The Finance Glossary is a collection of the finance, accounting, and business-metrics terms John Zdanowski uses in his CFO work, gathered so founders, operators, and investors can read his models, metrics, and credit decisions with a shared vocabulary.
Glossary
0–9
- 📝83(b) Election — An IRS filing, made within 30 days of receiving restricted stock, that elects to be taxed on the stock's value at grant rather than as it vests.
A
- 📝Accrual Accounting — The practice of recording revenue when it is earned and expenses when they are incurred, rather than when cash moves through the bank account.
- 📝ARR — Annualized recurring revenue: the yearly value of a company's recurring subscription or contract revenue.
B
- 📝Base Budget — A conservative revenue budget, set so the company beats it in about 90% of scenarios, against which expenses are planned within the desired runway.
- 📝Bottoms up — A budgeting method that builds the forecast from every vendor, department, and account, reviewing prior spend with each department head.
C
- 📝Cash Basis — A method of recognizing revenue and expenses when cash enters or leaves the bank account, in contrast to accrual or GAAP basis.
- 📝Chart of Accounts — The numbered list of financial accounts, from assets through expenses, used to record transactions in a company's accounting system.
- Churn Rate — The percentage of customers or recurring revenue lost during a period, whose reciprocal approximates average customer life.
- Contribution Margin — Revenue minus all variable costs, showing what each sale contributes toward fixed costs and profit.
- 📝Convertible Note — An instrument that lets an investor fund a company now and convert into equity at a later priced round, typically with a discount and a valuation cap.
- 📝Credit Box — The objective set of requirements an underwriter uses to decide whether to make a loan.
- 📝Credit Committee — A small group that reviews an underwriter's work to make a go/no-go decision on an investment.
- 📝Customer Acquisition Cost (CAC) — The total sales and marketing spend required to win one new customer.
D
- 📝Deferred Salary Bridge Note — A mechanism that lets employees convert part of their salary into equity at a preferential rate while the company conserves cash.
E
- 📝Expense Accounts — The accounts that categorize a company's expenses on the income statement, grouped into major categories such as salary, sales and marketing, and general and administrative.
F
- 📝Financial Planning and Analysis — FP&A: the planning, budgeting, performance-reporting, forecasting, and modeling work that supports an organization's financial health.
- 📝Fractional CFO — A financial executive who leads a company's finance strategy and department on a part-time or contract basis.
- 📝Fully Diluted Shares Outstanding — The total number of common shares that would exist if all options, convertible securities, and other rights to shares were exercised.
G
- 📝GAAP — Generally Accepted Accounting Principles: the authoritative standards and accepted conventions for recording and reporting financial information.
- 📝General Ledger — The master record of a company's financial transactions, organized by account and maintained in an accounting system such as 📝Quickbooks Online.
- 📝Granting Equity — The ways a company issues ownership, including founder stock purchases, restricted stock, stock options, and warrants.
- Gross Margin — Revenue minus cost of goods sold, expressed as a percentage of revenue.
H
- 📝Highest and Best Use — The legal, physically possible, financially feasible use of a property that produces the highest value.
I
- 📝Income Statement — The financial statement showing a company's revenues and expenses over a period and how they become net income.
- 📝Integrated Financial Model (IFM) — A model that collects data from every system a business runs on to forecast it and align daily activity with long-term goals.
- 📝Investment Committee — The body chartered by a fund's investors to approve investments that fit its credit box or investment criteria.
L
- 📝Level 1 Metrics — The minimal set of metrics needed to forecast a business, also called vital signs.
- 📝Level 2 Marketing Metrics — The detailed channel and advertising metrics used to oversee marketing, among the hardest on the 📝Instrumentation Pyramid to collect.
- 📝Level 3 Metrics — The metrics of basic integrity on the instrumentation pyramid, such as mutual trust within the team and customers who rebuy and rarely return products.
- Lifetime Gross Profit (LTGP) — A customer's lifetime revenue multiplied by realized gross margin, a stricter substitute for revenue-based lifetime value.
- Lifetime Value (LTV) — The total value a business expects to earn from a single customer over the entire relationship.
- 📝Liquidity — How readily a company or asset can be turned into cash to meet obligations as they come due.
- 📝LTV:CAC — The ratio of a customer's lifetime value to the cost of acquiring them, the core component of a 📝Financeable Equation.
M
- 📝Magic Cohort — The subset of customers with the highest LTV:CAC ratio, which makes a business look healthier than it is when viewed alone.
- 📝Management Fee Plus Carry — The compensation structure of fund general partners: an annual fee on assets under management plus a share of gains, such as "2 and 20."
- 📝Marginal Income Statement — An income statement with every line expressed as a percentage of revenue.
- 📝Monday Morning Metrics (MMM) — A weekly report of a few dozen key metrics across departments, color-coded to show week-over-week change.
N
- 📝Net Orderly Liquidation Value — NOLV: the estimated net proceeds from an orderly sale of a set of assets, used by lenders to size how much to lend against them.
O
- 📝Operational Accounting vs Tax Accounting — The principle that weekly operational accounting for running the business takes priority over annual tax accounting.
- 📝Other Variable Overheads — Costs that rise with sales but sit outside cost of goods sold, such as revenue-based referral fees and customer care.
P
- Payback Period — The time an investment, or a customer's gross profit, takes to recover its initial cost.
- 📝Personal Guarantee — A promise by a person or organization to repay another party's debt if the debtor fails to pay.
- 📝Profit and Loss Statement — The P&L: a financial statement summarizing revenues, costs, and expenses over a period, another name for the income statement.
- 📝Profitable Revenue Stream — A way of generating revenue that earns more gross profit from its customers than it costs to acquire them.
R
- 📝Roll-Forward — The reconciliation showing that a starting balance plus or minus the period's changes equals the ending balance.
- 📝Rule of 40 — The principle that a software company's combined growth rate and profit margin should exceed 40%.
- 📝The Runway Calculation — Cash on hand divided by monthly net burn: the number of months a company can operate before it runs out of cash.
S
- 📝Schumer Box — The standardized table in credit card offers that discloses the card's rates and fees.
- 📝Stock Options — The right, but not the obligation, to buy company stock at a set strike price for a set period, typically vesting over four years.
T
- 📝Tops Down — A budgeting method that starts with 📝Boundary Conditions for growth and runway, then sets the level of expenses the company can sustain.
U
- 📝Unit Economics — The revenues and costs of a business expressed per fundamental unit, such as a customer or an order.
V
- 📝Venture Factoring — Lending against future invoices that can reasonably be expected from a sales pipeline, taken to its extreme for a brand-new product.
- 📝Virtual Cap Table — A method of recording each contributor's time and money invested in a startup before the company formally exists.
- 📝Vital Signs — The minimal set of metrics needed to forecast a business, also called Level 1 Metrics.
W
- 📝Working Capital — Current assets minus current liabilities: the capital a business uses in its day-to-day operations.