US GAAP vs Non-GAAP EBITDA, ASC 842 lease classifications, accrued liabilities, compound interest, and credit facilities.
Revenue is the total amount of money a business collects from sales of goods or services before any expenses are subtracted ('top-line growth'). Profit is the actual financial gain remaining after deducting all operating costs, taxes, debt, and inventory expenses ('bottom-line earnings').
A sole proprietorship is an unincorporated business automatically owned by one individual with zero paperwork, but provides zero liability protection—meaning your personal savings, home, and car can be seized to pay business debts. An LLC is a formal legal entity registered with the state that creates a corporate veil, protecting personal assets from business lawsuits.
A debit card withdraws your own deposited cash directly from your checking account in real time, preventing you from spending money you don't have. A credit card borrows the bank's money on a revolving line of credit with a grace period, offering superior fraud protection, travel rewards, and credit score building.
APR is the simple annual interest rate applied to money you borrow (loans, credit cards, mortgages) without accounting for the compounding of interest within the year. APY is the effective annual rate of return that includes compound interest, representing the true amount you earn on savings accounts or pay on compounding debt.
Stocks represent fractional equity ownership in a company, offering high historical growth through capital appreciation and dividends but carrying higher volatility and risk of total loss. Bonds are debt instruments where you act as a lender to a corporation or government, receiving guaranteed periodic interest payments (coupons) and return of principal at maturity.
A balance sheet is a financial snapshot of what a company owns (assets) and owes (liabilities) along with shareholder equity at a single specific moment in time. An income statement (Profit and Loss / P&L) tracks a company's financial performance—total revenues, operating expenses, and net profit—over a continuous period of time (e.g. a quarter or full year).
Accounts Payable (AP) is a short-term liability representing money your business owes to suppliers, vendors, or creditors for goods and services received on credit. Accounts Receivable (AR) is a current asset representing money owed to your business by customers or clients who purchased your products or services on invoice terms.
CapEx (Capital Expenditure) represents major long-term investments in physical assets—such as purchasing real estate, factory machinery, or data center servers—that are capitalized on the balance sheet and depreciated over multiple years. OpEx (Operating Expenditure) covers the day-to-day ongoing costs of running the business—such as employee wages, SaaS cloud subscriptions, and office rent—which are 100% tax-deductible in the current tax year.
A calendar year always starts on January 1 and ends on December 31, adhering to the Gregorian calendar for individual income tax filings. A fiscal year is a customized 12-month accounting period established by a corporation, university, or government to align financial reporting with its natural annual business revenue cycle (e.g., Apple's FY ends in late September; the US Federal Government's FY ends September 30).
Both are non-cash accounting methods that spread the capital cost of an asset over its useful economic lifespan. Depreciation strictly applies to tangible physical assets (machinery, delivery vehicles, buildings), calculating physical wear and tear often with a salvage value. Amortization strictly applies to intangible non-physical assets (patents, copyrights, trademarks), expensing costs on a straight-line basis with zero salvage value.
B2B (Business-to-Business) companies sell products or services directly to other commercial enterprises, characterized by multiple corporate decision-makers, complex multi-month sales cycles, high order values, and logic-driven ROI purchasing. B2C (Business-to-Consumer) companies sell directly to individual end-users, driven by single-person emotional decision-making, fast transaction cycles, and lower order values.
Debt financing involves borrowing capital from banks or issuing bonds that must be repaid with scheduled interest regardless of business performance, but allows founders to retain 100% company ownership and decision-making control. Equity financing raises capital by selling ownership shares to investors or venture capitalists, requiring zero debt repayment, but permanently diluting founder equity and sharing future profits and board control.
Direct costs are business expenses that can be directly and traceably attributed to the production of a specific product, project, or service—such as raw lumber for a table or hourly factory assembly labor. Indirect costs (overhead) are shared operating expenses that keep the business functioning as a whole—such as factory electricity, executive salaries, and office rent—which cannot be traced to a single unit produced.
