Fundamental Financial Terms for Small Business Strategy
Every business owner needs to understand how their business operates. Whether your objective is to make a bunch of money for yourself, support your community, or anything in between, it is critical that you understand how to turn a profit to keep your business going. Because if your business is not able to turn a profit, eventually it will run out of money. Today, I'm going to share with you some fundamental financial terms that you should clearly understand when analyzing and running your business. I will also provide some context that will hopefully allow you to make better decisions while planning the future of your business. Let’s get started:
Key Term #1 - Sales Price - for every good that you sell, every service you provide, or contract that you execute, there is going to be a price associated with it that the customer pays. Here are some examples of sales prices that might be relevant to your business:
$25 per T-shirt (Product)
$60 per Hour (Service)
$3000 for a Logo and Brand Consulting (Contract Bundle)
In each of these cases, it is very clear what the customer is paying for because it is written as a cost per something. You might have multiple products or services that you sell as a component of your business and it's important to know what each of their sale prices are so that you can communicate terms to prospective customers. Some businesses might operate solely on individually negotiated contracts; in these cases, you won't be able to immediately tell a prospective customer what their price might be, but being able to provide an estimate is still incredibly helpful. Note that I have defined sales price on an individual customer basis here because this is the language you need to be using when communicating to your current and prospective customers.
Key Term #2 - Revenues - money that is brought in from business operations. I typically like to think of revenue as the sales price times the quantity sold for every business unit added together. It's important to remember that revenue in this case is the total of all sales, and not just one single customer or product. For many small business owners, this is the most important metric for their business. If costs are structured properly, increasing revenue will increase the amount of money that can be taken out of the business. If your business is not near its capacity for handling customers, then your strategy should be to increase revenue in most circumstances. However, if your business is bottlenecked by some resource (such as your time, availability of staff, or warehouse space), then your focus should not be on maximizing revenue, but rather reducing or restructuring your expenses.
Key Term #3 - Expenses - money that is paid out of the business for its regular operation. For smaller businesses, these typically include the cost of products sold to the customers, consultant costs, and employment costs. If your business is at its capacity and cannot take on more customers, focusing on expenses is the way to go. Cutting the costs that your business incurs will allow you to keep more money for the same level of output (assuming you can maintain the same output while cutting costs). If you're at capacity, but need to grow your business, you need to consider cost and business restructuring. For example, if you are a solopreneur running a merchandise business and packing everything yourself to send to customers, you will eventually run out of time and energy to fulfill all the orders. In this scenario, you should hire a person or company to package and fulfill these orders. Doing this will change the cost structure of your company, and it will cost more money, but it will allow you to sell more merchandise and make more money as a result.
I chose to highlight these business terms today because business owners need to understand and properly consider each of these when operating their business and planning for the next steps. If you made it this far, thank you for reading! What area do you think you should focus on for your business:
Defining sales prices?
Increasing revenues?
Reducing or restructuring expenses?
Let me know in the comments below!