Startup Finance Glossary for All Employees: Bookings, MRR, CAC, Burn Rate Explained

The Top Line: Finance Terms Every Startup Employee Should Know for Revenue

Inconsistent financial terminology creates confusion. When a salesperson celebrates a new “booking” as revenue, but finance knows the cash will not arrive for months, flawed operational decisions are inevitable. For founders without a dedicated CFO, this forces constant, last-minute firefighting to clarify numbers. This glossary is designed to create a shared language, providing the finance terms every startup employee should know. It builds a common ground for understanding startup financials, from engineering to sales, enabling everyone to contribute to sustainable growth. This is not about turning everyone into an accountant; it is about equipping the entire team to speak the same financial language and make smarter, more aligned decisions.

Think of your business through the journey of a single dollar. First, we earn it (the top line). Then, we see how much is left after making our product (profitability). Next, we measure how efficiently we can attract more dollars (growth). Finally, we ensure we have enough dollars to stay alive (cash).

Measuring Momentum: MRR and ARR

This section answers the question: how do we measure the money coming in and the momentum we are building? For subscription-based companies, especially in SaaS, the key metrics are Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR). These metrics represent the predictable heartbeat of the business. They are calculated by multiplying your total number of customers by their recurring subscription fees. ARR is simply MRR multiplied by 12. Investors value recurring revenue highly because it is predictable and compounds over time, unlike one-off project fees.

Startup Accounting Definitions: Bookings vs. Billings vs. Revenue

The most common point of confusion for early-stage teams is the distinction between bookings, billings, and revenue. Getting this wrong can lead to a dangerously inaccurate picture of company health. Let us define each term clearly.

• Bookings: This is the total value of a contract signed with a customer. It represents a commitment to pay you money in the future. It is a great indicator of sales momentum but is not yet earned revenue.
• Billings: This is the actual invoice you send to a customer. Based on the contract, you might bill annually upfront, quarterly, or monthly. This is when you can expect cash to come in, but it is still not considered earned revenue.
• Revenue: This is the portion of the money you have *earned* by providing the service. Accounting standards, whether US GAAP for American companies or FRS 102 in the UK, require you to recognize revenue as you deliver the service, not when you sign a contract or send an invoice.

Consider this concrete example: a US-based SaaS startup signs a $24,000 annual contract on January 1st and immediately invoices for the full year.

• Booking: $24,000 is recorded on January 1st, reflecting the total contract value.
• Billing: A $24,000 invoice is sent on January 1st. You would see this in your accounting software like QuickBooks or Xero.
• Revenue: Only $2,000 is recognized as revenue in January ($24,000 divided by 12 months). The remaining $22,000 sits on the balance sheet as a liability called “deferred revenue” and is recognized incrementally each month as you provide the service.

Profitability: How Much We Keep to Run the Rest of the Business

For every dollar we earn, how much do we keep to fund everything else? This is where profitability metrics come in. The first and most important layer is understanding the direct costs associated with delivering your product or service.

Understanding Cost of Goods Sold (COGS)

The Cost of Goods Sold (COGS), sometimes called Cost of Service (COS), includes all direct expenses required to deliver your product to the customer. This number varies significantly by industry.

• For a SaaS company, COGS typically includes server hosting fees on platforms like AWS, third-party API licensing costs, and the salaries of your dedicated customer support and implementation teams.
• For an e-commerce business using Shopify, COGS is more straightforward: the cost to purchase inventory from suppliers, payment processing fees from Stripe, and shipping expenses.
• For a professional services firm, COGS would be the salaries of the consultants or agency staff who deliver the billable work to clients.

Why Gross Margin is a Key Health Metric

Subtracting COGS from your revenue gives you Gross Profit. Dividing that Gross Profit by your revenue gives you your Gross Margin percentage. This is a critical metric because it shows the fundamental profitability of what you sell, before accounting for overhead like R&D, sales, and general administrative costs. UK firms may be able to improve their bottom line through R&D tax relief.

A high gross margin means you have more money left over to invest in growth. For context, a healthy SaaS gross margin is typically 75% or higher. A low gross margin can signal that the business model itself is not scalable, as there is not enough profit from each sale to cover operating expenses.

Growth Efficiency: Are We Acquiring Customers Profitably?

Growth is essential for any startup, but it must be efficient to be sustainable. The key question is: are we spending money effectively to acquire new customers? Two of the most important common finance acronyms provide the answer: Customer Acquisition Cost (CAC) and Lifetime Value (LTV).