Fixed costs are business expenses that remain constant and predictable regardless of how many goods or services a company produces or sells—such as office building rent, business insurance, and salaried executive compensation. Variable costs fluctuate in direct proportion to production and sales volume—such as raw material purchases, packaging boxes, merchant credit card processing fees, and shipping postage.
Pre-money valuation is the agreed value of a company before receiving external investment capital. Post-money valuation equals the pre-money valuation plus the new capital invested (Post-Money = Pre-Money + Investment), directly determining the exact equity percentage dilution for founders and investors.
A merger occurs when two separate companies mutually agree to combine their operations, assets, and liabilities to form a brand-new single corporate legal entity. An acquisition occurs when one company (the acquirer) purchases the majority shares or assets of another company (the target), absorbing it into existing corporate operations.
A convertible note is a short-term debt instrument that accrues interest and possesses a legal maturity date at which the loan must either be repaid or converted into equity during a future priced funding round. A SAFE (created by Y Combinator in 2013) is not debt; it carries zero interest rate and zero maturity date, functioning as a lightweight contractual right to future equity shares.
Liquidity measures a company's ability to cover its immediate short-term financial obligations (due within 30 to 90 days) using cash or quick-converting liquid assets. Solvency measures a company's long-term financial health and ability to sustain ongoing operations by maintaining total assets that exceed total liabilities over years or decades.
In an asset purchase, the buyer cherry-picks specific corporate assets (machinery, patents, customer contracts) and leaves unwanted historical legal liabilities with the seller, gaining a stepped-up tax basis for future depreciation. In a stock purchase, the buyer purchases the target company's outstanding equity shares in full, seamlessly inheriting all historical contracts and licenses while also inheriting all known and unknown historical legal liabilities.
CAGR (Compound Annual Growth Rate) calculates the smoothed annual growth rate of an investment assuming a single lump-sum deposit at the start and a single exit payout at the end, ignoring all intermediate timing. IRR (Internal Rate of Return) calculates the annualized effective discount rate that sets the Net Present Value (NPV) of all irregular interim cash inflows and outflows to zero, making it the gold standard for evaluating multi-year private equity, real estate, and project capital investments.
Gross margin measures the percentage of revenue remaining after deducting only the direct Cost of Goods Sold (COGS)—revealing basic product manufacturing and delivery efficiency. Net margin (the 'bottom line') measures the percentage of revenue remaining after deducting ALL operating expenses, executive salaries, office rent, marketing costs, loan interest, and corporate income taxes.
Tangible assets are physical, measurable economic resources owned by a business—such as real estate, manufacturing machinery, fleet vehicles, and inventory. Intangible assets lack physical substance but hold significant economic value—such as patented technology, brand trademarks, proprietary software algorithms, copyrights, and corporate goodwill.
In financial and legal agreements, a debtor (or borrower) is the individual, business, or sovereign entity that has borrowed capital or incurred an obligation, owing money to another party. A creditor (or lender) is the individual, commercial bank, or bondholder that extended credit, provided goods on invoice terms, or loaned money, possessing the legal right to collect repayment with interest.
Revolving credit provides an open credit line (such as a credit card or HELOC) with a preset limit that borrowers can draw from, repay, and draw from again repeatedly, paying interest only on the actively borrowed balance. An installment loan disburses a single lump sum of capital upfront (such as a 30-year fixed mortgage, car loan, or student loan) that is repaid through a fixed schedule of equal monthly installments over a set amortization term.
An operating lease is a rental agreement that grants temporary operational use of an asset (like office space or delivery vans) without transferring ownership, treated as regular operational rental expense. A capital lease (classified as a finance lease under modern ASC 842 / IFRS 16) is economically equivalent to purchasing the asset with a loan, transferring substantially all ownership benefits, risks, and asset depreciation onto the lessee's balance sheet.
