Useful Acronyms for Software Executives
Software executives are experts at operating their businesses, but when it comes to M&A and financial terminology, there is a hefty amount of jargon. Keeping on top of industry terms is helpful in discussions with advisors, buyers, or investors, especially when going through an M&A process.
SEG created a cheat sheet of useful terms and definitions to help. Learning these metrics and abbreviations will enable productive discussions and help software executives better understand how their business is performing.
ACV: Annual Contract Value
ACV is the total annual value of customer contracts. ACV enables annual or multi-year contracts to be benchmarked against other annualized metrics.
ARPU: Average Revenue Per User
Measures the revenue generated from each active user, typically on a monthly basis. ARPU is calculated by dividing monthly recurring revenue (MRR) by the number of active customers.
ARR: Annual Recurring Revenue
ARR is a metric for subscription-based models to measure average recurring revenue. It annualizes monthly recurring revenues to provide insight on a run rate basis into growth. ARR is calculated by multiplying MRR by 12.
ASP: Average Selling Price
Average selling price is the average price a product or service is sold for. In software, ASP is a benchmark to help set prices and compare with other available products.
B2B: Business to Business
The exchange of services, products, or information between business entities is known as B2B commerce. The target customer for B2B businesses is other companies.
B2C: Business to Consumer
Business transactions between a business and at least one individual are labeled business to consumer (B2C). These companies sell their products or services directly to consumers.
CAC: Customer Acquisition Cost
Customer acquisition cost (CAC) measures the amount of money a business spends to acquire a new customer. You can calculate CAC on a monthly, quarterly, or yearly basis.
CAGR: Compound Annual Growth Rate
CAGR represents the average annual growth rate. It determines a more constant rate of return on business growth that naturally fluctuates over time. CAGR can be used to compare your performance against industry averages.
COGS: Cost of Goods Sold
The costs required to serve your product to your customer. For software companies, expenses included in COGS are those directly attributed to the delivery of software or services provided, including hosting expenses, costs for third-party software, and personnel costs for DevOps employees, the professional services team, and the customer support team, among others.
DCF: Discounted Cash Flow
Estimates a company’s value and forecasts future cash flow by incorporating the time value of money. DCF is used when making investment decisions and understanding a business’s current and future value.
EBITDA: Earnings Before Interest, Taxes, Depreciation & Amortization
BITDA stands for earnings before interest, taxes, depreciation, and amortization and is used to measure profitability. There are typically additional expenses that can be considered when analyzing profitability, referred to as EBITDA adjustments (or add-backs).
EV: Enterprise Value
EV measures the total value of a business and reflects its market value. This metric includes market capitalization and company debt, less cash and cash equivalents.
FCF: Free Cash Flow
The amount of cash a company generates after deducting any capital expenditures. FCF is the cash available on hand to pay investors and creditors.
FTE: Full-Time Equivalent
Measures hours worked in place of the number of employees when determining costs. For example, firms considering 40 hours as full-time measure that amount as 1.0 FTE and 20 hours as 0.5 FTE. This is important to understand in order to correctly allocate labor expenses into COGS.
G&A: General & Administrative
G&A is an operating expense that includes the daily costs of operating a business regardless of sales or other business activity. G&A expenses include rent, utilities, insurance, and office supplies. G&A is typically measured as a percent of total revenue.
GPM: Gross Profit Margin or Gross Margin
Gross profit margin looks at gross profit as a percent of total revenue and is the amount available to pay operating expenses and reinvest back into the business. Since SaaS businesses typically have relatively little cost associated with servicing revenue, this leads to a generally high gross margin.
IaaS: Infrastructure as a Service
Provides cloud IT and computing resources on demand. IaaS hosts virtual servers, storage, and networking components usually found on-premises.
IRR: Internal Rate of Return
IRR is a metric used in financial analysis to estimate the profitability of potential investments. It is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.
