Small Business Finance Glossary
This glossary defines, in plain language, the terms that come up when you read the books of a small business, from accounts payable to working capital. Each entry links to the guide that explains it in more depth.
By Matthew Dettman, ChFC, CLU, founder of Second Difference Solutions. Updated .
How to use this glossary
The terms are in alphabetical order. Jump to a letter below, or link straight to a term: each one has its own anchor on this page.
The financial ratio entries are short pointers. Each of the 23 ratios 2diff Business by 2diff.io calculates has its formula in words, what it measures and a worked example on a fictional sample company on the financial ratios page.
If you are an accountant or bookkeeper sharing these terms with a client, see 2diff Business for accountants. The definitions are general explanations to help you read financial statements, not financial advice.
A
- Accounts payable (A/P)
- Money the business owes its suppliers for goods and services it has already received. It is a current liability on the balance sheet until the bill is paid. Balance sheet guide
- Accounts Payable Period
- Roughly how long, in days, supplier bills stay unpaid. Accounts Payable Period: formula and worked example
- Accounts receivable (A/R)
- Money customers owe the business for work it has already invoiced. It is a current asset on the balance sheet until the customer pays. Balance sheet guide
- Accrual basis
- A way of keeping the books that records revenue when it is earned and expenses when they are incurred, whether or not cash has changed hands yet. Profit and loss statement guide
- A/R Collection Period
- Days of sales still owed by customers at year end, also called days sales outstanding. A/R Collection Period: formula and worked example
- Assets
- What the business owns that has value, such as cash, receivables, inventory, equipment and vehicles. Assets are one of the three parts of the balance sheet, with liabilities and equity. Chart of accounts guide
B
- Balance sheet
- A statement of what the business owns, what it owes and what belongs to the owners, all on one date. Assets always equal liabilities plus equity. Balance sheet guide
C
- Cash basis
- A way of keeping the books that records revenue when the money arrives and expenses when the money goes out. Profit and loss statement guide
- Cash flow forecast (13-week cash forecast)
- A week-by-week plan of the cash a business expects to receive and pay, carried forward from the bank balance today. A 13-week forecast covers the next quarter and shows the week cash runs lowest. How to build a 13-week cash flow forecast
- Cash flow statement (statement of cash flows)
- A statement of how cash moved during a period, split into operating, investing and financing activities. It explains why the bank balance changed when profit alone does not. Cash flow statement guide
- Cash Operating Cycle
- How many days cash is out of the business between paying for the work and being paid for it. Cash Operating Cycle: formula and worked example
- Chart of accounts (COA)
- The list of every account the business posts transactions to, each given a type: asset, liability, equity, revenue or expense. Every report the books produce is built from it. Chart of accounts guide
- Cost of goods sold (COGS, cost of sales)
- The direct cost of the products sold or the jobs delivered, such as materials and the labor that went into the work. Revenue minus cost of goods sold is gross profit. Profit and loss statement guide
- Current assets
- Cash, plus the assets the business expects to turn into cash or use up within a year, such as receivables, inventory and prepaid expenses. Balance sheet guide
- Current liabilities
- Debts due within a year, such as supplier bills, credit card balances, payroll owed and the part of a loan that falls due this year. Balance sheet guide
- Current Ratio
- Whether short-term assets cover the debts due within a year. Current Ratio: formula and worked example
D
- Depreciation
- The part of a long-lived asset's cost charged as an expense in each period of its useful life. It lowers profit but spends no cash in that period, so the cash flow statement adds it back. Cash flow statement guide
- Dupont ROE (return on equity)
- Return on equity split into profit margin, asset turnover and leverage. Dupont ROE: formula and worked example
E
- Earnings multiple
- The number a year of earnings, such as EBITDA or SDE, is multiplied by to estimate what a business might be worth. The multiple is always an assumption, and the result is an estimate for planning, not an appraisal. Business valuation guide
- EBITDA (earnings before interest, taxes, depreciation and amortization)
- Net income with interest, income taxes, depreciation and amortization added back. It gives a view of operating earnings that does not depend on how the business is financed or taxed. EBITDA in the valuation guide
- Ending cash
- In a cash flow forecast, the cash expected at the close of a week: starting cash plus receipts minus payments. It becomes the next week's starting cash. How to build a 13-week cash flow forecast
- Equity (owner's equity)
- What is left for the owners when liabilities are taken away from assets: the money the owners put in and the profits kept in the business, less what the owners took out. Balance sheet guide
F
- Financial goal
- A target set on one figure from the statements, such as revenue, net income or the current ratio, so progress toward it can be tracked over time. 2diff Business by 2diff.io lets you set a goal on any of 36 metrics. Goal metrics for a landscaping company
- Financial Leverage
- How much of what the business owns is financed by liabilities rather than by the owners. Financial Leverage: formula and worked example
- Financing activities
- The part of the cash flow statement that shows cash coming in from loans and owner investment, and going out on loan repayments and owner draws. Cash flow statement guide
- Fixed Asset Turnover
- Revenue compared with vehicles, equipment and other fixed assets. Fixed Asset Turnover: formula and worked example
- Fixed assets