Cash accounting records revenue and expenses only when physical money actually enters or leaves the corporate bank account, offering simple bookkeeping ideal for sole proprietors and micro-businesses. Accrual accounting recognizes revenue when earned and expenses when incurred (the matching principle), regardless of when cash changes hands, mandated by GAAP and IFRS for public corporations to provide an accurate picture of financial health.
A stock split divides existing corporate shares by a predetermined ratio (e.g. 2-for-1 or 3-for-1) to lower the per-share trading price and boost retail liquidity without altering corporate retained earnings or balance sheet equity. A stock dividend issues additional newly minted shares to shareholders (typically under 20-25%), requiring an internal accounting journal entry that transfers dollar value from Retained Earnings into Paid-in Capital.
Operating income (Earnings Before Interest and Taxes, or EBIT) measures the profit a company generates strictly from its core day-to-day business operations, deducting only COGS and operating expenses (SG&A, R&D, depreciation). Net income is the final 'bottom line' profit after deducting ALL corporate expenses, including capital debt interest payments, non-operating investments, and corporate income taxes.
Common stock represents true equity ownership in a corporation, providing shareholders with voting rights in board elections and unlimited capital appreciation upside, but occupies the most junior priority in corporate bankruptcy liquidation. Preferred stock functions as a hybrid equity-debt security that typically lacks voting rights, but pays guaranteed fixed dividend yields and holds senior liquidation priority over common shareholders.
A C-Corporation is the standard legal corporate structure that pays corporate income tax at entity level, can issue multiple stock classes, and accepts unlimited domestic and foreign shareholders, making it mandatory for venture capital investment. An S-Corporation is an IRS tax status elected by qualifying businesses to pass profits and losses directly to shareholders' personal returns, avoiding double taxation.
Equity financing raises growth capital by selling ownership shares to investors, requiring no monthly debt service or collateral, but permanently diluting the founders' equity and voting control. Debt financing secures capital through bank loans, bonds, or venture debt that must be repaid with interest, retaining 100% company ownership and profits for the founders.
A Limited Liability Company (LLC) is a formal state-registered legal entity that provides a robust liability shield protecting its owners' personal assets (home, car, personal bank accounts) from business debts and lawsuits. A General Partnership is an informal business structure formed automatically when two or more people do business together without filing state paperwork, carrying unlimited personal joint liability for all partner obligations.
Book value is the historical accounting net worth of a company as recorded on its balance sheet, calculated by subtracting total liabilities and intangible amortization from total physical assets. Market value is the dynamic public valuation of a company determined by financial markets, calculated by multiplying current share price by total outstanding shares (market capitalization).
Operating expenses (OpEx) are short-term, recurring day-to-day operational costs—such as employee payroll, office rent, utilities, and software subscriptions—that are 100% tax-deductible in the period incurred. Capital expenditures (CapEx) are long-term investments in tangible physical assets—such as manufacturing equipment, vehicles, real estate, and servers—that must be capitalized and depreciated over their multi-year useful life.
Gross revenue (top-line sales) represents the total aggregate dollar amount earned from all customer transactions, invoiced contracts, and sales before taking any deductions. Net revenue is the true adjusted income realized by the company after subtracting customer returns, broken-product allowances, discounts, chargebacks, and rebates from gross sales.
Fixed costs are baseline business expenses—such as building rent, full-time administrative salaries, insurance, and equipment leases—that remain constant regardless of whether the company produces zero units or one million units. Variable costs are operational expenses—such as raw production materials, factory hourly labor, packaging, and shipping freight—that scale directly up or down in proportion to sales and manufacturing volume.
Analyzing operating profit margin (EBIT) versus net profit margin to evaluate core organizational performance stripped of tax structures and interest expenses.
Contrasting Accounts Payable (AP) short-term liabilities against Accounts Receivable (AR) short-term liquid assets in working capital accounting.
Exploring the relationship between single-period Net Income on the Income Statement and cumulative Retained Earnings in the Shareholders' Equity section.
