Glossary
Business finance terms kept simple—with formulas, examples, and links to the calculators that use them.
Use this glossary when a calculator result uses a term you want to understand more deeply. Each entry is short but useful: definition, simple explanation, formula when it helps, an example, common mistakes, and related tools.
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A
Accounts receivable days
Definition. How many days, on average, it takes to collect payment after a sale on credit.
In simple terms. Higher AR days mean more of your money sits in unpaid invoices. That affects runway and whether you need deposits or tighter terms.
AR days ≈ (accounts receivable ÷ revenue) × days in period
Example. If AR is $30,000 and monthly revenue is $45,000, AR days are roughly 20 on a 30-day basis (simplified).
Common mistake. Ignoring aging—averages can hide a few very late invoices.
Related calculators. Accounts Receivable Days Calculator, Invoice Due Date Calculator
Related terms. Cash flow, Invoice due date, Late fee
After-tax income
Definition. What remains from earnings after estimated income and self-employment taxes (and similar obligations) are accounted for.
In simple terms. Gross revenue is not spendable lifestyle money. After-tax views help set rates, savings, and owner draws more honestly.
After-tax ≈ income − estimated taxes (simplified models vary)
Example. If $80,000 profit faces roughly $20,000 in combined tax estimates, about $60,000 is the after-tax ballpark before personal budgeting.
Common mistake. Comparing a W-2 salary to freelance gross without normalizing for tax and benefits.
Related calculators. After-Tax Income Calculator
Related terms. Self-employment tax, Quarterly tax reserve
ARR
Definition. Annual recurring revenue—subscription revenue expressed on an annualized basis.
In simple terms. ARR is often MRR × 12 (with consistent definitions). Investors and SaaS operators use it to talk about scale without monthly noise.
ARR ≈ MRR × 12 (when definitions align)
Example. $8,000 MRR → about $96,000 ARR.
Common mistake. Annualizing non-recurring revenue or inconsistent MRR definitions.
Related calculators. ARR Calculator, MRR Calculator
Related terms. MRR, LTV, LTV:CAC ratio
B
Billable hours
Definition. Hours you can reasonably charge a client for—usually delivery work, not all work time.
In simple terms. Marketing, bookkeeping, learning, and unpaid meetings often are not billable. Capacity planning should separate available hours from billable hours.
Annual billable hours ≈ weekly billable hours × working weeks
Example. 20 billable hours/week × 48 weeks ≈ 960 billable hours/year.
Common mistake. Using 2,080 hours (40 × 52) as if they were all billable.
Related calculators. Hourly Rate Calculator, Utilization Rate Calculator
Related terms. Utilization rate, Hourly rate
Break-even
Definition. The sales level where contribution covers fixed costs—so profit is roughly zero.
In simple terms. Below break-even you lose money; above it, each incremental sale contributes more to profit (within capacity). Useful for pricing and capacity decisions.
Break-even units ≈ fixed costs ÷ (price − variable cost per unit)
Example. Fixed costs $5,000/month, $40 contribution per unit → break-even at 125 units.
Common mistake. Treating all costs as variable, or ignoring that break-even can shift when pricing or mix changes.
Related calculators. Break-Even Calculator
Related terms. Profit margin, Gross margin, Burn rate
Burn rate
Definition. How fast a business spends cash—usually net monthly cash decrease when expenses exceed cash in.
In simple terms. Startups and early freelancers use burn to understand how aggressive spending is relative to cash on hand. Positive cash generation is the opposite of burn.
Burn rate ≈ monthly cash out − monthly cash in (when out > in)
Example. Spend $12,000 and collect $7,000 in a month → about $5,000 monthly burn.
Common mistake. Calling all expenses “burn” even when revenue covers them, or ignoring one-time cash events.
Related calculators. Burn Rate Calculator, Runway Calculator
C
CAC
Definition. Customer acquisition cost—what you spend, on average, to win one new customer.
In simple terms. CAC usually includes ads, sales time, tools, and related acquisition spend for a period, divided by new customers won in that period.
CAC = acquisition spend ÷ new customers acquired
Example. $5,000 marketing spend and 25 new customers → $200 CAC.
Common mistake. Excluding sales labor or counting leads instead of paying customers.
