One Page Financial Model - Glossary of Terms
Assets - Assets are items, properties, or resources owned by an individual or a business that have value and can be used to meet debts, commitments, or legacies. In simpler terms, assets are things you own that are worth money. This includes physical items like houses, cars, and computers, as well as non-physical items like money in the bank, stocks, or intellectual property. They are important in finance because they represent the resources available to a person or a company to pay for their needs, invest for the future, or to sell in exchange for money when necessary.
Balance Sheet - A balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders, at a specific point in time. It consists of three main sections: assets, liabilities, and shareholders' equity. Assets, both current and long-term, represent the resources controlled by the company. Liabilities, similarly divided into current and long-term, are obligations the company must fulfil. Shareholders' equity represents the residual interest in the assets of the company after deducting liabilities. The fundamental equation of a balance sheet is: Assets = Liabilities + Shareholders' Equity. This statement is crucial for assessing the financial health and stability of a business.
Burn Rate - Burn rate refers to the speed at which a company expends its financial resources, particularly venture capital, in the absence of positive cash flow. It's a key metric for start-ups and growth-focused businesses, primarily used to gauge the company's cash runway - the time until it runs out of money if income and spending levels remain constant. High burn rates might indicate rapid scaling, significant investments in product development or market expansion, but also raise concerns about long-term sustainability. Conversely, a low burn rate suggests more conservative spending, potentially increasing the runway and lowering the risk of insolvency
Cap table - A Capitalisation Table, commonly referred to as a cap table, is a detailed spreadsheet or document that outlines the equity ownership capital of a company. It includes information about the company's shares, options, warrants, and any other securities convertible into equity. The cap table displays the percentage of ownership, equity dilution, and value of equity in each round of investment. It is a crucial tool for start-ups and growing businesses, providing a clear picture of the company's ownership structure and the distribution of its equity among founders, investors, and other stakeholders. Cap tables are essential for financial decision-making, particularly during funding rounds, as they illustrate how investments and other transactions impact ownership and control.
Capital Investments - Money spent by a business to buy, improve, or maintain long-term assets like equipment, buildings, or technology. These investments help a business grow and improve its operations. They typically require a large amount of upfront money but can generate returns over time through increased efficiency, capacity, or sales
Cash Flow Statement - A cash flow statement is a financial document that provides a detailed analysis of what happened to a business's cash during a specific period. It categorizes cash flow into three main activities: operating (cash earned or spent in the course of regular business activity), investing (cash used for or generated from investments in assets), and financing (cash exchanged with investors and creditors). This statement is crucial for assessing the liquidity, flexibility, and overall financial health of a business. It helps stakeholders understand how the company generates and uses its cash, crucial for evaluating its ability to generate positive cash flow in the future.
Cash Growth - The increase in the amount of cash a business has over time, often resulting from profits, better cash flow management, or external funding. Cash growth indicates financial health and stability, giving a business more flexibility to invest in opportunities, cover unexpected costs, or expand operations.
Contingency - A reserve of money set aside to cover unexpected expenses or emergencies. Having a contingency fund helps a business handle unforeseen costs, ensuring that unexpected events don’t disrupt operations or cause financial strain. It acts as a safety net for the business.
Cost of Goods Sold - Cost of Goods Sold (COGS) represents the direct costs attributable to the production of the goods sold by a business. This amount includes the cost of the materials used in creating the good along with the direct labour costs involved in its production. COGS is important for understanding the gross margin and is deducted from revenues (sales) to calculate a company's gross profit. It's a crucial metric in the profit and loss statement and can significantly impact the financial health and pricing strategies of a business.
Days Payable - Days payable refers to the amounts that a company owes to its suppliers or creditors for goods and services received but not yet paid for. It is a current liability on a company's balance sheet, representing the company's short-term obligations to pay off these debts typically within a year. Effective management of accounts payable is crucial for maintaining good relationships with suppliers and for effective cash flow management. Accounts payable are often contrasted with accounts receivable, which are the amounts that others owe to the company. Accurate tracking and timely payment of accounts payable are essential for sustaining business operations and avoiding late fees or disrupted supply chains.
Days receivable - Accounts receivable (AR) represents the money that a company is owed by its customers for goods or services that have been delivered or used but not yet paid for. It is considered a current asset on a company's balance sheet and is essential for its cash flow and liquidity. Accounts receivable arise from credit sales, where customers are allowed to pay for their purchases at a later date. Effective management of accounts receivable is crucial as it directly impacts the cash flow and financial health of a business. The key challenge in AR management is to minimize the time between sale and payment, reducing the risk of non-payment and ensuring a steady inflow of cash.