Depreciation is the systematic accounting expense allocation of physical, tangible fixed assets (such as manufacturing machinery, vehicles, and company buildings) across their estimated useful lifespans. Amortization is the equivalent periodic expense allocation of non-physical, intangible corporate assets (such as patents, trademarks, proprietary software licenses, and customer lists).
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a non-GAAP profitability proxy measuring pure operational earning power stripped of capital structure and accounting methods. Operating Cash Flow (Cash Flow from Operations) is a GAAP cash-basis statement measuring the actual net liquid cash generated by core operations, factoring in real tax checks, interest payments, and working capital inventory swings.
The Current Ratio evaluates short-term liquidity by dividing all current assets by current liabilities, assuming inventory and prepaid expenses can be liquidated within one year. The Quick Ratio (Acid-Test) applies a stricter liquidity standard by excluding illiquid inventory and prepaid expenses, measuring whether a company can satisfy its immediate short-term obligations using strictly cash, marketable securities, and accounts receivable.
Direct labor encompasses wages and payroll expenses paid to employees physically handling materials, assembling products, or directly delivering client services (e.g., assembly line workers, machinists, bricklayers), classified as Cost of Goods Sold (COGS). Indirect labor includes operational support personnel (e.g., plant security, factory maintenance, supervisors, accounting staff) categorized as manufacturing overhead or SG&A expenses.
Gross Margin calculates profitability after subtracting all Cost of Goods Sold (COGS)—combining both direct variable production costs and fixed manufacturing factory overhead—according to formal GAAP accounting. Contribution Margin evaluates profitability by subtracting strictly all variable costs (both manufacturing and variable sales/shipping commissions), measuring the exact revenue remaining to cover fixed corporate overhead and generate net profit.
Net Income is the official 'bottom-line' accounting profit calculated on the Income Statement via accrual accounting, subject to non-cash deductions (depreciation, amortization, stock-based compensation) and revenue timing rules. Free Cash Flow (FCF) measures the actual discretionary cash remaining after operating expenses and required capital asset expenditures (FCF = Operating Cash Flow minus Capex), representing true cash available for dividends, debt paydown, and share buybacks.
A Leveraged Buyout (LBO) is an acquisition strategy where an external private equity firm purchases a target company using substantial borrowed debt (typically 60% to 80% of purchase price) secured against the target's own assets and cash flows. A Management Buyout (MBO) occurs when the existing executive management team of a company joins forces with financial sponsors to buy out the controlling stake from existing shareholders or parent corporations.
Cost of Goods Sold (COGS) comprises all direct expenses physically required to manufacture a product or deliver a core service, including raw materials, direct factory labor, and manufacturing overhead. Operating Expenses (OPEX) encompass the indirect day-to-day overhead costs necessary to run the administrative enterprise as a whole, including corporate office rent, marketing advertising, executive salaries, and software subscriptions.
Cash dividends represent direct, periodic cash disbursements paid directly from corporate retained earnings into shareholder brokerage accounts, providing steady income but triggering immediate taxable events. Share buybacks occur when a corporation repurchases its own shares from the open market to cancel them, reducing total shares outstanding, boosting Earnings Per Share (EPS), and offering tax-deferred capital appreciation.
Return on Equity (ROE) measures how efficiently a corporation generates profit from shareholders' invested capital (Net Income ÷ Shareholders' Equity), making it vulnerable to debt leverage distortion. Return on Assets (ROA) measures how efficiently management converts all company assets—funded by both debt and equity—into earnings (Net Income ÷ Total Assets), providing an unmanipulated benchmark of capital efficiency.
Amortization allocates the capitalized cost of non-physical intangible assets (such as patents, trademarks, proprietary algorithms, and software licenses) over their legal or economic useful lives. Depletion allocates the cost of extracting finite natural resources (such as oil reserves, timber stands, coal deposits, and precious metal mines) directly into inventory as physical raw materials are mined and consumed.
