Glossary
Key financial modeling terms, definitions, and common gotchas.
34 terms
A
The annualized value of recurring subscription revenue. Calculated as MRR × 12. Excludes one-time fees, professional services, and usage-based overages unless contractually committed.
Common Gotcha
ARR ≠ GAAP revenue. Bookings, billings, and ARR are three different metrics. ARR is a forward-looking metric; GAAP revenue is backward-looking and recognized over time.
Accounts Receivable / (Revenue / 365). Days Sales Outstanding — how long it takes to collect payment after a sale. Lower is better.
Common Gotcha
AR Days increasing over time often signals collection problems, customer distress, or aggressive revenue recognition. Seasonal businesses will have natural AR fluctuations.
Accounts Payable / (COGS / 365). Days Payable Outstanding — how long you take to pay suppliers. Higher means more supplier-financed working capital.
Common Gotcha
Extending AP beyond terms damages supplier relationships and may trigger early payment discounts foregone. Some 'improvement' in AP days is actually vendor negotiation leverage, not efficiency.
C
Total sales and marketing cost divided by new customers acquired in a period. Should include all fully-loaded costs: salaries, commissions, tools, marketing spend.
Common Gotcha
Many companies understate CAC by excluding overhead, tools, or management salaries. Enterprise CAC should be measured over the full sales cycle, not just the closing quarter.
Months of gross profit needed to recover the cost of acquiring a customer. CAC / (Monthly Revenue per Customer × Gross Margin).
Common Gotcha
Payback calculated on revenue (not gross profit) understates the real recovery time. For SaaS, <12 months is excellent; 18-24 is acceptable; >24 signals inefficiency.
The rate at which customers or revenue is lost in a period. Logo churn counts customers; revenue churn weights by dollar value. Can be gross (before expansion) or net (after expansion).
Common Gotcha
Monthly vs. annual churn is not a simple ×12 conversion. 2% monthly churn ≈ 21.5% annual churn (compounding). Always clarify the basis: monthly/annual, logo/revenue, gross/net.
AR Days + Inventory Days - AP Days. The number of days between paying suppliers and collecting from customers. Lower is better — means less cash tied up in operations.
Common Gotcha
Negative CCC (like Amazon) means you collect before you pay suppliers — the business self-funds its growth. But stretching AP too far can damage supplier relationships.
Capital Expenditures / Revenue. How much of revenue must be reinvested in capital assets. Higher means more capital-intensive business.
Common Gotcha
Distinguish maintenance capex (keeping assets running) from growth capex (expanding capacity). Only maintenance capex is a true ongoing requirement; growth capex is discretionary.
The date a project transitions from construction to commercial operation. In project finance, COD triggers the conversion from construction debt to term debt and the start of debt service.
Common Gotcha
COD delays are the #1 risk in project finance. Every month of delay means more IDC (interest during construction), delayed revenue, and potential covenant breaches. Always stress-test COD timing.
Mechanism where excess cash flow after debt service and reserves is used to prepay debt. Common in project finance and LBOs. Reduces outstanding principal faster.
Common Gotcha
Cash sweeps accelerate debt paydown but reduce equity distributions. In LBOs, the sweep percentage is negotiated (often 50-75% of excess cash). Model the waterfall correctly: debt service → reserves → sweep → distributions.
D
Cash Available for Debt Service / (Interest + Principal Payments). The key metric in project finance. Shows ability to meet all debt obligations.
Common Gotcha
DSCR < 1.0x means the project cannot service its debt from operations. Lenders typically require 1.2-1.5x minimum, with lock-up provisions at higher levels. DSCR is calculated period-by-period, not just on average.
Cash collected for services not yet delivered. A liability on the balance sheet that converts to revenue as service is provided. Common in SaaS with annual prepaid contracts.
Common Gotcha
Deferred revenue is a leading indicator — declining deferred revenue may signal slowing sales even before revenue shows it. In SaaS, deferred revenue ≈ future recognized revenue.
E
Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for operating cash generation before capital structure and accounting policy effects.
Common Gotcha
EBITDA is not cash flow. It ignores working capital changes, capex, debt service, and taxes — all of which consume real cash. 'Adjusted EBITDA' often adds back SBC and one-time items, which can be misleading.
EBITDA / Revenue. Measures operating profitability before capital structure effects. Higher margins mean more operating leverage.
Common Gotcha
Comparing EBITDA margins across industries is misleading. A 15% margin in industrial services is excellent; in SaaS it's mediocre. Always compare within peer group.
Market Cap + Net Debt + Minority Interest + Preferred Equity. Represents the total value of the business to all capital providers, independent of capital structure.
Common Gotcha
EV is capital-structure neutral; equity value is not. When comparing companies, always use EV-based multiples (EV/EBITDA, EV/Revenue) to avoid distortions from different leverage levels.
Net Income / Weighted Average Diluted Shares Outstanding. The key metric for public equity investors. Basic EPS uses actual shares; diluted EPS includes options, warrants, and convertibles.
Common Gotcha
Diluted share count can be significantly higher than basic — check the option pool, convertible notes, and warrants. Also, 'adjusted EPS' often excludes real costs like SBC and restructuring charges.
F
Cash generated after all operating expenses and capital expenditures. FCF = Operating Cash Flow - Capex. The cash actually available to service debt, pay dividends, or reinvest.
Common Gotcha
FCF definitions vary. Some include all capex; others separate maintenance vs. growth capex. Interest treatment (before or after) also varies. Always define which FCF you mean.
