Financial dictionary

A

• Amortization scheduleA table of every loan payment: how much of each is interest, how much is principal and how much remains to be repaid.
• Annualized return (CAGR)The average compound annual return of an investment between two dates.
• APR / APY (annual equivalent rate)A measure of the real annual cost or return of a product: it includes the interest rate, how often interest is paid and, for loans, mandatory fees and costs.
• Arrangement feeAn amount the lender charges for granting a loan, usually a percentage of the amount.

B

• Balloon paymentA large amount left to pay at the end of some car finance deals in exchange for low monthly payments.
• Break-even pointThe sales volume at which you cover all costs, neither making nor losing money.
• BudgetA plan of income and spending for a period, usually a month.
• Burn rateThe money a business loses each month when it pays out more than it collects: monthly payments − monthly receipts.

C

• CAC (customer acquisition cost)What it costs to win a new customer: marketing and sales spend for the period ÷ new customers.
• Cash conversion cycleThe days between paying your suppliers and collecting from customers: inventory days + collection days − payment days.
• Cash flowThe money that actually comes in and goes out of the business in a period.
• Cash flow forecastA week-by-week or month-by-month plan of expected receipts and payments, to see in advance when cash will run short.
• Cash runwayThe months a business can keep operating with its cash if receipts do not cover payments: cash ÷ net monthly burn.
• Compound interestInterest earned on a balance is added to it and then earns interest itself.
• Contribution marginWhat each sale leaves after paying its variable costs, available to cover fixed costs and generate profit.
• Current ratioCurrent assets ÷ current liabilities.
• Customer lifetime value (LTV)The total contribution a customer leaves while they stay with you.

D

• Days sales outstanding (DSO)The average number of days it takes to collect your sales: receivables ÷ annual sales × 365.
• Debt-to-equityThe ratio between a company's debt and its equity.
• DiversificationSpreading money across different investments, sectors or countries so that a fall in one weighs less on the whole.
• DividendPart of a company's profit paid out to its shareholders.

E

• Early repayment (overpayment)Paying back part of the debt ahead of schedule.
• EBITDAEarnings before interest, taxes, depreciation and amortization.
• Emergency fundMoney set aside and available for the unexpected, such as a breakdown or a few months without income.
• EuriborA reference index reflecting the rate at which euro-area banks lend to each other.
• Extra paymentsPayments on top of the monthly salary, common in Spain (usually in June and December).

F

• Fixed costA cost that does not change with what you sell or produce, at least in the short term: rent, salaries, insurance, subscriptions.
• Fixed-payment loan (French amortization)A way of repaying a loan with equal payments.
• Fixed-rate mortgageA mortgage with the same interest rate for the whole term.

G

• Gross salaryWhat you agree with your employer before taxes and social contributions are deducted.

I

• Index fundAn investment fund that tracks an index, such as the S&P 500, instead of picking individual stocks.
• InflationA general, sustained rise in prices.
• IRR (internal rate of return)The annual return that makes an investment's NPV zero.

L

• LiquidityHow easily an asset can be turned into cash quickly without losing value.
• Loan-to-value (LTV)The ratio between the loan amount and the property's value.

M

• Management feeAn annual percentage a fund or manager charges on the money invested.
• MarginWhat is left from a sale after subtracting the cost, as a percentage of the selling price.
• Margin (spread)A fixed percentage the lender adds to the reference index on a variable mortgage to get the interest rate.
• Margin of safetyHow much your sales can fall before you make a loss, as a percentage of current sales: (sales − break-even) ÷ sales.
• MarkupWhat is added to the cost to set the price, as a percentage of the cost.
• Maximum drawdownThe largest fall in an investment's value from a previous high to the lowest point.

N

• Net salary (take-home pay)What reaches your account: gross pay minus social security contributions and income tax withholding.
• Net worthEverything you own (cash, investments, home…) minus everything you owe.
• Nominal interest rateThe annual interest rate applied to a loan or deposit, excluding fees and the effect of compounding.
• NPV (net present value)The sum of an investment's cash flows expressed in today's money, discounted at the return you require, minus the initial investment.

P

• Payback periodThe time an investment takes to return the money invested from the cash it generates.
• Price-volume-mix analysisA method to explain the difference between actual and budgeted profit: how much is due to the number of units sold (volume), selling more of some products than others (mix), price and costs.
• Principal repayment (amortization)Repaying the principal of a loan.
• Purchasing powerThe amount of goods and services your income can buy.

Q

• Quick ratio (acid test)Like the current ratio, but leaving out inventory, which can take time to sell: (current assets − inventory) ÷ current liabilities.

R

• Real returnWhat an investment really earns after inflation, that is, in purchasing power.
• Reorder pointThe stock level at which you should place a new order: daily sales × lead time in days + safety stock.
• ROAS (return on ad spend)Sales attributed to a campaign for each unit spent on advertising.
• ROE (return on equity)Net profit ÷ equity.
• ROI (return on investment)An investment's gain relative to the amount invested: (gain − investment) ÷ investment.

S

• Safety stockReserve inventory so you do not run out if sales rise or an order is late.
• Savings rateThe share of your net income you do not spend.
• Sensitivity analysisChecking how a result, such as profit, changes when one or two inputs vary, such as price or units.
• Simple interestInterest always calculated on the original amount, without adding the interest already earned.

T

• Tax withholdingPart of your pay that your employer deducts and pays in advance towards your income tax (IRPF in Spain).
• Tied productsProducts the lender asks you to take in exchange for a lower rate, such as insurance, salary deposit or cards.

U

• Unit costWhat each unit costs to produce: its variable cost plus its share of fixed costs.

V

• Variable costA cost that rises with each unit you sell or produce: materials, shipping, sales fees.
• Variable-rate mortgageA mortgage whose rate is reviewed periodically (usually every year) based on a reference index, such as Euribor, plus a margin.
• VolatilityHow much the value of an investment moves up and down over short periods.

W

• Working capitalThe difference between what a business holds in the short term (cash, receivables, inventory) and what it owes in the short term.