- Long-lived assets the business uses to do its work rather than to sell, such as vehicles, equipment and buildings. The balance sheet shows them less the depreciation charged so far. Balance sheet guide
- Free cash flow
- Cash from operating activities minus what the business spent on fixed assets in the period. It is the cash left to repay debt, pay the owners or keep in reserve. Cash flow statement guide
G
- Gross Margin
- Gross profit as a share of revenue. Gross Margin: formula and worked example
- Gross profit
- Revenue minus cost of goods sold: what is left from sales to cover the running costs of the business. Profit and loss statement guide
I
- Interest Debt to Equity
- Loans, credit cards and credit lines compared with equity. Interest Debt to Equity: formula and worked example
- Inventory
- Goods the business holds to sell or to use on jobs. They sit on the balance sheet as a current asset until they are sold or used, when their cost moves to cost of goods sold. Balance sheet guide
- Inventory Days on Hand
- How long, in days, stock sits before it is sold or used. Inventory Days on Hand: formula and worked example
- Investing activities
- The part of the cash flow statement that shows cash spent on long-lived assets such as vehicles and equipment, and cash received from selling them. Cash flow statement guide
L
- Liabilities
- What the business owes to others: supplier bills, credit cards, payroll and taxes owed, and loans. Chart of accounts guide
- Long-term liabilities
- Debts that are not due within the next year, such as most of a vehicle loan or an equipment note. Balance sheet guide
N
- Net income (net profit, the bottom line)
- Revenue minus all of the expenses for the period. It is the last line of the profit and loss statement, and a negative figure is a net loss. Profit and loss statement guide
- Net Profit Margin
- Net income as a share of revenue. Net Profit Margin: formula and worked example
O
- Operating activities
- The part of the cash flow statement that shows cash from running the business day to day: what customers paid, less what went to suppliers, staff and running costs. Cash flow statement guide
- Operating Cycle
- The receivable days plus the inventory days. Operating Cycle: formula and worked example
- Operating expenses (overhead)
- The running costs of the business that are not part of cost of goods sold, such as rent, office pay, insurance, fuel and marketing. Profit and loss statement guide
- Operating income (operating profit)
- Gross profit minus operating expenses: what the business earns from its main work before interest and other items outside its operations. Profit and loss statement guide
- Operating Margin
- Operating income as a share of revenue. Operating Margin: formula and worked example
- Owner's draw
- Money the owner takes out of the business for personal use. It lowers equity and is not an expense on the profit and loss statement. Chart of accounts guide
P
- Payments
- In a cash flow forecast, the money expected to go out in a week, such as payroll, rent, supplier bills, loan payments and taxes, each placed in the week it is due. How to build a 13-week cash flow forecast
- Profit and loss statement (P&L, income statement)
- A statement of revenue, costs and profit over a period such as a month, a quarter or a year. It ends at net income. Profit and loss statement guide
Q
- Quick Ratio
- The current ratio with inventory left out. Quick Ratio: formula and worked example
R
- Receipts
- In a cash flow forecast, the money expected to come in during a week, such as customer payments on invoices and deposits, placed in the week the cash should arrive. How to build a 13-week cash flow forecast
- Retained earnings
- The running total of past profits kept in the business rather than paid out to the owners. It is part of equity on the balance sheet. Balance sheet guide
- Revenue (sales, income)
- What the business earns from selling its products or services in a period, before any costs are taken out. It is the top line of the profit and loss statement. Profit and loss statement guide
- Revenue Growth
- How much revenue rose or fell compared with the prior period. Revenue Growth: formula and worked example
- ROA (return on assets)
- Net income compared with total assets. ROA: formula and worked example
- ROE (return on equity)
- Net income compared with the owners' equity. ROE: formula and worked example
S
- SDE (seller's discretionary earnings)
- A measure of the earnings available to one full-time owner-operator: EBITDA plus that owner's pay and benefits, plus personal or one-time costs the business paid. It suits a business the owner runs day to day. SDE in the valuation guide
- Seasonality
- A pattern in which revenue or costs rise and fall in the same months each year. One way to read it is to set each month beside the same month in other years and compare the highest whole month with the lowest. Reading seasonality in a landscaping business
- Starting cash
- The cash a forecast begins from: the bank balance on the day the forecast is built, and after that each week's ending cash. How to build a 13-week cash flow forecast
T
- Times Interest Earned
- How many times operating income covers interest expense. Times Interest Earned: formula and worked example
- Total Asset Turnover
- Revenue compared with total assets. Total Asset Turnover: formula and worked example
W
- Working capital
- Current assets minus current liabilities: the short-term cushion the business runs on from week to week. Balance sheet guide
Related
- Financial Ratios ExplainedWhat each ratio measures, which statement it reads, and a worked example.
- 13-Week Cash Flow ForecastHow a weekly cash forecast is built, with a worked example and a sample file.
- Business Valuation: SDE and EBITDAHow earnings multiples give a planning estimate of value. Not an appraisal.
This content is for educational purposes only and does not constitute financial, tax, accounting, or legal advice. Consult with a qualified professional for advice specific to your situation. AI-generated insights may contain errors; verify information before taking action.