29 Financial Terms Every Seller Needs to Know

How well do you understand the basics of your customers' financial performance? This glossary covers the go-to vocabulary every strategic seller's account plan should reference.

For sellers to understand a buyer's strategic priorities, they must also understand the company's financial health.

The problem? Strong financial acumen isn’t often taught on the job. And when sellers lack the knowledge to align to key metrics, they get stuck chasing low-level problems that lead to small deals—if they can even get buyers to connect.

That's why we’ve compiled this glossary of 29 financial terms every seller needs to know. In addition to definitions and related formulas, we've also included important details on when sellers should apply or track these metrics. Learn these, and you'll start seeing the big-picture challenges that buyers expect you to solve. More importantly, you'll create more strategic relationships for bigger, better deals.

Get to Know These Financial Terms

A 10-K (also called Form 10-K) is a financial performance report that the U.S. Securities and Exchange Commission (SEC) requires publicly-traded companies to file annually—which is why we typically think of it as “the annual report.” (Note that this shouldn’t be confused with a company’s annual shareholder report, which is a more stylized, formal publication that tends to contain less analyst-focused detail and is sent to shareholders before the annual election of company directors.) You can find a public company’s 10-Ks on the SEC website.

The 10-K includes five main sections:

  • Business. This is an overview of company operations, products and services. If you’re looking for basic info on how a company makes money, this is a good place to start.
  • Risk factors. Here, a company lists the risks it’s currently facing or may face in the future. You can often gauge the level of impact risks might have on a company’s performance by the order in which they’re listed; bigger risks are usually at the top of the list. But avoid the temptation to base your sales motions on what you find here. Companies literally outline any and every perceivable risk to their business in this section, so it's not really a true lens into the concerns executives see as immediately threatening and worth actively investing in to resolve.
  • Selected financial data. As you might imagine, this section offers some specific details about the company’s financial performance, typically through a near-term lens covering the last five years.
    Management’s discussion and analysis of financial condition and results of operations. This section is paydirt for strategic sellers. The MD&A, as it’s often called, is where executives provide their own perspective on the company’s performance and outcomes from the past year. If you’re looking for a way to connect with a specific company leader, you’ll find great opportunities here.
  • Financial statements and supplementary data. Now for the nitty-gritty details. This section contains all the official and audited numbers from the past year, including the income or Profit & Loss (P&L) statement, balance sheets, and statement of cash flows. Sellers can use this data to better understand where a company might be struggling, so they can align use cases to specific financial needs.

An 8-K (or Form 8-K) is a report that the SEC requires publicly traded companies to file regarding any unscheduled material events or corporate changes at a company. The objective is to remain transparent with shareholders and the SEC about anything that might have an impact on share prices or trading. For example, if a company makes an acquisition, changes executive leadership, declares bankruptcy, changes its capital spending, updates its guidance, or adjusts the timing of its fiscal year, it must file an 8-K within four business days of the event.

The fact that the report is so timely gives sellers a unique opportunity to tailor strategic narratives to urgent or high-impact events—so it could be worth setting an alert for this report on all your accounts. You want to keep watch on anything that could be either indicative of risks or accelerators to opportunities.

This metric tells you how much a company spends on a weekly, monthly, and yearly basis. Using this information, sellers can tell whether a company might have trouble sustaining current operating costs and how urgent the need is.

Burn Rate = (Starting Balance – Ending Balance) / # Months

The cash conversion cycle (CCC) is one of several key metrics for management effectiveness. Specifically, it measures how fast a company can convert cash on hand into even more cash on hand. The CCC does this by following the cash as it’s first converted (produced) into inventory and accounts payable (AP), through sales and accounts receivable (AR), and then back into cash.

Generally, the lower this number is, the better for the company. Although it should be combined with other metrics (such as Return on Equity and Return on Assets), it can be especially useful for comparing close competitors, because the company with the lowest CCC is often the one with better management.

