2. Cost Of Goods Sold (COGS): As mentioned above, costs come in many different forms.

A key
component of costs is Cost Of Goods Sold, also known as Cost of Sales. COGS represent the
total amount of cost that the company can attribute to a particular item they sell.
Lets return to our handbag-manufacturing example. For each handbag you sell, you have to
buy leather, pay an employee to assemble the handbag, and face some costs to transport and
store the good until it is sold. All of those expenses count towards the handbags COGS. This is
because they can all be traced back to one single item.
The opposite of COGS are called overheads. These are costs that cannot be allocated to any
particular good sold. In the example above, the costs of a marketing campaign, the costs of
employees operating the store or your salary as a CEO cannot be attributed to one particular
good and therefore do not fall under COGS.
At this point, the distinction between variable / fixed costs and COGS / overheads may not
seem obvious. You may be tempted to think that if all COGS can be traced back to the
production of a particular item, then they will change with production, and COGS and variable
costs would be the same thing. However, COGS and variables costs are distinct. In particular,
some COGS may be variable and others fixed. For instance, the storage of goods is generally
included in COGS, even though it is independent of production if your company rents the
storage facility on a long-term basis, and therefore a fixed cost.
3. Gross profits are calculated as Revenues COGS: they represent the profits of the company
before subtracting overheads.

Ratios and metrics

1. Growth rates: Many McKinsey PST questions will require you to calculate or compare growth
rates. Growth rates are a very useful basic tool for businesses as they allow managers to
determine whether the company is going in the right direction, and how its performance
compares with previous years. Growth rates can be calculated for any of the performance
measures we defined above: sales, costs or profits. For example you could calculate the growth
in revenue between 2014 and 2015 using the following formula:
Revenue growth = (Revenue(2015) Revenue(2014)) / Revenue(2014)
You might also encounter the acronym CAGR: it stands for compound annual growth rate.
Given a starting quantity and a quantity several years later, the CAGR is the rate at which the
quantity would have to grow every year from the first period to reach the amount of the last
period. This could be different than the actual year-on-year growth, which may not be constant.

For instance, suppose your company generated $100m in revenues in 2013. The next year,
revenues grew by 2% to $102m. The following year, your sales grew even faster, by 4%, so that
revenues for 2015 stood at $106.1m. The CAGR represents the average annual growth over
these two years. However, it will not be equal to the arithmetic average (which here would be
equal to (2%+4%)/2=3%), because we need to account for the fact that the 4% growth is based
on $102m not $100m (this is the compounding part). The formula for the CAGR is ((sales 2015)/
(sales 2013))^(1/2)-1 (the corresponds to raising the ratio to the power 1/(number of years)).
This gives 2.995%. As you can see, the arithmetic average is in fact very close to the CAGR. This
means that in most cases, when the number of years is small and the growth rate low, you can
approximate the CAGR by the average growth rate, instead of using the exact formula.
2. Margins: Another term that you will encounter frequently is margin. Margins are essentially
any of the quantities we may be interested in, divided by net revenues. For instance, you can
define the profit margin as:
Profit margin = Profits / (Net Revenues)
Equivalently, you could define the gross profit margin as (Gross Profit) / (Net Revenues).
Remember the issue we had with comparing companies based on absolute profit? Profit
margins provide a more direct way to compare companies. Since they are always expressed as
a percentage, you can say that a company with a higher profit margin is performing better,
relative to its size.
In the McKinsey PST, you might be given a profit margin and be asked to calculate sales given
profits, or vice versa. Using the definition above will allow you to answer this type of questions.
3. Revenues / profits per product or revenues / profits per employee: While expressing profits
as percentages of revenues (margins) is the most common thing business analysts do, you
might encounter some quantities expressed in per unit or per employee terms. These
measures can also be useful in assessing whether some product or some group of employees
are performing better than others.
These few definitions cover the essential business vocabulary that you should know before
taking the PST. Knowing these terms will make you a lot more comfortable going through the
business descriptions and the questions in the test. As a result you will increase your speed and
your level of confidence on the day of the test. They will also come in handy in a case interview.

This list is far from exhaustive however; another way to get acquainted with more business
jargon is by reading business books or business news.
If you have any questions on the terms above or on any other term not featured in the list feel
free to share them in the comments section!
List of synonyms:

Revenue(s), sales, turnover

Cost(s), expenses

Profit(s), net income, net earnings

Gross / net revenues, gross / net sales

Cost of Goods Sold, Cost of Sales

Overheads, overhead expenses

Gross margin is sometimes used as synonym to gross profit, rather than as referring to the
ratio of gross profit to net revenues