As an entrepreneur you will be required to put on different hats at the same time, a marketing hat, sales hat, a strategic and most importantly a financial hat. Developing a financial lingo, will enhance your ability to effectively analyze and make decisions about your businesses financial standing. here are 7 financial concepts for every entrepreneur must know:
1. Working Capital
Money required to start a business is the working capital. It is required to pay for licenses, permits, office space, product development, inventory, marketing, manufacturing or other expenses.
Why you need the working capital is for these reasons:
· Gaining credibility- Look for the right places offering substantial funding amount and startup. Deliver something compelling. Build credibility at the fastest to get stakeholders.
· Tap resources –Raise startup capital and tap extensive resources to get instant growth.
· Get assistance- The need for assistance is to serve as advisors and to make strategic directions.
2. Return on Investment (ROI)
ROI represents ‘Return on Investment’. It means you must make money after putting money into a business or a project.
Why ROI is Important:
· Hiring of employees- Doing ROI calculations you can understand if hiring employees is worth or not.
· New equipment purchase- Buy the right equipment to get ROI.
· Marketing strategies allows assessing profitability and its implementation brings profits.
3. Cost of goods sold (COGS)
Cost of goods sold is the specific costs relating sales directly. It includes packaging, inventory, labor production costs, and raw material.
What more is included in COGS?
· Direct labor, shipping, distribution costs, raw materials, finished products resale, and more.
· Cost of Goods Sold = (Starting Inventory + Purchases) – Ending Inventory
Revenue is the money generated by the business. How much your business earned.
Why does it matter?
Revenue demonstrates the ability to generate sales. Revenue indicates within the market demand. Businesses may be profitable to generate revenue and to earn profit, so revenue is important.
5. Return on Advertising Spend (ROAS)
ROAS refers to the profit on the advertising spending. The focus is on ROI. ROAS is the benchmark for ad spends and it varies with each business.
6. Profit Margins
Profit margin is the metrics determining profitability. Profit margins are in 3 types:
· Net profit margin revealing the company’s profitability in relation to expenses
· Gross profit margin: It evaluates production processes, pricing strategies, and manufacturing efforts.
· Operating profit margin: The profit margin is after materials and wages. It does not include interest and taxes.
Valuation is the estimate of something. Knowing the valuation of your business is a must to inform your seeking investors. Knowing the valuation keeps you motivated. Valuation is determines using a few methods:
· Asset valuation taking into account the intangible and tangible assets with market value to get the company worth.
· Relative valuation is to determine similar business worth.
· Discount cash flow valuation is when there are no profits and to stay stable in the future.