A revolving line of credit provides flexible, recurring access to borrowed capital up to a pre-approved ceiling, allowing businesses to draw, repay, and redraw cash as needed while paying interest only on the active outstanding balance. A term loan delivers a single lump-sum cash disbursement upfront, repaid over a fixed multi-year amortization schedule with predictable monthly principal and interest payments.
A Seed round is early-stage startup funding ($500K to $3M) provided by angel investors and micro-VCs to validate product-market fit, build early prototypes, and onboard initial pilot customers, commonly structured using convertible SAFEs. A Series A round is the first institutional venture capital round ($5M to $15M+) aimed at scaling proven unit economics, optimizing sales distribution funnels, and issuing priced preferred stock.
Exchange-traded stock options are standardized derivative contracts created by secondary market traders on options exchanges (such as CBOE) where transactions occur strictly between investors without company involvement or share dilution. Stock warrants are private contracts issued directly by the corporation itself (often as 'sweeteners' alongside debt or venture debt), where exercise injects fresh capital into corporate coffers while issuing brand-new shares that dilute existing equity.
Equity Value (Market Cap) represents the total open-market dollar value of a company's common shares available to equity shareholders (Share Price × Total Shares Outstanding). Enterprise Value (EV) measures the theoretical total cost to acquire the entire operating business, calculated as Equity Value plus Total Debt and Preferred Equity minus Cash, reflecting the true takeover price debt-free and cash-free.
Customer Acquisition Cost (CAC) measures the total sales and marketing expenditure required to win a single new paying customer. Lifetime Value (LTV) estimates the total net gross profit a business generates from that customer across their entire relationship. The ratio between them (LTV:CAC) represents the definitive health benchmark of modern subscription and SaaS business models.
Burn rate is the pace at which a non-profitable company spends cash reserves each month, separated into Gross Burn (total monthly cash outflow) and Net Burn (cash outflow minus revenue). Runway is the resulting survival timeline measured in months, calculated by dividing total liquid bank cash by net monthly burn rate, showing precisely how long the startup can survive before running out of money.
In venture capital financings, liquidation preferences dictate who gets paid first when a company is sold. Non-participating preferred stock gives investors a choice: take their original investment back first (typically 1x), OR convert to common stock to share pro-rata in total proceeds. Participating preferred stock allows investors to 'double-dip': they take their full investment back first, AND THEN also participate pro-rata in remaining proceeds alongside common shareholders.
Convertible debt is a short-term loan instrument that accrues interest and postpones company valuation, converting into equity shares during a future financing round at a discount or valuation cap. A priced equity round establishes a formal, negotiated post-money valuation where investors immediately purchase specific shares of preferred stock, requiring comprehensive due diligence, corporate charter amendments, and substantial legal expenditures.
A SAFE (Simple Agreement for Future Equity) is a modular legal instrument created by Y Combinator that gives early investors the right to convert their capital into equity during a future priced round, carrying no interest and no debt maturity date. A convertible note is a traditional debt instrument that accrues interest over time and features a strict maturity date at which the company must either repay the loan or negotiate an extension.
Identifiable intangible assets are non-physical commercial assets that can be individually separated, licensed, or sold—such as patents, trademarks, software copyrights, and proprietary customer contracts. Accounting goodwill is an unidentifiable residual asset arising strictly during a business acquisition, representing the premium purchase price paid over the aggregate fair market value of all acquired net tangible and identifiable intangible assets.
Accrual accounting records revenues and associated expenses in the period in which they are earned or incurred, regardless of when cash changes hands, adhering strictly to the GAAP matching principle. Cash basis accounting records transactions solely when money is deposited into or disbursed from corporate bank accounts, offering a simplified cash-flow snapshot for small businesses.
Incentive Stock Options (ISOs) are statutory equity awards granted strictly to employees that enjoy favorable federal tax treatment, triggering no ordinary income tax upon exercise (though potentially subject to the Alternative Minimum Tax) and qualifying for long-term capital gains if held for required statutory periods. Non-Qualified Stock Options (NSOs) can be granted to employees, advisors, and contractors, triggering ordinary income tax and payroll withholdings immediately upon exercise on the spread between the strike price and fair market value.