Related calculators. CAC Calculator, LTV:CAC Ratio Calculator
Related terms. LTV, LTV:CAC ratio, ROI
Cash flow
Definition. The movement of cash in and out of the business over a period—not the same as profit on paper.
In simple terms. You can be profitable and still short on cash if customers pay late or you buy inventory up front. Cash-flow views focus on timing.
Net cash flow = cash in − cash out (for the period)
Example. Invoicing $20,000 but collecting $8,000 while paying $12,000 in bills creates a cash squeeze despite strong sales.
Common mistake. Equating booked revenue with cash in the bank.
Related calculators. Cash Flow Forecast Calculator, Accounts Receivable Days Calculator
Related terms. Accounts receivable days, Burn rate, Runway
E
Effective hourly rate
Definition. What you actually earned per hour after dividing real pay by all hours worked—not only billed hours.
In simple terms. Project fees can look high until you count revisions, sales, and admin. Effective rate shows the true return on time.
Effective hourly rate = total earnings ÷ total hours worked
Example. A $3,000 project that took 60 hours (including unpaid work) is $50/hour effective—not the $100/hour you quoted for 30 billable hours.
Common mistake. Comparing quoted rates across freelancers without knowing how much unpaid time each includes.
Related calculators. Effective Hourly Rate Calculator, Project Pricing Calculator
Related terms. Hourly rate, Utilization rate, Billable hours
Effective rate
Definition. Total processing cost as a percentage of the payment amount.
In simple terms. Because of fixed per-transaction fees, small payments often have a higher effective rate than large ones—even at the same posted rate.
Effective rate = processing fee ÷ payment amount
Example. A $3.20 fee on $100 is a 3.2% effective rate. The same structure on a $20 charge is a much higher effective rate.
Common mistake. Using the advertised percentage alone when comparing processors or pricing low-ticket items.
Related calculators. Stripe Fee Calculator, Processor Comparison Tool
Related terms. Processing fee, Net payout
Estimated tax
Definition. Advance payments of income tax (and often self-employment tax) made during the year when withholding is not enough.
In simple terms. The IRS expects tax to be paid as you earn. Freelancers commonly use quarterly estimated payments based on projected profit.
Varies—often based on projected taxable income and prior-year safe harbors
Example. A profitable sole prop with little withholding may send four estimated payments instead of waiting until filing season.
Common mistake. Skipping estimates when you had a large prior-year liability and triggering underpayment penalties.
Related calculators. Estimated Tax Calculator, Quarterly Tax Reserve Calculator
Related terms. Quarterly tax reserve, Self-employment tax
F
Fee pass-through
Definition. Raising your price (or adding a fee) so the customer covers some or all of the processing cost.
In simple terms. If you need a target net after fees, you invoice a higher amount. Rules for surcharges and convenience fees vary by card network and location—check before adding line-item fees.
Invoice for target net ≈ (target net + fixed fee) ÷ (1 − rate)
Example. To keep about $100 after 2.9% + $0.30, you typically need to invoice a bit more than $100.
Common mistake. Adding a surcharge where it is restricted, or forgetting currency and cross-border fees.
Related calculators. Fee Pass-Through Calculator
Related terms. Processing fee, Net payout
G
Gross margin
Definition. Revenue minus cost of goods sold (or direct delivery costs), often shown as a percentage of revenue.
In simple terms. Gross margin shows whether the core offer is priced above direct cost before overhead like rent, software, and marketing.
Gross margin % = (revenue − COGS) ÷ revenue
Example. Sell $10,000 of product with $4,000 COGS → $6,000 gross profit → 60% gross margin.
Common mistake. Stuffing all operating expenses into COGS (or leaving direct labor out) and misreading the business model.
Related calculators. Gross Margin Calculator, Profit Margin Calculator
Related terms. Profit margin, Break-even
H
Hourly rate
Definition. The price you charge per billable hour so income and business costs fit your goals.
In simple terms. A sustainable rate covers desired income, business expenses, and non-billable time—not only the hours you hope to invoice.
Hourly rate ≈ (desired income + annual expenses + profit buffer) ÷ annual billable hours
Example. If you need $90,000 covered and expect 1,200 billable hours, you need about $75/hour before tax nuance.
Common mistake. Pricing from take-home wish alone while ignoring expenses, taxes, and unpaid admin time.