CCC = Days of Sales Outstanding + Days of Inventory Outstanding - Days of Payables Outstanding

Change in Cost Position (Cost Take-Out) is generally assessed by looking at analyst revenue and profit forecasts to determine how much of the expected profit will come from sources other than expected revenue growth (scaling at the latest operating margin). Cost take-out is a forward-looking metric, so view it as an estimate rather than a set figure.

This metric matters to sellers because it can help you understand whether cutting costs or growing revenue will impact a company’s profitability. Generally speaking, a higher percentage of profit improvement (30% or more) tied to Cost Take-Out tells you that reducing costs will have a greater impact on profit, whereas a lower percentage (usually less than 20%) tells you that boosting revenue growth is likely to be more important to management.

Also referred to as COGS, this term pretty much means what it says: It’s the actual costs (both material and labor) of producing the goods a company sells. If a company sells shoes, for example, their COGS is the amount of money it takes to physically make the shoes. Note that COGS does not include indirect expenses beyond production, such as distribution, marketing, sales, R&D expenses like engineering, and other administrative costs or salaries.

The current ratio is a key financial health metric that tells you a company’s basic solvency, or whether it could successfully pay all of its financial obligations in one year’s time, given assets on hand. A current ratio of 1 or more indicates that a company has more assets than it does debts.

Current Ratio = Current Assets / Current Liabilities

The D/E ratio, as its name implies, measures how much of a company is financed with straight-up debt (i.e., loans) as opposed to equity (shares in the company). An optimal D/E ratio is considered to be no higher than 2.0, which means two-thirds of the company’s financing comes from debt and one-third from equity shares.

This metric is important in that it gives sellers a cue about the type of urgency behind a company’s profitability goals, as well as the risk with which they’re viewed in the market. Companies with more borrowed money to repay tend to be seen as riskier investments. They’ll be extremely interested in improving profitability fast.

Debt-to-Equity Ratio = Total Debt / Total Equity

Publicly traded companies hold regular (often quarterly) calls with analysts and investors to discuss their financial performance for the term. These sessions are recorded, and the transcripts are typically provided on a company’s website along with other key investor materials.

These transcripts are a treasure trove of management intent and executive insight regarding a company’s strategic priorities, largely because they contain Q&A sessions at the end. Sellers can comb these documents for near-real-time takes on what matters most to company leadership, making it easier to connect use cases to buyer needs.

EBITDA—or earnings before interest, tax, depreciation and amortization—theoretically measures the size of a company’s profits. But take the data with a grain of salt. EBITDA often does not tell the whole story about how profitable a company is, particularly when looked at independently of EBITDA Margin or other profitability metrics. Because EBITDA excludes information relating to debt, it should be used with caution to assess the profitability of companies with high debt levels.

EBITDA Margin is an important metric for assessing the operating profitability and efficiency of a company. It’s calculated by expressing a company’s EBITDA as a percentage of the company’s total revenue. A high EBITDA Margin indicates that a company’s operating costs are small relative to its total revenue. A low margin, on the other hand, can indicate a company has cost-cutting work to do—which can spell opportunity for sellers.

As EBITDA Margin takes into account employee salaries—usually one of the largest costs for a company—it is a good benchmark for understanding how efficient a business is compared to its competitors. It also excludes financing costs, so it’s generally a better measure of operational performance than Net Income or other profitability metrics.

EBITDA margin = (earnings before interest and tax + depreciation + amortization) / total revenue

In enterprise sales, we use this term to mean a compelling collection of evidence that gives a buyer the financial rationale behind a potential purchase. A Financial Case for Change should be based on a company’s own financial data wherever possible, but can also include competitors’ financials for comparison, which will tell you whether the company's particular performance is "in range" for companies in their industry or not. For instance, Retail is a much lower margin business than Software. A 65% Gross Margin in Retail would be excellent. 65% in Software, on the other hand, would be abysmal. The intent is for a seller to demonstrate how a purchase investment will result in specific financial outcomes that align to the buyer’s specific performance targets. Note this is somewhat different from a Business Case for Change, which looks more at aligning a solution’s use cases to buyers’ strategic priorities. Both are critical to creating strategic sales narratives that engage buyers.

