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Financial KPIs, EBITDA, Gross Profit, and 12 other financial terms you should know

Financial literacy: “the knowledge and skills that give you the ability to manage your finances, including budgeting and investing” 

Financial literacy is the key to successful money management and the reduction of financial stress. Yet many people struggle with financial literacy, to the point that the National Financial Educators Council (NFEC) estimates that financial illiteracy cost the U.S. population more than $352 billion in 2021 alone. 

Below, we have a defined a few key financial terms to improve your financial literacy and support your money management abilities: 

1. Financial KPIs: Financial key performance indicators are quantifiable metrics that help measure a business’s performance in terms of things like revenue, expenses, profits or other financial targets.
2. EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization. It is a metric used to evaluate a business’s profitability and a common starting point in determining a company’s value. It is calculated using this formula: EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization.
3. Gross Profit Margin: A metric often used to analyze a business’s financial wellbeing by calculating the amount of money made from product sales after cost of goods is subtracted,
4. Net Income: The amount of profit left after subtracting other costs (selling, administrative and other general expenses) from the gross profit margin.
5. Accounts Receivable (AR): The amount of money owed to a business for good or services delivered that hasn’t been paid yet by the customer.
6. Accounts Payable (AP): The amount of money that a business owes to its creditors or suppliers.
7. Return on Capital: A payment (also known as a return) received from an investment that is not considered taxable income or capital gain.
8. Capital Gains: Income that results when an asset is sold for more than you originally paid for it.
9. Capital Loss: The opposite of capital gain; A possible tax deduction resulting from an asset being sold for less than its cost or book value.
10. IRA: Individual Retirement Account, which may be one of the several types. Traditional IRAs are typically funded with pre-tax dollars while Roth IRAs are often funded with after-tax money.
11. Defined Contribution (DC) Plans: A type of retirement plan (such as a 401k) in which employees contribute a set amount of their wages to the account, usually pre-tax.
12. APR: Annual Percentage Rate; refers to the amount of interest on a loan or investment, not including compounding interest.
13. APY: Annual Percentage Yield; refers to the amount of interest on a loan or investment, including compounding interest.
14. Articles of Incorporation: A set of documents filed with the government to legally create a corporation, such as a C-corp or S-corp.
15. Articles of Organization: Similar to Articles of Incorporation, these are a set of government documents files to create a limited liability company (LLC).

If you want to continue improving your financial literacy or are worried about your finances, Padgett’s nationwide network of CPAs and EAs can help. Our advisors can work with you to understand your personal or business finances and can help you make financial decisions with confidence. Find an office near you today!