Related calculators. Hourly Rate Calculator, Effective Hourly Rate Calculator
Related terms. Effective hourly rate, Utilization rate, Billable hours
I
Invoice due date
Definition. The date payment is expected under your payment terms (Net 15, Net 30, due on receipt, etc.).
In simple terms. Clear due dates set collection expectations. They also feed cash-flow forecasts and late-fee policies.
Due date = invoice date + payment terms (in days)
Example. Invoice dated March 1 on Net 30 is due March 31.
Common mistake. Sending invoices without stated terms, then arguing about “late.”
Related calculators. Invoice Due Date Calculator, Late Fee Calculator
Related terms. Late fee, Accounts receivable days, Cash flow
L
Late fee
Definition. An extra charge applied when payment arrives after the due date, according to your terms and applicable rules.
In simple terms. Late fees can encourage on-time payment, but they must be disclosed and legally allowed. They are not a substitute for deposits and clear scope.
Late fee ≈ overdue amount × late fee rate (or a fixed fee, per your terms)
Example. A $2,000 invoice 15 days late at 1.5%/month (if allowed and disclosed) is modeled differently than a flat $25 fee.
Common mistake. Adding surprise fees that were never in the contract or invoice terms.
Related calculators. Late Fee Calculator, Invoice Due Date Calculator
Related terms. Invoice due date, Accounts receivable days
LTV
Definition. Customer lifetime value—estimated gross profit (or revenue, depending on model) from a customer over the relationship.
In simple terms. LTV helps you decide how much you can spend to acquire a customer. Simple models use average revenue, margin, and lifespan or churn.
Common simple form: LTV ≈ ARPU × gross margin × average customer lifespan
Example. $50/month, 70% margin, 24-month average life → LTV ≈ $840 in that model.
Common mistake. Using revenue LTV against costs that need gross-profit LTV—or ignoring churn.
Related calculators. LTV Calculator, LTV:CAC Ratio Calculator
Related terms. CAC, LTV:CAC ratio, MRR
LTV:CAC ratio
Definition. How customer lifetime value compares to what it costs to acquire that customer.
In simple terms. A higher ratio generally means acquisition is more efficient—though “good” targets depend on margins, payback period, and growth stage. It is a directional health check, not a law.
LTV:CAC = LTV ÷ CAC
Example. LTV $800 and CAC $200 → 4:1 LTV:CAC.
Common mistake. Optimizing the ratio by under-investing in growth, or comparing ratios built with different LTV definitions.
Related calculators. LTV:CAC Ratio Calculator, LTV Calculator, CAC Calculator
M
MRR
Definition. Monthly recurring revenue—normalized subscription revenue you expect every month.
In simple terms. MRR smooths annual and monthly plans into a monthly run-rate so growth and churn are easier to compare. One-time setup fees usually are not MRR.
MRR ≈ sum of normalized monthly subscription amounts
Example. Ten customers on $50/month and two on $600/year ($50/month each) → $600 MRR.
Common mistake. Mixing one-time revenue into MRR or forgetting to normalize annual plans.
Related calculators. MRR Calculator, ARR Calculator
N
Net payout
Definition. What you actually receive after processing fees are deducted from a payment.
In simple terms. Customers pay the invoice amount; the processor keeps its fee; the remainder is your net. Pricing and cash-flow decisions should use net, not the sticker invoice total.
Net payout = invoice amount − processing fee
Example. Invoice $250, fee $7.55 → net payout ≈ $242.45.
Common mistake. Planning expenses from the full invoice amount and discovering shortfalls after fees clear.
Related calculators. Stripe Fee Calculator, Fee Pass-Through Calculator
Related terms. Processing fee, Effective rate, Fee pass-through
P
Processing fee
Definition. The amount a payment processor charges to accept a card or digital payment.
In simple terms. Most online processors charge a percentage of the payment plus a fixed per-transaction amount. The fee is how the processor gets paid for authorization, settlement, fraud tools, and payouts.
Fee ≈ (rate × transaction amount) + fixed fee
Example. On a $100 charge at 2.9% + $0.30, the fee is about $3.20 and you keep about $96.80 (before refunds or chargebacks).
Common mistake. Comparing only the percentage rate and ignoring the fixed fee—or assuming every payment method uses the same rate.
