Financial Basics for an Entrepreneur
In a recent post, I talked about the importance of an entrepreneur having at least some basic understanding surrounding the basics that make up their business. Even if you have delegated some part of this responsibility to someone else, there are three concepts you may want to ensure you fully understand.
The first is cash flow operations. The cash flow statement shows how cash comes into the business and goes out of it. Cash flow from operations measures the amount of cash dollars a company generates in a certain period from its regular operations; it shows the cash that has come into and out of the company from normal activities. Cash flow operations does not take into account any loans, grants or other such financials that may have been obtained. Having a good understanding of your cash can help you carefully guard the activity within your business.
Here is another concept to understand – net-income margin. It can be really exciting to see money flowing into your company. But you will want to be able to discern how much of the money is actually profit. You will also want to understand the percentage of profit you are earning on each sales dollar – this is called the net income margin. The formula to determine your net income margin is: [Revenues – All Expenses]/Sales. There is no simple rule of thumb for what makes for a good ne-income margin. Generally speaking however, an operating profit margin of approximately 25% or better is considered favorable by most market analysts. Do yourself a favor and learn as much as you can about how to achieve the best net-income margins. Your business will have a better chance of thriving if you do.
Finally, let’s talk about revenue growth. Sounds simple enough, it means more money is coming in. When examining your revenue growth, please also give consideration to your rate of growth over a period of time. If things are improving year to year, great. Pay attention to those moments when you see a decline rate. Think about contributing factors and plan accordingly.