Understanding the terminology used in profit and cash flow analysis is essential to managing the finances of your business. Here are some key terms you should commit to memory:
Break-even: The level of sales required to produce operating results with zero profit (sales revenue less cost of sales and other expenses equals zero).
Burn rate: The rate at which cash is burned or consumed by a business that is operating at a loss (or at a very low profit margin possibly).
Cap table: A cap table, or capitalization table, is a summary of who owns what portion of a company and in what structure. Ownership structures are a very sensitive and important issue with third-party financing sources.
Extending the runway: If you’re forecasting cash to run out in four months but a new source of cash won’t be available for six months, you must find a way to stretch your cash, or extend the runway to reach the next funding date.
Fume date: Closely related to the burn rate, the fume date is an estimate of the date a company will run out of cash and be left running on fumes.
Sustainable growth rate: Based on how fast a company can grow with internal resources alone (that is, without securing external capital or cash to support future growth). Breaching the sustainable growth rate means external capital is needed to support the higher growth rate.