Related calculators. Stripe Fee Calculator, PayPal Fee Calculator, Square Fee Calculator, Processor Comparison Tool
Related terms. Net payout, Effective rate, Fee pass-through
Profit margin
Definition. Profit as a percentage of revenue—how much of each sales dollar remains after the costs you include.
In simple terms. Margin answers “is this business (or period) actually profitable?” Define costs the same way every time so comparisons mean something.
Profit margin = profit ÷ revenue (profit = revenue − costs)
Example. $20,000 profit on $100,000 revenue is a 20% profit margin.
Common mistake. Mixing personal draws, one-off investments, and operating costs without labeling what the margin includes.
Related calculators. Profit Margin Calculator, Gross Margin Calculator
Related terms. Gross margin, Break-even, ROI
Project pricing
Definition. Setting a fixed (or capped) price for a scoped body of work instead of pure hourly billing.
In simple terms. Good project prices usually start from estimated hours and your target rate, then add risk, revisions, and value. The quote should survive scope creep assumptions you write down.
Project price ≈ (estimated hours × target rate) × risk/value factor
Example. 40 hours at $100/hour with a 1.25 buffer → about a $5,000 project quote.
Common mistake. Quoting a round number with no hour estimate, then absorbing unlimited revisions.
Related calculators. Project Pricing Calculator, Hourly Rate Calculator
Related terms. Hourly rate, Effective hourly rate
Q
Quarterly tax reserve
Definition. Money set aside during the year so estimated tax payments and year-end balances are less painful.
In simple terms. Independent businesses often owe tax throughout the year. A reserve turns irregular income into a predictable habit instead of a April surprise.
Reserve ≈ expected annual tax ÷ number of set-aside periods (e.g. 4)
Example. If you expect $12,000 of tax for the year, reserving about $3,000 per quarter (or a % of each payout) keeps you closer to current.
Common mistake. Spending every invoice and hoping future months cover last quarter’s tax.
Related calculators. Quarterly Tax Reserve Calculator, Estimated Tax Calculator
Related terms. Estimated tax, Self-employment tax, After-tax income
R
ROI
Definition. Return on investment—gain (or loss) relative to what you put in, usually as a percentage.
In simple terms. ROI helps compare options (ads, tools, courses, equipment) on a common scale. Define the investment and the return window clearly.
ROI = (gain − cost) ÷ cost
Example. Spend $1,000 on a campaign that returns $1,400 attributable profit → 40% ROI.
Common mistake. Claiming ROI without isolating the investment cost or counting revenue that would have happened anyway.
Related calculators. ROI Calculator
Related terms. Profit margin, CAC, LTV
Runway
Definition. How many months current cash can fund the business at the current burn rate.
In simple terms. Runway is a planning clock—not a prediction of success. It tells you how long you have to grow revenue, cut costs, or raise funds before cash hits zero.
Runway (months) ≈ cash balance ÷ monthly burn rate
Example. $60,000 cash and $10,000/month burn → about 6 months of runway.
Common mistake. Using an optimistic burn that ignores upcoming known costs, or forgetting taxes and owner draws.
Related calculators. Runway Calculator, Burn Rate Calculator
S
Self-employment tax
Definition. U.S. Social Security and Medicare taxes paid by self-employed people on net earnings from self-employment.
In simple terms. Employees split FICA with their employer. Freelancers generally pay both sides (with deductions and rules that change—verify with IRS guidance or a tax pro).
Often estimated from net self-employment income × applicable SE tax rates
Example. Many owners reserve roughly 15% of profit as a starting SE-tax ballpark, then refine with real forms and credits.
Common mistake. Only budgeting income tax and forgetting SE tax until quarterly payments are due.
Related calculators. Self-Employment Tax Calculator, Quarterly Tax Reserve Calculator
Related terms. Quarterly tax reserve, Estimated tax, After-tax income
U
Utilization rate
Definition. The share of available work time that is billable (or productive toward revenue).
In simple terms. No one bills 100% of the week. Utilization explains why a target hourly rate must be higher than a naive income ÷ hours-in-a-year math.
Utilization = billable hours ÷ available hours
Example. 25 billable hours in a 40-hour week is 62.5% utilization.
Common mistake. Assuming full-time hours are all billable when setting prices or hiring capacity.
Related calculators. Utilization Rate Calculator, Hourly Rate Calculator
Related terms. Billable hours, Hourly rate, Effective hourly rate