Gross Margin (also known as Gross Profit Margin) represents the percentage of sales revenue that accrues to a company after it has accounted for the direct costs of producing the products or services it sells (or COGS).

Sellers should keep an eye on this metric, as it often indicates where management will be focusing their priorities in the near term. If a company’s Gross Margin is falling, it may decide to cut costs (e.g. labor, supplier, materials costs) or increase the prices of its goods or services.

Gross Margin (%) = (Total revenue – Cost of goods sold) / Total revenue * 100

Also known as Market Sentiment, this is the overall feeling of investors toward a particular company or security traded in the market. A bullish market indicates positive sentiment and rising stock prices, while a bearish market indicates negative sentiment and falling prices. Although there are several technical tools that can help watch or measure investor sentiment, it’s largely based on emotion and feeling—and as such, its impact can be dramatic to the market at large. You can read a real-world example of how investor sentiment tanked the stock market in December 2018 here. Sellers should keep in mind the impact of investor sentiment during strategic account planning. For example, bearish investor sentiment will often cause companies within an Industry to be more conservative with capital spending. And this applies when pitching to private companies, too (because publicly traded competitor performance matters).

This profitability metric is similar to Gross Margin, except it looks at the percentage of revenue left over after subtracting not only COGS, but also interest, taxes, and operating expenses (also known as Net Profit). In other words, Gross Profit Margin looks more at a company’s ability to generate revenue—while Net Profit Margin looks at a company’s ability to operate efficiently and retain profits.

A few things to keep in mind: Companies at different stages or in different industries will often have different profit margins by nature. For example, some companies can have high profit margins because they are experiencing rapid growth. Other companies, like retailers, might have lower profit margins that they compensate for with higher volumes of sales. Your job as a seller is to figure out where your buyer sits on this spectrum and how your solution might drive their profit margin toward any stated performance targets. You’ll typically find Net Profit Margin on the income statement, listed as Net Income.

Net Profit Margin = (Total revenue – (Cost of goods sold + interest + taxes + operating expenses )) / Revenue * 100

This is a critical KPI for most CFOs. It’s typically listed on a cash flow statement outlining the total income generated by a company’s daily business operations. If operating cash flow is positive, a company is positioned well for growth. Negative cash flow, however, indicates rapid action is needed to generate cash and sustain operations.

Profitability is essentially an efficiency metric that weighs an organization’s profit (revenue) as a percentage of its expenses (costs). In other words, how much money does it cost to achieve a certain level of profit? When profit equates to a higher percentage of a company’s expenses, efficiency is greater. A less efficient organization will need to spend more money to achieve the same level of profit. We’ve defined a number of metrics in this post that help measure profitability in different ways.

An alternative to the current ratio, the quick ratio (or acid test ratio) also gauges whether a company is financially capable of paying back its near-term obligations. Unlike the current ratio, however, the quick ratio accounts only considers assets that are easily liquidated into cash on hand—so it’s often thought to paint a more accurate picture of a company’s overall financial health.

Quick Ratio = (Cash + Accounts Receivable + Short-Term Investments) / Current Liabilities

This metric, calculated by dividing a company’s total assets by its net income, shows how efficient a company is at using its assets to generate profit. If you’re comparing company ROAs, it’s best to keep them within the same or similar industry (as industries tend to share the same asset base). Of course, you can also do a historical analysis of a company’s own ROAs year over year to outline any trends.

ROA = Net Income / Total Assets

Somewhat similar to ROA, the ROE metric also measures a company’s efficiency in using its resources to build profitability—but instead of weighing income against assets (which include a company’s debt and liabilities), ROE looks at net income against shareholder equity. Note that Net Income is typically reported on a company’s P&L statement, whereas Total Shareholders’ Equity is reported on the balance sheet. To account for this discrepancy, ROE is usually calculated using average equity over a period of time. A high ROE tells you that a company can more efficiently turn its equity obligations into profit.

