Summary
Financial models, loan applications and investor meetings come with their own vocabulary, and not knowing it can leave owners nodding along to decisions they don't fully understand. This glossary explains about 50 terms Canadian business owners hear most, grouped into model basics, profitability, cash and working capital, lending, valuation, start-up metrics and Canadian tax, including the CRA business number (BN) and its program accounts. A worked example then shows the key ratios calculated from one set of statements.
Sit in on a meeting between a business owner and their banker, and you'll hear a dozen terms in the first ten minutes: DSCR, covenants, working capital, EBITDA, amortization, security. An investor meeting adds burn rate, runway, post-money valuation and dilution. Your accountant contributes ITCs, CCPC status and instalments. Each one matters to a decision you're about to make.
Many owners pick these terms up gradually, sometimes after an expensive misunderstanding. A loan covenant that wasn't understood, a valuation calculated on the wrong basis, or a cash shortfall nobody saw coming because "profit" and "cash" were treated as the same thing. Knowing the vocabulary helps you ask better questions and make better decisions.
This glossary explains the terms in plain English, with a Canadian focus. Use the search box to jump straight to a term, or read section by section. At the end, a worked example shows how the most important ratios are calculated from one set of statements, using the Ontario business from our guide to three-statement financial models for SMEs.
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Why the Vocabulary Matters
Some terms come up far more often than others in conversations with lenders and investors. In our experience, the most frequent topics are:
Terms owners hear most in lender and investor meetings
Illustrative frequency, relative to the most common
1. Model Basics
- Financial model
- A spreadsheet that links assumptions about a business to projected financial statements, so changing an input updates every result.
- Three-statement model
- A model where the income statement, balance sheet and cash flow statement are linked, and the balance sheet balances every period.
- Assumptions
- The inputs a model is built on, such as prices, volumes, wages, growth rates and payment terms. Good assumptions are sourced and documented.
- Driver-based forecast
- A forecast built from the activities that produce results, such as customers × average sale, rather than from a growth percentage.
- Scenario analysis
- Running the model under different sets of assumptions, typically base, downside and upside cases.
- Sensitivity analysis
- Changing one assumption at a time to see which inputs affect results most.
- Historicals
- Actual past results used as the starting point for projections.
2. Revenue and Profitability
- Revenue
- Income earned from selling goods or services, shown before costs. In Canada, it's normally recorded net of GST/HST collected.
- Cost of goods sold (COGS)
- Direct costs of producing what you sell, such as materials, direct labour and freight-in.
- Gross margin
- Gross profit (revenue minus COGS) as a percentage of revenue.Example: $800K gross profit ÷ $2M revenue = 40%
- Contribution margin
- Revenue minus all variable costs; the amount each sale contributes toward fixed costs and profit.
- Operating expenses (OpEx)
- Ongoing costs of running the business that aren't part of COGS, such as rent, salaries, marketing and software.
- EBITDA
- Earnings before interest, taxes, depreciation and amortization; a common measure of operating profit used by lenders and buyers.
- Net income
- Profit after all expenses, interest and taxes; the bottom line of the income statement.
- Break-even point
- The level of sales at which total revenue equals total costs. Calculated as fixed costs ÷ contribution margin percentage.
3. Cash and Working Capital
- Cash flow
- The actual movement of money in and out of the business over a period, split into operating, investing and financing activities.
- Working capital
- Current assets minus current liabilities; the short-term funds available to run the business.
- Days sales outstanding (DSO)
- The average number of days customers take to pay. Calculated as receivables ÷ revenue × 365.
- Days inventory on hand
- How many days of sales your inventory represents. Calculated as inventory ÷ COGS × 365.
- Days payable outstanding (DPO)
- The average number of days you take to pay suppliers.
- Cash conversion cycle
- Days inventory + DSO − DPO; how long cash is tied up between paying suppliers and collecting from customers.
- 13-week cash flow forecast
- A rolling weekly forecast of receipts and payments that shows short-term cash gaps in advance.
- Capital expenditure (CapEx)
- Spending on long-lived assets such as equipment, vehicles or leasehold improvements, recorded on the balance sheet and depreciated over time.
4. Lending and Debt
- Debt service
- The total principal and interest a business must pay on its loans over a period.
- Debt service coverage ratio (DSCR)
- Cash available for debt payments ÷ annual debt service. Many Canadian lenders look for at least 1.25x.
- Covenant
- A condition in a loan agreement, such as maintaining a minimum DSCR or maximum debt-to-equity ratio. Breaching one can trigger lender action.
- Amortization
- For loans, the schedule over which principal is repaid. For assets, the expensing of intangible assets over their useful life.
- Security (collateral)
- Assets pledged to a lender that can be claimed if the loan isn't repaid.
- Personal guarantee
- An owner's personal promise to repay a business loan if the business cannot.
- Debt-to-equity ratio
- Total debt ÷ owner equity; a measure of how leveraged a business is.
- Current ratio
- Current assets ÷ current liabilities; a measure of short-term liquidity.
- CSBFP
- The Canada Small Business Financing Program, under which participating lenders make loans for eligible assets with the federal government sharing part of the lender's risk.
5. Valuation and Investment
- Net present value (NPV)
- Future cash flows discounted to today's value at a required return, minus the initial investment. Positive NPV means the investment creates value.
