You need enough business vocabulary to understand what the client is trying to improve and how the numbers fit together. You do not need to sound like a finance textbook.
Start with this habit: when someone uses a term, ask yourself what is being measured, over which period, and what decision it helps us make. “Margin improved” means very little until you know which margin and whether total profit also increased.
The glossary below follows the questions a business faces: Does it make money? Are individual customers worthwhile? Is it growing? Does it have cash? Can it deliver? Use it as a reference, then test the terms in an actual case.
Follow the money through one small business
Imagine a café sells 20,000 drinks a month for $5 each. Ingredients, cups and other costs that vary with each drink total $2 per drink. Monthly fixed costs are $45,000. These are simplified teaching figures.
Revenue is 20,000 × $5 = $100,000. Variable costs are 20,000 × $2 = $40,000. The remaining $60,000 of contribution pays the fixed costs, leaving $15,000 of profit in this simplified model.
Each additional drink contributes $3 while the café has spare capacity and the stated costs hold. It needs $45,000 ÷ $3 = 15,000 drinks to break even.
Now suppose the owner proposes a $1 discount. Contribution falls from $3 to $2 per drink. Maintaining the same $15,000 profit would require ($45,000 + $15,000) ÷ $2 = 30,000 drinks. A 20% price reduction requires 50% more volume here. That is why knowing the word “contribution” helps you make a better pricing decision.
Profit and cost: know what has been deducted
| Term | What it means | What to check in a case |
|---|---|---|
| Revenue | Sales earned in the period; for one product, price × units | Customer payments can arrive in a different period |
| Cost of goods sold, or COGS | Costs assigned to the goods or services sold | Which production or service costs the business includes |
| Gross profit | Revenue minus COGS | It still has to cover other expenses |
| Gross margin | Gross profit divided by revenue | A percentage is different from total profit dollars |
| Operating expenses, or OpEx | Operating costs outside COGS, such as sales and administration | Avoid counting a cost again if it is already in COGS |
| Fixed cost | A cost that stays unchanged within the relevant volume range and period | A second site or shift can make it jump |
| Variable cost | A cost that changes with activity, such as packaging per order | Use a unit and activity that match the calculation |
| EBIT | Net income before interest and taxes | Do not automatically equate it with operating profit; definitions and included items matter |
| EBITDA | EBIT before depreciation and amortisation | It excludes some costs and does not tell you cash generated |
| Net income | The accounting profit after recognised expenses, including interest and tax | Profit can be positive while cash is falling |
Gross margin and contribution margin are different views of costs. Gross margin follows the COGS classification. Contribution subtracts variable costs, including variable selling costs where relevant. A fixed factory cost can sit inside COGS; a per-sale commission can sit outside it. Do not substitute one margin for the other without checking the cost definitions.
Quick Case Math Drill
A florist chain tells investors it runs at a 40% margin. You suspect that figure ignores the cost of actually running the shops.
- Monthly revenue
- $500,000
- Flowers and delivery (COGS)
- $300,000
- Rent, staff, marketing
- $150,000
What is the chain's operating profit margin for the month, as a percentage?
Unit economics: decide whether more business helps
| Term | Practical meaning | Useful calculation or example |
|---|---|---|
| Contribution per unit | Revenue left after variable cost for one unit | $15 price − $9 variable cost = $6 |
| Contribution margin ratio | Contribution as a share of revenue | $6 ÷ $15 = 40% |
| Break-even volume | Units needed to cover fixed costs | Fixed costs ÷ contribution per unit |
| Unit economics | Revenue and costs attached to a useful unit, such as an order or customer | Define the unit before comparing results |
| Marginal cost | Cost caused by one more unit or a small increase in output | It can be low with spare capacity and jump when another shift is needed |
| Willingness to pay | The price a customer is prepared to accept for an offer | Different segments and alternatives can produce different answers |
| Price elasticity | How quantity responds to price | % quantity change ÷ % price change; state the percentage convention used |
| Cannibalisation | Business taken from another of the company's offers | Compare the new contribution with the contribution displaced |
A new product selling $1 million is not necessarily adding $1 million of company revenue. If $300,000 replaces existing sales, incremental revenue is $700,000. Profit needs another step: subtract the contribution lost on those existing sales, the costs of the new sales and any launch costs.
Growth: keep the denominator visible
| Term | Meaning | Example |
|---|---|---|
| Percentage change | Change divided by the starting value | $80m to $100m is $20m ÷ $80m = 25% growth |
| Compound annual growth rate, or CAGR | The constant annual rate connecting a beginning and ending value | $100m to $121m in two years is 10% a year compounded |
| Percentage point | The difference between two percentages | 20% to 25% is up 5 percentage points |
| Basis point | One hundredth of a percentage point | 5.00% to 5.25% is up 25 basis points |
| Weighted average | An average that reflects each group's size | 80% of units at $10 and 20% at $20 gives $12 per unit |
| Mix shift | A change in the share coming from different segments | Average price can rise because more customers buy premium, without any price change |
| TAM, SAM and SOM | Total addressable demand, the portion you can serve, and the portion you can realistically obtain | Define geography, customer eligibility and period consistently |
| Market share | Company sales divided by market sales | Match revenue with revenue, or units with units |
If a margin goes from 20% to 25%, both “up 5 percentage points” and “up 25% relative to its old level” can be true. Say which you mean. For more practice, use the case maths problems.