ROE = Net Income / Average Shareholders’ Equity

Revenue is the money a company earns annually (income). For many companies, revenue is largely equivalent to sales, but can also include other sources of income such as royalties or returns on investment.

Revenue Growth measures the percentage increase (or decrease) in a company’s revenue over time. Sellers should typically look at Revenue Growth to identify fast-growing companies or as a sort of apples-to-apples converter, in that it gives you a standard by which to compare companies of different sizes or that report in different currencies. Keep in mind that not all issues with Revenue Growth are internally driven. Many external factors can affect variations in a company’s Revenue Growth over specific periods of time—such as seasons (think toy store revenue pre- and post-holidays) or M&A activity.

Revenue Per Employee is another measure of how efficient a company is. High Revenue Per Employee suggests that the company’s workforce is highly productive. As Revenue Per Employee varies significantly between different industries, we recommend sellers only use this metric to compare companies within the same industry.

Revenue Per Employee = Total revenue / # of employees

Selling, General & Administrative (commonly called SG&A) represents the total expenses relating to the support functions of a company. (This is in contrast to COGS, which relates directly to the creation of products or services being sold.) SG&A typically includes all costs around selling, promoting and delivering these goods or services—so anything associated with sales, marketing, customer support, IT, Finance, and HR (including salaries). Companies with SG&A trending upward are usually eager to rein in those costs, so sellers should watch for opportunities here.

SG&A Efficiency, also known as Back Office Efficiency, is equivalent to SG&A costs as a percentage of total revenue. This metric provides a useful insight into the productivity of the company’s support functions and their contribution to generating revenue. Generally, falling SG&A Efficiency is a positive sign, as long as the company’s revenue is growing.

Stock Price is the monetary amount that a single share of a publicly traded company’s stock is currently trading for on the market. Companies are assigned a Stock Price value upon Initial Public Offering (IPO). After trading begins, Stock Prices fluctuate depending on Investor Sentiment. Sellers should focus on the percentage change in a company’s Stock Price over time, rather than its monetary value, as this gives an indication of whether the company’s recent performance and strategy has been viewed positively or negatively by investors—presenting possible opportunities for engagement.

Total Shareholder Return (TSR) measures the performance of a company’s shares over time. TSR is calculated by adding any increase (or decrease) in the share price to the value of dividends paid. It is a crucial metric for publicly listed companies, both as it informs future expectations for the company and is a major component of variable compensation for senior management. TSR also offers an easy way to compare a company’s relative performance against competitors. It is expressed for periods of more than one year as a compound annual growth rate (CAGR).

TSR = (Current Price − Purchase Price) + Dividends / Purchase Price​

Sellers most often look at value drivers in the context of the business at large. Value drivers for a business are those factors that directly influence the worth of the company. We like to encourage sellers to Value drivers are factors that increase the worth of a product, service, asset or business. In the case of a product, it could be a differentiating capability that makes the product a must-have for customers. For a business, it could be economies of scale, skilled staff or a loyal customer base that increases the value of the business for shareholders and potential buyers.

Working capital is a company’s immediately available cash on hand. Similar to the Current Ratio, this metric also looks at the difference between current assets and liabilities, offering an indication of financial health for the near future. Obviously, companies prefer a positive number. You can find all the elements for calculating working capital on a company’s balance sheet.

A few things to note: High working capital isn’t always equivalent to great financial health. It might mean a company is amassing too much inventory, or that it’s spending its own cash to fund operations instead of taking advantage of smarter, low-interest financing. Sellers watching this metric should dig a little deeper to understand the number if it appears off. A better approach might be to look at a company’s trend in working capital, too. The number will always be changing, of course, but an obvious downward trend can signal problems in other areas that you can investigate further as you look for opportunities to engage.

Working Capital = Current Assets – Current Liabilities

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