- Internal rate of return (IRR)
- The annual return an investment earns; the discount rate at which NPV equals zero.
- Payback period
- How long it takes for an investment's cash flows to recover its cost.
- Discount rate
- The required return used to convert future cash flows into present value; it reflects risk and the cost of capital.
- Discounted cash flow (DCF)
- A valuation method that values a business based on the present value of its expected future cash flows.
- EBITDA multiple
- A valuation shortcut: business value = normalized EBITDA × a multiple based on industry, size and risk.
- Normalized earnings
- Earnings adjusted for one-time or owner-specific items, such as above-market owner salary, to show sustainable profit.
6. Start-up and Growth Metrics
- Burn rate
- Monthly cash spending. Gross burn is total spending; net burn is spending minus cash coming in.
- Runway
- How many months a business can operate before running out of cash: cash on hand ÷ monthly net burn.
- MRR and ARR
- Monthly and annual recurring revenue from subscriptions, excluding one-time fees. ARR is usually MRR × 12.
- Churn
- The rate at which customers or recurring revenue are lost over a period.
- CAC and LTV
- Customer acquisition cost and customer lifetime value. A common benchmark is LTV at least 3× CAC.
- Pre-money and post-money valuation
- The company's value before and after new investment. Investor ownership = investment ÷ post-money valuation.
- Dilution
- The reduction in existing owners' percentage when new shares are issued.
7. Canadian Tax, BN Registration and Compliance
These are the terms Canadian lenders, investors and accountants assume you know. Most connect back to your CRA business number, so it's worth understanding how the accounts fit together.
- CRA business number (BN)
- A nine-digit identifier the Canada Revenue Agency assigns to a business for its federal tax dealings. Each corporation has its own BN.
- BN registration
- The process of obtaining a business number. Ontario corporations generally receive one at incorporation through the Ontario Business Registry; others register through the CRA's Business Registration Online service, by phone or with Form RC1.
- Program account
- An account added to a BN for a specific obligation, shown as the BN plus two letters and four digits, such as 123456789 RT0001.RT = GST/HST, RP = payroll, RC = corporate income tax, RM = import-export
- GST/HST
- Federal goods and services tax, harmonized with provincial sales tax in some provinces. Ontario's HST rate is 13%. It is collected for the government, so it isn't revenue.
- Input tax credit (ITC)
- A credit that lets a GST/HST registrant recover the GST/HST paid on business purchases, generally supported by invoices showing the supplier's registration number.
- CCPC
- Canadian-controlled private corporation; a status that can give access to the small business deduction and enhanced refundable SR&ED credits.
- Small business deduction
- A lower corporate tax rate on active business income up to a limit for eligible CCPCs. Ontario's combined small business rate has been 12.2%.
- SR&ED
- The Scientific Research and Experimental Development program, which provides tax credits for eligible R&D spending, claimed with the corporate tax return.
- Notice of assessment (NOA)
- The CRA's confirmation of the income and tax on a filed return; lenders often request recent NOAs.
- Employer Health Tax (EHT)
- An Ontario payroll tax paid by employers on payroll above an exemption amount for eligible employers.
Confirm current tax rates, limits and eligibility with a qualified tax professional before relying on them.
Worked Example: Ratios from One Set of Statements
Terms make more sense with numbers attached. Using the Ontario distributor from our three-statement guide, with $2 million in revenue, here are the key ratios a lender would calculate:
| Ratio | Calculation | Result |
|---|---|---|
| Gross margin | $800K ÷ $2,000K | 40.0% |
| EBITDA margin | $250K ÷ $2,000K | 12.5% |
| Net margin | $166.8K ÷ $2,000K | 8.3% |
| DSCR | $250K EBITDA ÷ ($50K principal + $20K interest) | 3.6x |
| Current ratio | $521.8K current assets ÷ $185K current liabilities* | 2.8x |
| Debt to equity | $200K loan ÷ $506.8K equity | 0.39x |
| Cash conversion cycle | 53 inventory days + 42 DSO − 41 DPO | 54 days |
*Current liabilities include $135K of payables and an assumed $50K current portion of the term loan.
From gross margin to net margin
How much of each sales dollar remains at each level
Knowing these terms is the first step; using them to run the business is the next. Our financial modeling services build models that calculate these ratios automatically, our bookkeeping services keep the underlying numbers accurate, and our business plan services present them the way lenders expect. Before you submit a plan, run it through our business plan review checklist.
Frequently Asked Questions
What is the difference between EBITDA and net income?
What does DSCR mean in business lending?
What is working capital and why does it matter?
What is a CRA business number and program account?
What is the difference between NPV and IRR?
Summary
Understanding financial modeling vocabulary helps Canadian owners make better decisions and hold their own in conversations with bankers, investors and accountants. The most important terms cover profit (gross margin, EBITDA, net income), cash (working capital, DSO, cash conversion cycle), lending (DSCR, covenants, security), valuation (NPV, IRR, multiples), growth (burn, runway, dilution) and Canadian tax, including your CRA business number, program accounts, HST, ITCs and CCPC status. Bookmark this glossary and use it whenever a new term comes up.
Turn financial terms into better decisions
Ledgerive builds financial models and provides CFO, bookkeeping and business plan support for businesses across Ontario and Canada. Book a free 30-minute call or reach us directly.