Financial Model Template and Basic Glossary

We have put together a list of basic terms used in financial models.

Income: Income is money (or some equivalent value) that an individual or business receives, usually in exchange for providing a good or service or through investing capital.

Direct Sales: sales directly to consumers.

Cost of Goods (COGs): Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.

R&D Payroll – Salary & Wages: Research and development Payroll – Salary & Wages.

R&D Expenses: Research and development expenses.

Gross Income: A company’s gross income is the revenue from all sources minus the firm’s cost of goods sold (COGS).

Operations/operational costs: Operating costs are associated with the maintenance and administration of a business on a day-to-day basis.

S&M Payroll – Salary & Wages: Sales and marketing Payroll – Salary & Wages.

S&M Expenses: Sales and marketing expenses.

G&A Payroll – Salary & Wages: General and Administrative Payroll – Salary & Wages.

G&A Expenses: General and Administrative expenses.

Income before taxes: Calculated as revenue minus expenses excluding taxes.

Income Tax: Income tax is a type of tax that governments impose on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligations.

Net Income: Net income (NI), also called net earnings, is calculated as sales minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses.

Shares: Shares are units of equity ownership interest in a corporation or financial asset.

EBITDA: Earnings before interest, taxes, depreciation and amortization.

IRR: The internal rate of return is a metric used in financial analysis to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.

NPV: Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.

ROI: Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.

Cost of capital: Cost of capital is the required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. The cost of capital metric is used by companies internally to judge whether a capital project is worth the expenditure of resources, and by investors who use it to determine whether an investment is worth the risk compared to the return.

Cash Inflows: Cash inflow is the money going into a business. That could be from sales, investments or financing.

PV: Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows.

Costs: A cost is an expenditure required to produce or sell a product or get an asset ready for normal use. In other words, it’s the amount paid to manufacture a product, purchase inventory, sell merchandise, or get equipment ready to use in a business process.

Cash outflow: Cash outflow is any money leaving a business. This could be from paying staff wages, the cost of renting an office or from paying dividends to shareholders.

MAU: Monthly Active Users

Subscription: Subscription business models are based on the idea of selling a product or service to receive monthly or yearly recurring subscription revenue.

MRR: Simply put, monthly recurring revenue (MRR) is income that a business can count on receiving every single month - a predictable revenue.

ARR: Annual Recurring Revenue, or ARR, is a subscription economy metric that shows the money that comes in every year for the life of a subscription (or contract). More specifically, ARR is the value of the recurring revenue of a business’s term subscriptions normalized for a single calendar year.

CPA: Сost per action.

ARPU: Average Revenue Per User.

MoM growth: Month-on-month growth.

Churn rate: The percentage of service subscribers who discontinue their subscriptions within a given time period.

Conversion: Conversion rate is defined as the number of visitors to a website that complete a desired goal (a conversion) out of the total number of visitors.