Debt - Debt refers to the amount of money borrowed by an individual or organization from another party, often financial institutions, under the agreement to repay it in the future, typically with interest. This financial obligation can take various forms, such as loans, bonds, or lines of credit. Debt is used for purposes like funding operations, investing in growth, or personal expenditures. The terms of debt include the amount borrowed (principal), the interest rate, and the repayment schedule. While it can provide necessary capital, excessive debt can lead to financial strain and impact credit ratings.
Depreciation - Depreciation is an accounting method used to allocate the cost of a tangible or physical asset over its useful life. It represents how much of an asset's value has been used up. Depreciation allows businesses to generate revenue from an asset while expensing a portion of its cost each year it is in use. This process helps companies account for the wear and tear on long-term assets like machinery, vehicles, or buildings. The depreciation expense is recognized on the income statement and reduces the value of the asset on the balance sheet
Dilution - The reduction in ownership percentage of existing shareholders when a company issues new shares. Dilution decreases the value of each existing share and can reduce the control or decision-making power of early investors or founders in the company. It's important to understand when raising funds or bringing in new investors.
Discount Rate - The interest rate used to calculate the present value of future cash flows in financial models, like Net Present Value (NPV). It reflects the time value of money and the risk associated with future cash flows. The discount rate helps determine the value of money over time. A higher discount rate lowers the present value of future cash flows, reflecting higher risk, while a lower rate increases the present value, indicating lower risk. Choosing the right discount rate is essential for accurate investment evaluations and financial decision-making.
Discounted Cash Flow - Discounted Cash Flow (DCF) is a financial valuation method used to estimate the value of an investment based on its expected future cash flows. This technique involves projecting future cash flows and then discounting them back to the present value using a discount rate, typically the weighted average cost of capital (WACC) or a similar rate of return. The DCF analysis helps determine the value of an investment, asset, or a company by considering the time value of money, which states that a dollar today is worth more than a dollar tomorrow. DCF is widely used in finance for investment appraisal, capital budgeting, and valuing businesses. It is a critical tool for investors and analysts in making informed investment decisions.
DSCR - The Debt Cover Ratio, also known as the Debt Service Coverage Ratio (DSCR), is a financial metric used to determine a company's ability to pay its debt obligations with its operating income. It is calculated by dividing the company's net operating income by its total debt service (principal and interest payments due for the period). A higher ratio indicates greater ability to cover debt payments from operational earnings, reflecting financial stability. Conversely, a lower ratio suggests potential difficulties in meeting debt obligations, signalling financial risk. This ratio is vital for lenders and investors in assessing the financial health of a business.
EBITDA - EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a financial metric used to evaluate a company's operating performance. EBITDA focuses on the earnings generated from core business operations, excluding the effects of financing and accounting decisions. By removing interest, taxes, depreciation, and amortization, EBITDA provides a clearer picture of a company’s profitability from its operations. It is often used by investors and analysts to compare companies within the same industry, as it eliminates the effects of different capital structures, tax rates, and non-cash accounting practices like depreciation. However, it doesn't account for capital expenditures or changes in working capital.
EBITDA Growth - The increase in a company’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) over time. EBITDA growth shows how well a company is improving its core profitability without considering non-operational expenses. It’s a key indicator of operational performance and financial health, often used by investors to assess the company’s earning potential.
EBITDA Multiple - A ratio used to value a company, calculated by dividing the company’s enterprise value (EV) by its EBITDA. The EBITDA multiple is commonly used by investors and analysts to compare companies and assess their value. A higher multiple indicates that the market expects higher growth, while a lower multiple may suggest the company is undervalued or facing challenges. It’s useful in mergers, acquisitions, and investment decisions.
Enterprise Value - Enterprise Value (EV) is a comprehensive measure of a company's total value, often used in valuation or buyout scenarios. It represents the market value of the entire business, including its equity and debt components. EV is calculated by adding the company's market capitalization (total value of its outstanding shares) to its total net debt (the sum of its short-term and long-term debt minus cash and cash equivalents). This metric is especially useful for comparing companies with different capital structures, as it provides a more complete picture than market capitalization alone. It is widely used in mergers and acquisitions to assess the value of a company.
