Here’s a detailed list of essential business terms every business analyst should be familiar
with, along with explanations and formulas where applicable:
1. Return on Investment (ROI)
Definition: Measures the gain or loss generated on an investment relative to its cost. It's a
performance metric that evaluates the efficiency of an investment.
Explanation: A higher ROI means the investment gains compare favorably to its cost.
Business analysts use this to evaluate the success of investments and initiatives.
2. Net Present Value (NPV)
Definition: NPV is used to determine the value of a series of cash flows over time,
discounted back to the present value.
Explanation: Positive NPV means a profitable project, and a negative NPV indicates an
unprofitable investment.
3. Internal Rate of Return (IRR)
Definition: The discount rate that makes the NPV of a project equal to zero. It is used to
estimate the profitability of potential investments.
Explanation: IRR is often used to evaluate the desirability of investments. A higher IRR
compared to the required rate of return signals a good investment opportunity.
4. Break-Even Point (BEP)
Definition: The point where total revenue equals total costs, and the business makes
neither a profit nor a loss.
Explanation: The BEP helps a business understand how many units need to be sold to
cover its costs.
5. Gross Profit Margin
Definition: A profitability ratio that shows the percentage of revenue that exceeds the cost
of goods sold (COGS).
Explanation: A higher margin indicates better efficiency in turning sales into actual profit.
6. Operating Profit Margin
Definition: A profitability ratio that shows the proportion of revenue that remains after
paying for variable costs of production.
Explanation: This margin helps assess how well a company controls its costs and operating
efficiency.
7. Customer Acquisition Cost (CAC)
Definition: The cost associated with acquiring a new customer. It includes marketing,
advertising, and sales expenses.
Explanation: CAC is crucial for evaluating the effectiveness of sales and marketing
strategies.
8. Churn Rate
Definition: The percentage of customers who stop doing business with a company during a
certain time period.
Explanation: A high churn rate indicates problems with customer satisfaction or
product/service offerings.
9. Lifetime Value (LTV)
Definition: The predicted net profit attributed to the entire future relationship with a
customer.
Explanation: LTV helps businesses understand how valuable a customer will be over their
lifetime, aiding in customer retention strategies.
10. Profitability Index (PI)
Definition: A measure used to evaluate the attractiveness of an investment or project.
Explanation: A PI greater than 1 suggests the investment is worthwhile, whereas a PI less
than 1 suggests it is not.
11. Cost-Benefit Analysis (CBA)
Definition: A process of comparing the costs and benefits of a decision or project to
determine if it is a good investment.
Explanation: A CBA greater than 1 means the benefits outweigh the costs.
12. Variance Analysis
Definition: The process of analyzing the difference between planned financial outcomes
and the actual results.
Explanation: Variance analysis helps identify areas that are underperforming or exceeding
expectations.
13. Key Performance Indicators (KPIs)
Definition: Quantifiable metrics that reflect the critical success factors of an organization.
Explanation: KPIs can be financial (e.g., profitability ratios) or operational (e.g., customer
satisfaction) and are used to monitor performance and drive decision-making.
14. SWOT Analysis
Definition: A strategic planning tool used to identify the Strengths, Weaknesses,
Opportunities, and Threats related to a business or project.
Explanation: SWOT analysis helps businesses understand both internal and external
factors that could impact their success.
15. PESTLE Analysis (or PESTEL)
Definition: A framework for analyzing the external environment, focusing on Political,
Economic, Social, Technological, Legal, and Environmental factors.
Explanation: It is used to understand macro-environmental factors that may influence
business decisions and strategies.
16. Porter's Five Forces
Definition: A framework for analyzing the competitive forces within an industry.
Explanation: The five forces are:
1. Threat of New Entrants
2. Bargaining Power of Suppliers
3. Bargaining Power of Buyers
4. Threat of Substitute Products or Services
5. Industry Rivalry
17. Work Breakdown Structure (WBS)
Definition: A hierarchical decomposition of a project into smaller, more manageable
components.
Explanation: It is used in project management to organize tasks and ensure that all work is
captured.
18. Balanced Scorecard (BSC)
Definition: A performance measurement tool that considers financial and non-financial
aspects of business performance.
Explanation: The BSC includes four perspectives:
1. Financial
2. Customer
3. Internal Processes
4. Learning and Growth
19. Benchmarking
Definition: The process of comparing a company’s performance metrics with industry
bests or best practices from other companies.
Explanation: Benchmarking helps identify areas of improvement and set performance
targets.
20. S.M.A.R.T. Goals
Definition: A framework for setting clear and achievable objectives.
Explanation:
• Specific
• Measurable
• Achievable
• Relevant
• Time-bound