G
Revenue retained from existing customers excluding any expansion. GRR = (Beginning Revenue - Churn - Contraction) / Beginning Revenue. Always ≤ 100%.
Common Gotcha
GRR is the 'floor' of retention — it shows your baseline without the benefit of upsells. Enterprise SaaS should be >90%; SMB SaaS may be 70-85%.
Gross Profit / Revenue. Measures the profitability of delivering the product/service before operating expenses. What's included in COGS varies significantly by industry.
Common Gotcha
COGS composition differs radically: SaaS (hosting, support), Retail (product cost, freight), Industrial (direct labor, materials), Infrastructure (O&M). Always understand what's above vs. below the gross profit line.
I
Inventory / (COGS / 365). Days Inventory Outstanding — how long inventory sits before being sold. Lower usually means better inventory management.
Common Gotcha
Very low inventory days can mean stock-outs and lost sales. Seasonal businesses may have legitimately high pre-season inventory. Always look at inventory aging, not just days.
EBITDA / Interest Expense. How many times over the company can pay its interest from operating earnings. Higher is safer.
Common Gotcha
Interest coverage doesn't account for principal repayments. A company with 5x interest coverage can still struggle if large amortization payments are due. Use DSCR for full picture.
Interest that accrues on debt drawn during the construction phase, before the project generates revenue. Typically capitalized into the project cost.
Common Gotcha
IDC is often underestimated. Delays compound IDC because you're paying interest for longer while also drawing more debt. IDC should be explicitly modeled period-by-period.
The discount rate at which the NPV of all cash flows equals zero. In private equity, measures the annualized return on invested equity. Time-weighted — earlier cash flows are better.
Common Gotcha
IRR is heavily influenced by timing. Dividend recaps and early partial exits can inflate IRR without changing total money returned. Always pair IRR with MOIC for the complete picture.
L
Total gross profit expected from a customer over their lifetime. LTV = ARPU × Gross Margin / Churn Rate. Should use gross margin, not revenue.
Common Gotcha
LTV calculations are extremely sensitive to churn rate assumptions. Small changes in churn can 2-3x the LTV. Be skeptical of LTV projections using early-stage churn data.
M
The monthly equivalent of ARR. More granular for tracking month-over-month changes in subscription base. MRR × 12 = ARR.
Common Gotcha
When annualizing MRR, ensure you're not double-counting annual contracts already recognized. Some companies mix monthly and annual billing terms.
Total cash returned / Total cash invested. If you invest $100M and get back $300M, MOIC = 3.0x. Unlike IRR, MOIC ignores time value.
Common Gotcha
High MOIC with low IRR means the investment took a long time. High IRR with low MOIC usually means a quick flip with small absolute dollars. PE firms target both: typically 2.5-3.5x MOIC and 20-25% IRR.
N
Revenue from existing customers this period divided by their revenue last period. Includes expansion, contraction, and churn. NRR > 100% means existing customers are growing.
Common Gotcha
NRR can mask new customer acquisition problems. A company with 130% NRR but no new logos is still at risk if expansion plateaus.
(Total Debt - Cash) / EBITDA. Primary leverage metric. Shows how many years of EBITDA it would take to repay net debt. Lower is less leveraged.
Common Gotcha
Using 'adjusted' EBITDA flatters leverage. Also, ND/EBITDA is backward-looking — if EBITDA is declining, the ratio will worsen faster than it appears. Lenders often set covenants on this ratio.
R
Revenue growth rate (%) + EBITDA margin (%) should exceed 40% for healthy SaaS companies. Measures the growth-vs-profitability tradeoff.
Common Gotcha
Not all growth is equal — organic vs. acquired growth have very different implications. Also, SBC-adjusted EBITDA can flatter the number significantly.
S
Non-cash expense for equity grants to employees. Required to be expensed under GAAP but often excluded from 'adjusted' metrics because it's non-cash.
Common Gotcha
SBC is a real economic cost — it dilutes existing shareholders. Companies excluding SBC from adjusted EBITDA may appear more profitable than they are. SBC can be 15-30% of revenue in high-growth tech.
Revenue growth from stores open for at least 12 months. Isolates organic growth from new store openings. The purest measure of retail operating performance.
Common Gotcha
SSSG includes both traffic and ticket size changes — a store can show positive SSSG from higher prices even as traffic declines. Always decompose into traffic × conversion × AOV.
In M&A/LBO context: Sources = how the transaction is funded (debt tranches + equity). Uses = what the money is spent on (purchase price + fees + existing debt repayment). Must balance exactly.
Common Gotcha
Sources must ALWAYS equal Uses — this is the first check in any transaction model. Common Uses to forget: transaction fees (advisory, legal, financing), existing debt refinanced, and working capital adjustments.
U
Billable hours / Available hours. In services businesses, the % of available capacity that generates revenue. The primary driver of services profitability.
Common Gotcha
100% utilization is not achievable or desirable — people need training, admin time, and downtime. Sustainable targets: consulting 65-75%, field services 80-88%, manufacturing 85-95%.
W
Current Assets - Current Liabilities. The capital tied up in day-to-day operations. Key components: AR + Inventory - AP. Changes in working capital directly impact cash flow.
Common Gotcha
Profitable companies can go bankrupt from working capital mismanagement. Growing companies often consume more working capital (more inventory, more AR) even as profits rise.