Equity - Equity, in a financial context, refers to the residual interest in the assets of a business after deducting liabilities. It represents the ownership value held by the shareholders in the form of capital, retained earnings, and other equity components. Equity is crucial as it provides a cushion against losses and is an indicator of the company's financial health and potential to generate returns for its owners. For small businesses and startups, equity is often a critical source of funding and a measure of the business's value as perceived by owners and investors.
Fixed Assets - Tangible assets are physical assets that hold economic value and can be observed and quantified. These assets include machinery, buildings, vehicles, inventory, and furniture. They are key components of a business's operations and are often used in the production of goods or services. Tangible assets are recorded on a company's balance sheet at their purchase cost, minus depreciation. Depreciation is the process of allocating the cost of a tangible asset over its useful life. These assets are essential for performing day-to-day operations and can be sold or used as collateral for loans, making them vital for a business's financial strategy.
Free Cash Flow to Firm - Free Cash Flow (FCF) is a financial performance metric that represents the amount of cash a company generates after accounting for capital expenditures (CapEx) like investments in plant, property, and equipment. It is calculated by subtracting CapEx from Operating Cash Flow. FCF is an important indicator of a company's financial health and its ability to generate cash profit. It is considered by many investors and analysts as a more accurate representation of a company's profitability and efficiency than traditional earnings or net income measures. A positive FCF indicates that a company has sufficient cash for dividends, debt reduction, expansion, and other investments to grow the business. Conversely, a negative FCF can signal potential financial problems or the need for additional funding.
FTE - A unit that represents the workload of an employee in a way that makes workloads comparable across different employment arrangements. One FTE is equal to one full-time worker. FTE is used to measure staffing levels and project labour costs. It helps businesses assess how many full-time workers they need or how part-time hours add up to equivalent full-time positions, useful for budgeting and resource planning.
Funding Round - A stage in the process of raising capital for a business, where investors provide funds in exchange for equity or other financial returns. Common rounds include Seed, Series A, Series B, and so on. Each funding round helps businesses grow by providing capital to scale operations, develop products, or enter new markets. Understanding funding rounds is key for start-ups seeking investment and for investors looking to assess growth potential.
Gross Profit - Gross profit is a key financial metric that represents the difference between revenue and the cost of goods sold (COGS). It's an important indicator of a business's profitability, exclusive of indirect expenses. Calculated by subtracting COGS – the direct costs attributable to the production of the goods sold or services provided – from total revenue, it reflects the efficiency of a company in managing its production processes and supply chain. Gross profit provides insights into the financial health of a business and is crucial for pricing strategies, financial analysis, and budget planning.
Gross Profit Margin - Gross profit margin is a financial ratio that expresses the percentage of revenue that exceeds the cost of goods sold (COGS). It is a critical indicator of a company's financial health and operational efficiency. Calculated by dividing gross profit by total revenue and multiplying by 100, this margin illustrates what proportion of each dollar of revenue is retained as gross profit. Higher gross profit margins indicate better control over production and supply costs, and the ability to generate sufficient revenue over these costs. It is vital for pricing strategy, cost management, and comparative analysis within an industry.
Income Statement - An income statement, also known as a profit and loss statement, is a financial report that provides a summary of a company's revenues, expenses, and profits or losses over a specific accounting period. It begins with sales or revenue and subtracts various costs and expenses incurred in operating the business to arrive at a net income or loss. Key components include gross profit, operating income, and net income. The income statement is essential for assessing a company's financial performance, profitability, and operational efficiency. It is one of the three core financial statements used in business, alongside the balance sheet and cash flow statement.
Inflation - Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. It is usually measured as an annual percentage increase. As inflation rises, every unit of currency buys fewer goods and services. Inflation is influenced by factors such as increases in production costs, higher demand for products, and monetary policies. Central banks and governments monitor inflation to adjust economic policy. While moderate inflation is a sign of a growing economy, hyperinflation can have detrimental effects, eroding savings and destabilizing economies. It's a crucial factor in financial planning and investment decisions.
Interest Payments - Regular payments made by a borrower to a lender as a cost of borrowing money, typically based on a percentage of the loan amount. Interest payments are a crucial part of debt financing. They affect a company’s cash flow and profitability, and higher interest rates increase the cost of borrowing, reducing available capital for other investments. Managing interest payments effectively helps maintain financial health.
Liabilities - Liabilities in financial accounting represent the debts or obligations of a company that arise during the course of its operations. They are settled over time through the transfer of economic benefits including money, goods, or services. Recorded on the right-hand side of the balance sheet, liabilities are a crucial part of the equation: Assets = Liabilities + Owners' Equity. Liabilities are categorized into current liabilities (due within one year) and long-term liabilities (due after one year). Understanding liabilities is essential for assessing a company’s financial health, as they reflect the company’s future sacrifices of economic benefits.