LTV: Lifetime Value or Customer Lifetime Value
This value is the gross profit a single customer is predicted to generate over their engagement with the company. Used in conjunction with CAC, the LTV:CAC ratio is an indication of both customer profitability and marketing effectiveness.
MQL: Marketing Qualified Lead
A lead that demonstrates their interest through online activity and is more likely to become a customer. They qualify based on engagement, such as visiting specific web pages or downloading whitepapers or ebooks.
MoM: Month Over Month
This metric measures the change and growth of key metrics such as revenue, number of subscribers, or active users from the previous month.
MRR: Monthly Recurring Revenue
MRR measures the recurring revenue generated monthly by subscription customers. To calculate MRR, multiply the average revenue per user by the total users that month, or divide ARR by 12.
NI: Net Income
Net income is the business’ earnings after deducting COGS and operating expenses (including taxes, interest, and wages).
NOI: Net Operating Income
This is pre-tax income after deducting operating costs. The metric indicates the amount of cash flow generated after expenses.
NPV: Net Present Value
NPV measures the current value of the projected cash flow of investments and projects. It uses the discounted rate to determine the present-day value of forecasted cash flows plus related initial expenses to evaluate the investment.
OPEX: Operating Expenditures
Operating Expenditures are the costs a business must make to run normal commercial operations, including employee wages, rent, and utilities.
P&L: Profit & Loss Statement
A summary of the revenue, expenses, and other costs incurred over a month, quarter, or fiscal year. The cash accounting or the accrual method is used to prepare P&L statements.
PaaS: Platform as a Service
Platform as a service (PaaS) is a cloud-based computing platform for developers to build, test, deploy, host, and manage apps.
QoQ: Quarter Over Quarter
This metric compares changes and growth in business revenue and other data of the current quarter from the previous quarter.
R&D: Research & Development
R&D is an operating expense that includes a business’s activity in gathering knowledge for innovation or improving existing offerings. R&D is typically measured as a percent of total revenue.
R40: Rule of 40%
Software companies use the Rule of 40 to evaluate overall growth and profitability. A 40% combined EBITDA margin and revenue growth rate is considered healthy.
ROI: Return on Investment
This metric shows the value of an investment compared to its cost. To determine ROI, divide net profit or loss by the initial cost of the investment.
S&M: Sales and Marketing (Expense)
Sales & Marketing is an operating expense, used as a percent of revenue, that includes the activity a business participates in to generate leads and convert them into customers.
SaaS: Software as a Service
SaaS is a web-based software delivery service allowing users to connect and use cloud-based applications from any internet-connected device.
SAM: Serviceable Addressable Market
SAM is the portion of the total addressable market the business’ product can reach, based on existing performance and revenue opportunities.
SMB: Small & Medium-Sized Businesses
SMBs have specific characteristics, including the number of employees. Small businesses have under 100 employees, while medium-sized companies have between 100 and 999 employees.
SOM: Serviceable Obtainable Market
SOM is the portion of SAM a business can realistically capture. This metric is used to develop short-term growth goals.
SQL: Sales Qualified Lead
An SQL is a potential qualified customer in a sales funnel that can be converted into a customer by the sales team.
TAM: Total Addressable Market
The total market demand for a service or product. TAM is the broadest and least specific market. Businesses use TAM to estimate growth potential.
TCV: Total Contract Value
The lifetime value of a contract, including the total revenue accumulated from the contract.
TTM: Trailing Twelve Months
The financial data from the previous 12 consecutive months needed to assess a business. It may include cash flow, revenue statements, or balance sheets.
WACC: Weighted Average Cost of Capital
This calculation measures a business’s cost of capital. WACC represents the average amount a firm expects to pay its investors, including creditors and stockholders.
YoY: Year Over Year
Year over Year (YoY) compares financial statistics from one time period (a month or quarter) to the same period from the previous year.
Please don’t hesitate to reach out if you have any questions about these acronyms.