Understanding your business means understanding the finances behind it. There is nothing more important than the economics behind your company, because without them, your company would not exist. It is very little consolation to have the best product or service in the business and be unable to create the kind of leverage with your finances to get things done in the marketplace. You can ask many companies about this – well, many former companies. They are no longer in existence.
There are certainly differences in financial levers from business to business and from industry to industry. However, there are also some similarities that you can use as templates. Here we will take a look at some of the most important financial levers that are likely in your business and how you can better understand them.
The most important financial lever in your business is the bottom line. Some might even call it your financial liver. However, do not think that this is the only one. It is simply the one that the rest of the body cannot function without. Everything that you do should be moving towards increasing this number so that you can have more leverage to handle all of the other financial levers that you will read about later on in this piece.
Almost as important as revenue is profit. This financial lever differs from revenue in one meaningful way – profit is the money that you get to take home after all of the expenses have been paid. Revenue is slightly more important because you cannot achieve scale without increases in revenue, but keeping your profit margins high is definitely second on the list. Dealing with profit is also dealing with your supply chain. If you are spending too much to get your products out there or market your products, then you need to look into solutions that can help you improve this metric.
On the list is expenses. This has to do with the supply chain of your business and everything that you do to get your products and services out into the general public. If your expenses are high along with your revenues, then your profits will be low. This will ensure that you do not have the ability to expand your business. However, expenses in the right places can also be used quite favorably, such as for taxes. This is a financial lever that you should know how to wield judiciously. Not everything is all about reduction all the way down to the knob. In some cases, you may have to have higher expenses in order to create a more efficient or effective product.
This is an often overlooked financial lever that you should pay close attention to. You can have great revenues and even a high profit margin, but if you do not have a good cash flow, then your business will have problems. Cash flow has to do with your employees getting paid on time, your bills getting paid every month, and your overall business continuity. In many cases, companies with large take-home profits have to take out large loans as well in order to maintain a cash flow. Make sure that you have enough for the day-to-day expenses of your business by maintaining this metric just as much as you maintain your revenue and profit margin.
This is a financial lever that many companies do not ever get rid of, although it should definitely become less and less of a hassle as time goes on. Your fixed costs should be the costs that you take on when starting or expanding your business. Ideally, these costs become a negligible part of your overall financial profile. Your ongoing costs are much more important, because your fixed costs can get quite expensive if they become ongoing in any way. The way to make sure that your fixed costs are low include ensuring the quality of products that you buy, making partnerships that benefit you in the long run, and making good deals on equipment, labor and other costs.
There are many other financial levers that you may have to deal with in your business, but the above are among the most important. Make sure that you understand and completely before moving on into deeper aspects of business. If you do not, then you may find yourself tripping over your own feet without warning. The simple things in business are always the most important. The simple financial levers are the ones that will drive you forward the most quickly.
Mark Angelo co-founded the Investment Manager in August 2009 and two affiliated investment managers (the “Affiliated Investment Managers”) in 2000 and 2016.