Money Multiple - A ratio that measures the total return on an investment, calculated by dividing the total cash returned to investors by the total amount of money invested. The money multiple shows how much money an investor has gained (or lost) relative to their original investment. For example, a money multiple of 2x means the investment has doubled. It’s an important metric for investors to assess the overall profitability of their investments.
Net Profit Margin - A percentage that shows how much of a company's revenue is left as profit after all expenses, including taxes and interest, have been paid. It’s calculated by dividing net profit by total revenue and multiplying by 100. The net profit margin indicates how efficiently a company is converting revenue into actual profit. A higher margin means the company is more profitable, which is important for assessing financial health and sustainability.
Net Profit - Net Profit, also known as net income or net earnings, is the amount of money a company earns after subtracting all its expenses, taxes, and costs from its total revenue. It is a crucial indicator of a company's profitability and financial health. Net income is found at the bottom of the income statement, hence often referred to as "the bottom line." It includes deductions for operating expenses, cost of goods sold, interest, taxes, and other expenses. Net income is important for investors and stakeholders as it shows the company's ability to generate profit from its operations and is often used as a basis for dividends and reinvestment.
Net Working Capital - Net Working Capital (NWC) is a financial metric that measures a company's operational liquidity by subtracting current liabilities from current assets. Current assets include cash, accounts receivable, inventory, and other assets expected to be converted into cash within a year. Current liabilities encompass accounts payable, short-term debt, and other obligations due within the same period. A positive NWC indicates a company has sufficient short-term assets to cover its short-term liabilities, essential for maintaining smooth operations. Conversely, a negative NWC suggests potential liquidity problems, signalling difficulties in meeting immediate financial obligations. NWC is vital for assessing a company's short-term financial health and operational efficiency.
NPV - Net Present Value, the calculation of the present value of a series of future cash flows, discounted to reflect their value today. It accounts for the time value of money, where future cash is worth less than cash today. NPV is used to evaluate the profitability of an investment or project. A positive NPV means the projected returns exceed the cost, making it a good investment. A negative NPV indicates the project is likely to lose money.
NPV Discount Rate - The rate used to discount future cash flows back to their present value when calculating Net Present Value (NPV). It reflects the risk, opportunity cost, or expected rate of return for the investment. The discount rate significantly impacts the NPV calculation. A higher discount rate reduces the present value of future cash flows, making the investment seem less attractive, while a lower rate increases the present value, making the investment appear more favourable. Choosing the right discount rate is crucial for accurate financial analysis.
Operating Costs - Operating Costs are the costs a business incurs during its operations to generate revenue. They are an essential aspect of a company's financial activities and are reported in the income statement. Common examples include rent, salaries, utilities, and material costs. Expenses are categorized into various types, such as operating expenses (related to the company's primary activities) and non-operating expenses (like interest payments or one-time costs). They can also be fixed (constant over time, like rent) or variable (fluctuate with business activity, like shipping costs). Accurate recording and management of expenses are crucial for evaluating a business's profitability and financial health.
Overheads - Overheads, also known as indirect costs or operating expenses, are the ongoing expenses a business incurs that are not directly linked to the production of goods or services. These costs include rent, utilities, insurance, administrative salaries, and office supplies. Overheads are essential for the day-to-day functioning of a business but do not directly contribute to the production process. They are categorized as either fixed, varying consistently regardless of business activity levels, or variable, fluctuating with the level of business activity. Efficient management of overheads is crucial for maintaining profitability, as they can significantly impact a company’s bottom line.
Payback - The time it takes for an investment to generate enough cash flow to recover the initial amount invested. The payback period helps businesses and investors assess how quickly they will get their money back. A shorter payback period is generally more attractive, as it indicates lower risk and a quicker return on investment, but it doesn’t account for profitability beyond that point or the time value of money.
Post Money Valuation - The value of a company after it has received funding or investment. It is calculated by adding the amount of new investment to the company's pre-money valuation (the company's value before the investment). Post-money valuation is used to determine the ownership percentage of new and existing shareholders after a funding round. It’s crucial for investors and founders to understand how much equity they own after raising capital.
Pre-money Valuation - The value of a company before receiving any external funding or new investment. The pre-money valuation sets the baseline for determining the ownership percentage of new investors during a funding round. It helps both founders and investors negotiate how much equity is being sold in exchange for the investment.