Customer Acquisition Cost (CAC)

CAC measures the total cost of your sales and marketing efforts to acquire a single new customer. To calculate it, you divide your total sales and marketing expenses over a period by the number of new customers you acquired in that same period. These expenses include everything from salaries and commissions for the sales team to advertising spend on Google and social media.

Customer Lifetime Value (LTV)

LTV is a prediction of the total gross profit a single customer will generate over the entire duration of their relationship with your business. It is not just about revenue; it crucially factors in your gross margin and customer churn rate. A simple way to think about it is: how much profit can we expect from a customer before they leave?

The LTV to CAC Ratio

The real insight comes from comparing these two numbers. The LTV to CAC ratio measures the return on your investment in customer acquisition. You are spending a certain amount to get a customer (CAC), and you expect a certain return from them (LTV). This ratio is a primary indicator of a healthy, scalable business model.

• An LTV/CAC ratio below 1x means you are losing money on every new customer.
• A ratio between 1x and 3x suggests your model might work but needs optimization.
• As a benchmark, an LTV/CAC ratio of 3x or higher is generally considered strong and signals a sustainable business.

Understanding these unit economics is crucial for making informed decisions about marketing budgets and sales strategies.

Survival Metrics: Why Cash Is Still King

Profitability on paper does not guarantee survival. A startup can have a fantastic LTV/CAC ratio and positive gross margins but still run out of cash if clients pay slowly or expenses are front-loaded. This section addresses the most critical question every founder and employee should be able to answer: how much time do we have?

Gross Burn vs. Net Burn

Understanding your cash consumption starts with your burn rate. It is vital to distinguish between net and gross burn.

• Gross Burn: The total amount of cash your company spends in a month, including salaries, rent, and software subscriptions.
• Net Burn: The total cash that went out minus the total cash that came in. This is the true measure of how much cash your company is losing each month.

Calculating Your Cash Runway

Your net burn directly informs your Cash Runway. This is the single most important number for a pre-profitable startup. It is calculated by dividing the total cash in your bank account by your monthly net burn. If you have $500,000 in the bank and a net burn of $50,000 per month, your runway is 10 months. This figure tells you how long the company can operate before it needs to raise more capital or achieve profitability.

The Hidden Danger of Working Capital

Finally, Working Capital is the cash required to bridge the gap between paying your day-to-day expenses and receiving cash from customers. It is calculated as Current Assets minus Current Liabilities. A scenario we repeatedly see is a services firm landing a huge project with “Net 60” payment terms. They must make payroll twice before the client's cash arrives. That payroll money is working capital. A lack of it is what causes sudden liquidity crunches that jeopardize growth plans.

A Shared Language for Building a Durable Business

Understanding these basic finance terms for startups is not just an accounting exercise; it is a strategic necessity. A shared financial vocabulary ensures every department makes decisions that support the company’s long-term health. Sales teams understand why a booking is not yet revenue. Marketing focuses on acquiring customers with a strong LTV/CAC profile. Engineering becomes mindful of how infrastructure choices impact COGS. When everyone knows the burn rate and runway, spending decisions become more disciplined and aligned toward the common goal of building a durable business.

Frequently Asked Questions

Q: Why do SaaS startups focus on ARR instead of total bookings?
A: Investors and operators in SaaS prioritize Annual Recurring Revenue (ARR) because it represents predictable, stable income. Bookings show sales momentum but can be lumpy and do not guarantee future revenue. ARR, on the other hand, provides a clear view of the company's baseline health and growth trajectory over time.

Q: Can a company be profitable but still run out of cash?
A: Yes, absolutely. Profitability is an accounting concept based on revenue and expenses, but cash is about actual money in the bank. A company can be profitable on paper but run out of cash if customers pay their invoices slowly (delaying cash inflow) while the company has to pay its own bills and salaries on time (maintaining cash outflow).

Q: What is a good LTV/CAC ratio for a growing startup?
A: A good Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratio is generally considered to be 3x or higher. A ratio below 1x is unsustainable. A ratio of 3x or more indicates a strong, scalable business model where the return on acquiring a customer significantly outweighs the cost.

Q: What is the difference between gross burn and net burn?
A: Gross burn is the total amount of cash a company spends in a month on all expenses, like salaries and rent. Net burn is the key survival metric: it is the gross burn minus any cash that came in from customers during that same month. Net burn shows the actual amount of cash the company is losing.