Actuarial Society.

A company-wide approach to finding, measuring and managing all of its risks together.

Insurance that insurance companies buy to protect themselves against very large losses.

The final round of interviews at many banks and consulting firms: several interviews back to back on one day.

An offer of a full-time job, or another internship, made to an intern at the end of their internship.

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A short conversation with someone in a job or company you are curious about, to learn about their work. It is not a job interview.

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A way to answer behavioral interview questions in four parts: the Situation, your Task, the Action you took and the Result.

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Questions about how you handled real situations in the past, such as “Tell me about a time you worked on a team.”

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A work program, run with a college, in which students alternate terms of study with terms of paid, full-time work, often for academic credit.

A short, usually unpaid look at a workplace — often a few days to a few weeks of shadowing — to learn what a job involves before committing to it.

A short program, often a day to a week, run by banks and other large employers for freshmen and sophomores to learn about the industry. Some lead to internship offers.

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An early-career program in which new hires spend several months in each of a few teams before taking a permanent role.

Software employers use to post jobs and manage applications, such as Greenhouse, Lever, Workday or iCIMS.

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