Small business money glossary
The words of our course in plain English, each with a formula, a worked example and a common mistake.
- Contribution margin
- Price minus the variable costs of one item. It shows how much each sale adds towards fixed costs and then profit.
- Break-even point
- The number of items at which profit is zero: fixed costs / margin per item, rounded up to a whole item.
- Fixed cost
- A cost that stays the same each month, whether you sell a little or a lot, for example rent or a wage for a fixed shift.
- Variable cost
- A cost that grows with every item made or sold, for example ingredients or a fee per order.
- Profit per hour (real hourly pay)
- Profit divided by the owner's working hours in the same period. It shows what the owner's time really earns.
- Markup
- How much you add on top of the cost of an item, as a % of that cost: (price - cost) / cost x 100.
- Margin % (profit margin on the price)
- What share of the price is left after the variable costs of one item: (price - cost) / price x 100. It is always smaller than the markup.
- Cost-plus pricing
- A price set as the cost of one item plus a markup, for example cost x 1.6 for a 60% markup.
- Price floor (lowest price)
- For a one-off extra order when you have spare time, the lowest useful price is the variable cost. In the long run, prices must cover the full cost.
- Opportunity cost
- What you give up by choosing one option: for an hour of your time, what the best other use of that hour would bring.
- Cash flow
- Money that actually comes into the business and goes out of it, week by week or month by month.
- Cash runway
- How many weeks your cash lasts if more money keeps going out than coming in: cash / weekly shortfall.
- Cash buffer (cash reserve)
- Money you keep for bad weeks and surprises, often counted in weeks of fixed costs.
- Accounts receivable
- Money customers owe your business for work already done or goods already delivered.
- Payment terms
- When a bill must be paid, for example "30 days after the invoice" or "half before, half after".
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