20 finance terms that confuse smart people, explained side by side

Finance has a habit of giving similar names to different ideas. In a meeting, that turns into people agreeing loudly while meaning different things. Here are the pairs people mix up most often, with a plain definition and an everyday example.

Costs

Fixed costs stay roughly the same whatever you sell: rent, salaried staff, software subscriptions. Variable costs rise and fall with volume: materials, packaging, payment fees, shipping. The split matters because it tells you your break-even point. A business with high fixed costs needs volume; one with mostly variable costs can survive a quiet month.

Capex (capital expenditure) buys things that last more than a year: equipment, vehicles, a new warehouse. Opex (operating expenditure) keeps the business running: rent, utilities, wages. Capex is spread over years through depreciation; opex hits this year’s profit in full.

Income and profit

Revenue is everything you earn from sales before any costs. Profit is what is left after costs. A shop with £1 million of revenue and £990,000 of costs is not a million-pound business; it is a £10,000 one.

EBITDA is earnings before interest, tax, depreciation and amortisation. Net income is the bottom line after all of those. EBITDA shows how the operations perform; net income shows what owners actually earn.

Gross profit is revenue minus the direct cost of what you sold. Operating profit also subtracts overheads such as marketing, rent and admin.

Timing

Accrual accounting records revenue when it is earned and costs when they are incurred, whenever cash changes hands. Cash accounting records only when money actually moves. A consultancy that invoices £50,000 in March and is paid in May shows the revenue in March on an accrual basis, and in May on a cash basis. Most companies above a small size must use accruals.

Cash flow and profit also part ways here. A fast-growing business can be profitable on paper and still run out of cash, because customers pay later than suppliers must be paid.

Value

Market capitalisation is the share price times the number of shares. Enterprise value adds debt and subtracts cash, so it is closer to the price of buying the whole business. Two companies with the same market cap can have very different enterprise values if one carries heavy debt.

Book value is assets minus liabilities as recorded in the accounts. Market value is what investors will pay. The gap between them is the market’s view of everything the balance sheet cannot capture: brand, people, future growth.

Who does what at the top

In small companies one person often wears two or three of these hats. Knowing which hat you are wearing in a given decision makes the decision clearer.