Glossary of Common Financial Terms
Fixed Expenses (Costs)
Fixed expenses (costs) are business expenses that are not dependent on the quantity of goods or services produced by the business. Common fixed expenses are rent, insurance payments, and management labor costs.
Variable Expenses (Costs)
Variable expenses (costs) are costs that change as the quantity of the good or service that a business produces changes. A good example of a variable expense is the cost of the raw materials that go into producing a product. For instance, a shoe manufacturer will have higher costs for leather the more shoes they produce.
Business valuation is the amount that a business can be sold for. There are three methods for valuing a business: Discounted Cash Flow (DCF) analysis, comparable company analysis, and multiples analysis. Which method should be used is largely dependent on the type of business being sold and the relative maturity of the industry.
Earnings before interest, tax, depreciation and amortization (EBITDA) is a common way to evaluate a company's operating profitability, since it doesn't take into account financing decisions, accounting decisions or taxes.
The cost of goods sold (COGS) is the amount of all the inputs that were required for producing the goods or services that were sold. For example, if a shoe manufacturer sells 5 pairs of shoes, the COGS would be the total cost of the materials and labor that was required to produce those shoes.