A Right of First Refusal (ROFR) gives the right-holder the contractual opportunity to match any bona fide third-party offer already negotiated by the selling shareholder before the shares can be sold. A Right of First Offer (ROFO) requires the seller to offer the shares to the right-holder first at a stated price and terms; only if the right-holder declines or fails to agree can the seller market the asset to third parties at a price equal to or higher than offered.
Retained earnings represent cumulative historical net income generated by ongoing core business operations that have been retained in the business rather than distributed to stockholders as cash dividends. A capital reserve represents equity set aside from non-operating, non-trading capital transactions—such as issuing stock above par value (share premium), asset revaluations, or corporate reorganizations—which is legally restricted from dividend distributions.
A venture capital term sheet is a summary document outlining the fundamental investment terms, valuation cap, liquidation preference, and governance rights for an equity funding round (Series A/B) in a startup. A Letter of Intent (LOI) is a bilateral preliminary agreement utilized in mergers, corporate acquisitions, and major commercial transactions that establishes purchase price frameworks, due diligence windows, and legally binding exclusivity periods.
A statutory merger is a corporate transaction executed pursuant to state corporate law where the target entity is absorbed into the acquirer (or an acquisition subsidiary), automatically transferring all contracts, permits, assets, and unknown liabilities by operation of law. An asset purchase allows the buyer to cherry-pick specific tangible and intangible assets while leaving unwanted liabilities and contingent legal lawsuits behind in the selling corporate shell.
GAAP Net Income is the standardized bottom-line net profit calculated according to strictly regulated US Generally Accepted Accounting Principles, subtracting all operational expenses, stock-based compensation, depreciation, interest, and taxes. Non-GAAP Adjusted EBITDA is a customized management metric that adds back non-cash expenses, restructuring costs, and debt financing items to project core operating cash generation, frequently scrutinized for masking real corporate operational costs.
A standard non-revolving business line of credit provides a pre-approved pool of borrowed capital that can be drawn down as needed; once funds are repaid, the credit limit does not replenish and the account closes upon full repayment. A revolving credit facility automatically replenishes available credit as balances are paid down, functioning as an evergreen working capital account that businesses can tap, repay, and re-draw repeatedly over multi-year terms.
A Convertible Promissory Note is a traditional debt instrument that accrues interest, carries a formal maturity date, and can trigger bankruptcy default, whereas a KISS (created by 500 Global) is a streamlined hybrid agreement available in debt or equity flavors, featuring pre-negotiated investor protections and standard boilerplate that eliminates high legal fees.
Regulation CF allows early-stage startups to raise up to $5 million in a 12-month period from retail and accredited investors through registered funding portals with low regulatory overhead, whereas Regulation A+ operates as a 'Mini-IPO' permitting mature companies to raise up to $75 million with SEC qualification and semi-annual reporting.
Incentive Stock Options grant the right to buy company shares at a fixed strike price with potential long-term capital gains tax treatment if holding periods are met, typical of early-stage private startups, whereas RSUs are direct grants of actual company stock upon meeting vesting schedules that are taxed immediately as ordinary income upon delivery, standard at mature tech companies.
An operating lease is a rental agreement where the lessee utilizes an asset for a portion of its economic life without transferring ownership, treating payments as operating expenses, whereas a finance lease is an economically disguised asset purchase where substantially all risks, rewards, and ownership equity transfer to the lessee, resulting in asset capitalization, interest expense, and depreciation on the balance sheet under ASC 842 / IFRS 16.
Accrued expenses represent liabilities for goods or services that a business has already received and used but for which no formal vendor invoice has been received, whereas Accounts Payable represents verified, formal supplier invoices received that are awaiting scheduled cash payment.
Simple interest calculates finance charges strictly on the original principal amount, producing predictable linear growth, whereas compound interest calculates finance charges on both the original principal and the accumulated interest from prior compounding periods, resulting in rapid exponential growth.