Quick Answer Repair Drill
A gym chain is deciding where to focus next year's expansion budget. A candidate reviews last year's revenue for its two club types.
- Candidate's claim
- Suburban clubs, up 50%, drive our growth
| Club type | Last year revenue ($m) | This year revenue ($m) |
|---|---|---|
| Suburban | 4 | 6 |
| City | 40 | 46 |
Which correction to the candidate's claim is most precise?
Customers: distinguish winning them from keeping them
| Term | Meaning | Where candidates get caught |
|---|---|---|
| Conversion rate | Share of an eligible group completing a defined action | Website visits, leads and qualified leads are different denominators |
| Customer acquisition cost, or CAC | Acquisition spending divided by new customers acquired | Include the relevant sales and marketing costs; match the period and customer group |
| Retention and churn | Customers kept and lost from a starting group | Revenue retention can behave differently because customers upgrade or downgrade |
| Lifetime value, or LTV | Expected value of the customer relationship using a specified profit or contribution measure | Revenue alone overstates what is available to recover acquisition cost |
| LTV:CAC | Customer lifetime value divided by acquisition cost | The ratio does not show how quickly cash comes back |
| Average revenue per user, or ARPU | Revenue per user or account in a stated period | Check whether the denominator is average active users, paying users or another group |
| Average order value, or AOV | Revenue divided by orders | A larger basket can still have a worse margin |
| Share of wallet | Your share of a customer's spending in the relevant category | It is different from your share of the whole market |
A common simplified LTV model is monthly revenue per customer × contribution margin ÷ monthly churn. At $50 revenue, 60% margin and 5% churn, it gives $600. This assumes a steady contribution and constant churn, and ignores discounting. Use it when those assumptions fit the exercise. For a business with strongly changing retention, estimate the contribution of successive customer cohorts instead of forcing them into one average.
Cash and investment: profit does not pay every bill
| Term | Meaning | Decision relevance |
|---|---|---|
| Working capital | Broadly, current assets minus current liabilities; operating working capital often focuses on receivables + inventory − payables | Confirm which definition the case uses |
| Receivables, payables and inventory | Money customers owe, money owed to suppliers, and stock held | Growth can tie up cash before customers pay |
| Operating cash flow | Cash generated or used by operations | Accounting profit must be adjusted for noncash items and cash timing |
| Capital expenditure, or capex | Spending on assets used over time | Cash can leave now while accounting expense is recognised over several periods |
| Free cash flow, or FCF | Often operating cash flow minus capex | Definitions vary; debt obligations may still need funding |
| Return on investment, or ROI | Net gain relative to the investment | Specify the period and what is included in net gain |
| Payback period | Time until cumulative cash benefits recover the initial outlay | Investment ÷ annual benefit works only for level annual benefits under the stated timing |
| Net present value, or NPV | Future cash flows discounted to today, less the investment | Include the full relevant cash flows and the required return |
A distributor can sell more, report a profit and still need financing because it buys inventory today and receives customer payment later. Likewise, EBITDA does not subtract a new warehouse purchase or automatically capture the cash tied up in growth.
Labels such as EBITDA and free cash flow need clear definitions. Read the definition supplied in the case before using the number.
Operations: measure the whole flow
| Term | Meaning | Example or check |
|---|---|---|
| Capacity | Output a resource or process can sustain over a stated period | Specify staffing, uptime and quality assumptions |
| Utilisation | Actual use or output relative to defined capacity | Daily averages can hide an overloaded peak hour |
| Throughput | Completed output per unit of time | 2,400 completed orders in eight hours = 300 per hour |
| Bottleneck | The resource limiting the process under the current mix and demand | Speeding up another step may not increase total output |
| Cycle time and lead time | Timing measures whose start and end points must be defined | Cycle time may mean time between completions; lead time commonly runs from request to delivery |
| Yield and defect rate | Good output and defective output relative to the specified input or production count | Rework and multiple defects per item can complicate the relationship |
| Productivity | Output per unit of input | 240 orders over eight total labour-hours = 30 per labour-hour |
| Economies of scale | Lower average cost as volume increases | Fixed cost spread over more units helps only while the relevant capacity and costs hold |
Suppose cutting can process 500 units an hour, assembly 350 and packing 450. With one unit passing through every step and no other losses, the line can sustain 350. Buying faster packing equipment does not remove the assembly constraint.
