The owner's glossary
Plain words for the important numbers.
Definitions, formulas and context for owners.
Accounts Receivable Turnover
A ratio showing how many times per period a business collects its average accounts receivable balance.
Add-Backs
Discretionary or non-recurring expenses added back to net income to reflect a business's normalized earning capacity.
Break-Even Point
The sales volume or revenue at which total revenue equals total costs, with zero profit or loss.
Cash Conversion Cycle
The number of days it takes a business to convert spending on inventory and operations back into cash from sales.
Contribution Margin
Revenue remaining after variable costs, used to show how much each sale contributes toward covering fixed costs.
Days Sales Outstanding (DSO)
The average number of days it takes a business to collect payment after a sale is made on credit.
EBITDA
Earnings before interest, taxes, depreciation and amortization. EBITDA is not cash flow and is not the same as adjusted EBITDA.
Gross Margin
The percentage of revenue remaining after subtracting the direct cost of goods or services sold.
Markup
The percentage added to a product or service's cost to set its selling price.
Net Working Capital
The difference between current assets and current liabilities, measuring short-term liquidity to cover near-term obligations.
Overhead
Indirect costs that support operations rather than a single unit or job. Production overhead can be part of cost of goods sold; classification matters.
Owner's Draw
For a sole proprietor, business money withdrawn for personal use; it is not a deductible salary paid to oneself. Other entity types use different pay and distribution rules.
Owner's Equity
The owner's residual claim on business assets after subtracting all liabilities, per the books — not a measure of sale value.
Retained Earnings
The cumulative corporate profits kept in the business after dividends, rather than paid out to shareholders.
Seller's Discretionary Earnings (SDE)
A normalized profit figure used in small business valuation that adds back owner salary and discretionary costs to net income.
Retainage
Retainage is the portion of a construction progress payment withheld until contractual release conditions are met. It delays cash collection but does not automatically reduce the contract price or earned revenue. Track it separately from ordinary receivables, and check the contract and applicable law before assuming a withholding rate or payment deadline.
Job costing
Job costing tracks revenue and costs for an individual project so an owner can compare estimates with actual results. Include materials, subcontractors, direct labor and other attributable costs consistently. Show allocated overhead separately when used, because job gross profit and profit after overhead answer different questions about pricing and performance.
Gross profit vs net profit
Gross profit is revenue minus cost of goods sold; net profit reflects the remaining applicable expenses and other income or charges. Gross profit shows what sales leave to cover overhead. Always state whether owner compensation, interest and taxes are included before comparing a reported net profit with another business.
SDE vs EBITDA
Seller’s discretionary earnings, or SDE, commonly measures earnings before one working owner’s compensation and documented discretionary adjustments. EBITDA measures earnings before interest, taxes, depreciation and amortization, generally retaining compensation for required management. Neither equals cash flow, and comparisons require consistent adjustments, realistic replacement pay and a matching valuation multiple.
WIP overbilling and underbilling
A construction work-in-progress schedule compares earned revenue with billings on unfinished jobs. Overbilling means billings exceed earned revenue; underbilling means earned revenue exceeds billings. Under a cost-to-cost illustration, progress depends on costs incurred relative to estimated total costs, so estimate changes can move these balances without any new cash receipt.