Jargon-busting: Key business terms and acronyms to know

Acronyms and abbreviations are everywhere in business. They often represent vital concepts and can be extremely useful, but only if you know what they mean and how they apply to your company.

Let's take a look at some key terms you're sure to come across in business plans, performance reports and financial statements.

CAC - Customer aquisition cost

It's important to know how much you're spending to bring in new business. This is where CAC comes in.

CAC encompasses all you spend on sales and marketing activities to get new customers on board. For example:

• Marketing and sales team salaries
• Commissions and bonuses
• The costs of software and other tools
• Marketing campaign expenses, such as ad spend

Monitoring CAC across your various customer acquisition channels can help you gauge the cost-effectiveness of different sales and marketing tactics. You'll then be in a better position to tailor your strategy to optimise your return on investment.

CapEx - Capital expenditure

CapEx is the amount you spend, in a given period, on the assets required to run and grow your business. This could include anything from buying new equipment to investing in research and development.

This expenditure is capitalised on your balance sheet, as opposed to being expensed on an income statement.

CapEx is one of the most common types of costs you'll pay to run a business. Another key category is operating expenses (OpEx), which includes day-to-day running costs such as rent and bills.

EBITDA - Earnings before interest, taxes, depreciation and amortisation

Lenders and investors often use EBITDA when assessing a company's core performance and profitability.

It's a useful metric because it removes factors that are beyond your control but still affect your earnings. Taxes, for example, can vary based on location and from one accounting period to the next.

Depreciation and amortisation refer to reductions in the value of your tangible and intangible assets over time. They can impact your balance sheet, but don't necessarily reflect how your business is performing.

The EBITDA method takes these 'ITDA' expenses out of the equation by adding them back to your net income, giving a clearer picture of your financial health.

GAAP - Generally Accepted Accounting Practice/Principles

GAAP stands for Generally Accepted Accounting Practice in the UK and Generally Accepted Accounting Principles in the US.

These are sets of rules and standards for businesses to follow to ensure their financial reports are accurate, consistent and transparent.

Being aware of these procedures and knowing how to follow them could work in your favour if you're seeking outside investment and want to present a clear, compelling business case to investors.

LTV - Lifetime value

As every business owner knows, acquiring a customer is just the first step. To get an idea of the revenue you can reasonably expect to gain over your entire relationship with a customer, you'll need to consider LTV.

This is likely to involve looking at other, related metrics such as:

• Average purchase value
• Average purchase frequency rate
• Customer value
• Average customer lifespan

Monitoring customer LTV will help you understand how your business is progressing towards key goals such as building brand loyalty.

MRR/ARR - Monthly/annual recurring revenue

MRR tells you how much predictable income you have coming into the business each month. It's a key metric for subscription-based businesses - software-as-a-service (SaaS) providers, for instance.

Measuring your MRR can help you manage cash flow, make revenue forecasts and track growth trends. These are big considerations if you're thinking about growing your business and negotiating with investors.

If you operate on a subscription-based model, you can use ARR to measure recurring revenue over a 12-month period. This can help with assessing the stability of your income and the sustainability of your business model.

ROCE/ROIC - Return on capital employed/invested capital

ROCE and ROIC are financial ratios that investors might use to assess your company.

They show the profits you gain from capital employed and invested, respectively.

Capital employed is all of the capital available to the business, which might include debts and shareholders' capital. Invested capital, meanwhile, is a subset of the former. It includes all active capital currently circulating within the business.

Having a good grasp of ROCE and ROIC could put you in a better position to deal with investors and answer their questions about profitability.

If seeking funding, engaging with investors and growing your business are top priorities for you right now, head to our Insights page for more helpful tips and resources.