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

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. Discounted Cash Flow analysis: This is the most complicated and detailed method of business valuation. It essentially involves calculating the free cash that will generated over some period of time, and then "discounting" it to the present day value of that sum of money. The idea behind "discounting" is that, because of inflation, a dollar is worth more today than it will be in the future. Comparable Company Analysis: This method involves finding comparable businesses and using their valuation as a way to determine the valuation of the business being analyzed. Multiples Analysis: This method uses commonly accepted industry "multiples" of specific ratios or items on a P&L in order to determine an acceptable business valuation. For example, if you were trying to sell your tech business, and tech businesses usually sell for 5 times the value of Net Profit, then your business would be worth 5 times your Net Profit.



EBITDA

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.



COGS

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.