Financial Glossary
Key terms and metrics used throughout the Business Fluency Program. Definitions focus on practical application for building toward $1M ARR.
Metrics & KPIs
ARR (Annual Recurring Revenue)
The yearly value of recurring subscription revenue. Calculated as MRR × 12.
Example: $50K MRR = $600K ARR
MRR (Monthly Recurring Revenue)
Predictable revenue that recurs every month from subscriptions or retainers.
Why it matters: MRR is more stable than one-time revenue and easier to forecast.
CAC (Customer Acquisition Cost)
Total cost to acquire one customer. Includes marketing spend, sales salaries, tools, and advertising.
Formula: Total Sales & Marketing Costs ÷ Number of Customers Acquired
LTV (Lifetime Value)
Total profit expected from a customer over their entire relationship with your business.
Formula: Average Monthly Revenue per Customer × Gross Margin % × Average Lifetime (months)
Rule of thumb: LTV should be at least 3x CAC for a healthy business.
ARPC (Average Revenue Per Customer)
Total revenue divided by number of customers over a specific period (monthly or annually).
Formula: Total Revenue in Period ÷ Number of Customers
Usage: Track this monthly to see if you're moving upmarket or getting better at upsells.
GMV (Gross Merchandise Value)
Total sales volume that flows through a marketplace platform over a period. The platform typically takes a percentage (take rate) as revenue.
Example: $1M GMV with 15% take rate = $150K platform revenue
Financial Statements
COGS (Cost of Goods Sold)
Direct costs tied to delivering your product or service. Goes up proportionally with sales.
Examples: Server costs for SaaS, materials for physical products, contractor fees for services.
Gross Profit
Revenue minus COGS. Shows how much money is left after paying for direct costs.
Formula: Revenue - COGS = Gross Profit
Gross Margin
Gross profit expressed as a percentage of revenue. Indicates pricing power and scalability potential.
Formula: (Gross Profit ÷ Revenue) × 100
Benchmark: SaaS typically 80%+, services 50-70%, products 40-60%
EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization)
Operating profit before accounting for financing costs and non-cash charges. Shows core business performance.
Why it matters: Investors use this to compare profitability across companies with different capital structures.
Operating Expenses (OpEx)
Costs required to run the business that aren't directly tied to production. Includes salaries, rent, software, marketing.
Key insight: OpEx should grow slower than revenue for a healthy scaling business.
Unit Economics
Contribution Margin
Revenue minus variable costs per unit. Shows profitability per customer before fixed costs.
Formula: (Revenue per Customer - Variable Costs per Customer) ÷ Revenue per Customer
Usage: Must be positive to have viable unit economics.
Payback Period
Time (in months) it takes to recover the cost of acquiring a customer through their gross profit.
Formula: CAC ÷ (Monthly Revenue per Customer × Gross Margin %)
Target: Under 12 months for most businesses, under 6 months for capital-efficient models.
Breakeven Point
The revenue level where total costs equal total revenue (profit = $0).
Formula: Fixed Costs ÷ Contribution Margin Percentage
Why it matters: Tells you how much revenue you need to stop losing money.
Churn Rate
Percentage of customers who cancel or stop paying each month.
Formula: (Customers Lost This Month ÷ Total Customers at Start of Month) × 100
Benchmark: Under 5% monthly for B2B SaaS, under 10% for consumer subscriptions.
Working Capital
DSO (Days Sales Outstanding)
Average number of days it takes to collect payment after a sale.
Formula: (Accounts Receivable ÷ Total Revenue) × Days in Period
Example: $50K AR ÷ $500K annual revenue × 365 = 36.5 days
Target: Lower is better. Under 30 days is excellent.
DIO (Days Inventory Outstanding)
Average number of days inventory sits before being sold.
Formula: (Average Inventory ÷ COGS) × Days in Period
Target: Varies by industry. Lower means less cash tied up.
DPO (Days Payable Outstanding)
Average number of days you take to pay suppliers after receiving an invoice.
Formula: (Average Accounts Payable ÷ COGS) × Days in Period
Strategy: Higher DPO improves cash position (but don't damage supplier relationships).
CCC (Cash Conversion Cycle)
Number of days between paying suppliers and collecting from customers. Lower is better.
Formula: DSO + DIO - DPO
Target: Negative CCC means customers pay you before you pay suppliers (ideal).
Working Capital
Current assets minus current liabilities. Represents cash available for day-to-day operations.
Formula: Current Assets - Current Liabilities
Components: (Cash + Receivables + Inventory) - (Payables + Short-term Debt + Accrued Expenses)
Why it matters: Growing businesses often need more working capital, creating a cash drain even when profitable.
Business Models & Concepts
Volume Leverage
Scaling by spreading fixed costs across a growing customer base. Revenue grows faster than costs.
Example: SaaS with 4 engineers serving 10 customers vs 1,000 customers (same team, 100x revenue).
Process Leverage
Scaling through systematization and automation. Each person handles more work without proportional quality loss.
Example: Consultant builds playbooks and templates, junior staff execute, senior reviews. 1 senior + 3 juniors = 5x output.
Platform Leverage
Users create value for each other. Network effects drive growth without proportional resource increases.
Example: Marketplaces where buyers attract sellers and sellers attract buyers (Airbnb, Upwork).
Take Rate
Percentage fee a platform charges on transactions. Platform revenue = GMV × Take Rate.
Typical ranges: 10-20% for marketplaces, 2-3% for payment processors, 20-30% for app stores.
Operating Leverage
Degree to which revenue growth translates to profit growth. High operating leverage means small revenue increases create large profit increases.
Key driver: High fixed costs + low variable costs = high operating leverage.