Revenue - Revenue, often referred to as sales or turnover, is the total amount of income generated by a company from its normal business operations. It includes income from the sale of goods or services before any deductions for expenses. Revenue is a crucial indicator of a company's financial performance and is reported at the top of the income statement, often leading to its nickname 'top line'. It's a key factor in determining a company's profitability and growth potential. For investors and analysts, revenue is a primary metric for assessing a company's size, market dominance, and ability to generate cash flow.
Revenue / FTE - A financial metric that measures the amount of revenue generated per full-time equivalent (FTE) employee. It’s calculated by dividing total revenue by the number of FTEs. This ratio helps assess the productivity and efficiency of a company’s workforce. A higher revenue per FTE indicates that each employee is contributing more to the company’s revenue, which is a sign of operational efficiency and scalability.
Revenue Growth - The increase in a company’s revenue over a specific period, usually expressed as a percentage. Revenue growth shows how well a company is expanding its sales or market share. Consistent revenue growth is a key indicator of business health, market demand, and the company’s ability to attract new customers or increase sales from existing customers. Investors and stakeholders closely monitor this metric to gauge the company’s success and potential for future expansion.
ROI - Return On Investment, a performance metric that measures the profitability of an investment, calculated by dividing the net profit from the investment by the initial cost of the investment, then multiplying by 100 to get a percentage. ROI helps determine how efficiently an investment is generating profit. A higher ROI indicates a more profitable investment, making it a key metric for comparing the potential returns of different opportunities and guiding financial decision-making.
Runway - The amount of time a company can continue operating before running out of cash, assuming no additional funding or significant changes in expenses. It’s typically measured in months. Knowing your runway is crucial for managing cash flow and planning for the future. A longer runway gives the business more time to achieve profitability or secure additional funding, while a shorter runway signals the need for quick adjustments or financing to avoid running out of money.
Shortfall - The gap between the money available and the money needed to meet financial obligations or goals. A shortfall indicates that a business doesn’t have enough resources to cover its expenses, which can lead to financial strain. Identifying and addressing shortfalls early helps avoid cash flow problems and ensures the business can continue operating smoothly.
Surplus - The amount of money or resources left over after all expenses or obligations have been met. A surplus indicates that a business has more income than expenses, which is a sign of financial health. Surpluses can be reinvested into the business, saved for future needs, or used to pay off debt, helping the company grow and strengthen its financial position.
Target Investment - The specific amount of money or resources a business aims to raise or allocate for a particular project, initiative, or growth plan. Setting a target investment helps define the capital required to achieve business goals, whether for expansion, new product development, or entering new markets. It provides a clear financial benchmark for investors and stakeholders to assess the feasibility and expected returns of the initiative.
Taxation - The process by which governments collect money from individuals and businesses based on their income, profits, or transactions to fund public services and infrastructure. Taxation affects a business’s net income, cash flow, and financial planning. Understanding and managing taxes is essential for maintaining compliance with laws, optimizing profits, and avoiding penalties or unexpected liabilities. Proper tax planning can also help reduce the overall tax burden on the business.
Terminal Growth Rate - The constant rate at which a company's cash flows or earnings are expected to grow indefinitely after a forecast period, typically used in discounted cash flow (DCF) models. The terminal growth rate helps estimate the value of a business beyond the forecasted period. It’s a key assumption in calculating a company’s terminal value and overall valuation. A realistic terminal growth rate is crucial because overestimating it can inflate the valuation, while underestimating it may undervalue the business.
Variable Costs - Variable costs are expenses that vary directly with the level of production or sales volume. Unlike fixed costs, which remain constant regardless of output, variable costs increase or decrease in proportion to business activity. Common examples include raw materials, direct labour costs, and sales commissions. These costs are a crucial part of cost accounting and financial analysis, as they affect a company's profit margins and break-even point. Understanding variable costs is essential for pricing strategies, budgeting, and financial forecasting. Businesses must manage variable costs effectively to maintain profitability, especially in industries where production volume fluctuates significantly.
Working Capital - The difference between a company’s current assets (like cash, accounts receivable, and inventory) and its current liabilities (such as accounts payable and short-term debt). Working capital measures a company’s ability to meet its short-term obligations and continue day-to-day operations. Positive working capital indicates that the business has enough liquidity to cover its short-term liabilities, while negative working capital could signal financial difficulties or cash flow issues. Managing working capital efficiently ensures operational stability.