Also distinguish actual processing from elapsed time. An order might require ten minutes of work but spend two days waiting for approval. Ask where the clock starts and stops before calling either number “cycle time.”
Learn a term by using it
Pick three terms you hesitate over. Explain each in ordinary language, calculate a small example and say how it could change a recommendation.
Then take a case maths exercise. Write the unit and period beside every result. The test is whether the vocabulary helps you reason clearly when the interviewer changes the facts.
Case math practice
Can you talk an MBB interviewer through the numbers?
Put your reasoning into words in a voice AI drill. Get feedback on your method, your calculations and what the answer means.
Try the voice AI drillFrequently asked questions
Core terms and what has been deducted
Do I need finance-textbook vocabulary to do well in case interviews?
No. You need enough vocabulary to understand what the client wants to improve and how the numbers connect. For any term, ask what is being measured, over which period, and what decision it informs. Explaining contribution clearly in plain English is more useful than reciting definitions you cannot apply when the interviewer changes the facts.
What is the difference between contribution and profit?
Contribution is revenue minus variable costs. Profit is what remains after fixed costs are also paid. In the café example, $100,000 of revenue less $40,000 of variable costs leaves $60,000 of contribution. Deducting $45,000 of fixed costs leaves $15,000 of profit for the month. Confusing the two can make a business look far healthier than it is.
If the interviewer says margin improved, is the business doing better?
Not necessarily. First establish which margin is meant and what has been deducted to reach it. A margin can rise while total profit stays flat or falls, for example if volume drops. Before drawing a conclusion, ask whether total profit also increased over the same period, because that is usually what the client actually cares about.
Is revenue the same as the cash a company receives?
No. Revenue is the sales earned in a period, which for a single product is price multiplied by units. Customers may pay in a different period, so a company can record strong revenue while the cash arrives later. If a case concerns funding or liquidity, check when payments arrive rather than assuming revenue equals cash in the bank.
What should I check when a case mentions cost of goods sold?
Check which costs have been assigned to it. COGS covers the costs attributed to the goods or services sold, but cases can differ on which production and related costs are included. Clarifying this before comparing margins stops you treating two figures as comparable when one has had more costs deducted than the other.
Unit economics and growth calculations
How do I work out the contribution margin ratio?
Divide contribution per unit by price. With a $15 price and a $9 variable cost, contribution is $6 per unit and the ratio is $6 ÷ $15, or 40%. The ratio shows how much of each additional unit of revenue is available to cover fixed costs, which helps when comparing products sold at different prices.
How do I calculate break-even volume in a case?
Divide fixed costs by contribution per unit. Using the café figures, each drink contributes $5 minus $2, or $3, so covering $45,000 of monthly fixed costs needs 15,000 drinks a month. Because the café sells 20,000, it is above break-even. Always state the period, since monthly fixed costs must be matched with monthly volumes.
Is CAGR just the average yearly growth rate?
Not quite. CAGR is the constant annual rate that connects a starting value to an ending value. Growing from $100m to $121m over two years is 10% a year, even though total growth is 21%. Simply halving the total would give 10.5%, which overstates the rate because each year's growth builds on a larger base.
Why does the starting value matter so much in percentage change?
Because percentage change divides the change by the starting value. Rising from $80m to $100m is $20m ÷ $80m, or 25% growth. Falling from $100m back to $80m is the same $20m but only a 20% decline, because the denominator is larger. State the base aloud so the interviewer can follow your comparison.
Customers, cash and operations
Which number should I divide by to get a conversion rate?
Divide by the eligible group the case defines, and confirm what that group is. Website visits, leads and qualified leads are different denominators and produce very different rates for the same number of sales. Before comparing two channels or periods, check that each rate starts from the same kind of group and ends with the same defined action.
How do I calculate customer acquisition cost properly?
Divide acquisition spending by the number of new customers acquired. Include the relevant sales and marketing costs, not only advertising, and make sure the spending and the customer count genuinely correspond, typically over the same period. A CAC that omits sales staff costs, or divides one quarter's spend by another quarter's customers, will mislead your recommendation.
Can a profitable business still run short of cash?
Yes. Profit does not pay every bill, because growth can tie up money in receivables owed by customers and in inventory held as stock, while suppliers may need paying sooner. When a case involves funding or expansion, examine working capital and confirm whether the case uses the broad definition or operating working capital of receivables plus inventory minus payables.
If average utilisation looks comfortable, is capacity really fine?
Not necessarily. Utilisation compares actual use with defined capacity, and a daily average can hide an overloaded peak hour. Check the busiest period as well as the average, and make sure capacity is stated with its staffing, uptime and quality assumptions. Otherwise you may be comparing demand with output the process cannot actually sustain.
What is the best way to learn these terms before an interview?
Use them rather than memorising them. Pick three terms you hesitate over, explain each in ordinary language, calculate a small example and say how it could change a recommendation. Then work through case maths practice, writing the unit and period beside every result so you notice whether a figure is monthly, annual or per customer.