5 Financial Concepts Every Business Owner Needs To Know
Updated: Apr 5, 2022
Business owners are jacks of all trades. They need to know as much as they can learn about every aspect of starting and growing a business. Financial know how forms a big chunk of that learning. We have put together a three part series of financial concepts that every small business owner needs to know.
This three part guide will polish up your knowledge about business finances, explaining a whopping 15 financial concepts that you should fully understand to help your business run smoothly, and profitably!
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1. ROI - Return On Investment
In simple terms, ROI is a way to measure profit or loss by any financial investment. For example if you where to spend £100 on a print advert in a magazine, and that ad generates £150 in sales, your ROI was £50 profit. If you spent £100 and got £100 in sales, that's a break even ROI (no profit, no loss). If you spent £100 and got £75 in sales, that would be a negative £25 ROI loss. Its essentially a metric that can be used to measure the success of a wide range of business activities including : Advertising, Investing, Product Launches, Personnel, Opening a new store etc.
Return on investment can be a complex subject so we put together a ROI for Dummies guide! Check it out for more information including how to calculate ROI and how to use it for your business.
2. ROAS - Return On Advertising Spend
Similar to the above, ROAS is used to calculate your profit or loss from your advertising spend! ROAS is calculated by deducting the cost of advertising from the total revenues generated by your ads. ROAS is used by marketers and business owners to analyse the effectiveness on different advertising campaigns. With marketing being such a highly competitive space, marketers will test and test until they find assets or campaigns with a high ROAS, then scale up those campaigns for huge profits.
3. Working Capital/ Cash Flow
Cash flow is king baby! Working capital as it is more formally known is the amount of liquid cash the business has at that particular time. Working capital is calculated by taking your current assets and deducting your liabilities.
Working capital calculations are most commonly used in business to help decide if a certain investment is affordable for a business, such as moving to a new office or investing in new equipment.
A good business owner keeps a close eye on their cash flow so as to not over leverage their working capital and get into a bad financial state.
4. Profit Margin
Profit margins are calculated to work out the overall profitability of various business avenues. One example is the amount of profit generated by a sale or service sold by a business. Its something worth keeping an eye on because the more profit a business generates the faster it can scale or grow.
However seeking profit should be balanced with other things like customer satisfaction. Seeking profit for profit sake is a quick way to destroy your own business. We all know about businesses that caught the public eye by exploiting customers and clients all to increase the bottom line, while offering no value to the very people who keep their business in business!
5. COGS - Cost Of Goods Sold
Cost of goods sold is a metric used to calculate the cost of bringing your product or service to market. It involves calculating the entire cost of your product by adding all off the various costs of producing our product or service. COGS are slightly different for each business and those selling physical products compared to builders using materials will have a completely different idea of COGS. For example a physical product might calculate manufacturing costs, packaging, inventory and shipping costs.
Service based businesses will have a different subset of COGS. Builders for example will have building materials factored in to their COGS to calculate profits for different jobs.
That wraps up the first part of our three part series on Financial Concepts Every Business Owner Needs To Know. The following parts will be listed here as they are released!