While starting your entrepreneurial journey, you have to watch various factors. You have to keep track of everything from marketing to investment to hiring suitable sources. You have to understand that everything in your business will somehow be related to the basics of finance.
So, you should have a firm grasp of it if you want to achieve the desired business results. Everybody knows how to keep track of essential profit margins. Unfortunately, finance is a vast field that covers a wide area of your business.
So, you have to be prepared to dig deep down to understand the complex finance concepts. It will help you run the business independently and make the right business decisions.
For the financial planning of your business, you always avail of the services of a professional advisor. It will help you to have valuable insights into your business. But eventually, you are the business owner, so you have to take matters into your hands.
Nobody knows better than the dynamics of your business, so you should know different financial metrics to lay your business foundation.
Let’s explore what is the basics of finance for every startup.
1. Cash Flow
Cash flow gives you the idea of how much money is coming in and going out of your business. This term can be related to accounting because it gives you your business’s financial information. Comparing finance and accounting will help you understand that both are interconnected.
Similarly, cash flow is also interrelated to finance and accounting which helps you measure your costs and revenue. Free cash flow shows liquidity which means more money is going out of business rather than coming in.
Cash flow is also known as cash transactions of a company that shows the amount of cash produced through different activities. Whether through financing, operations, or investment, it gives you a clear idea from which resource the money is flowing.
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2. Customer Lifetime Value
A particular customer’s revenue for your startup through their membership is known as customer lifetime value. You can determine the LTV (lifetime value) by knowing the customer value.
Then you have to multiply the purchase frequency value by the average purchase value. After doing this, you have to multiply the average customer value by the average period that the customer retained, which could be in months or years.
By knowing the LTV of a customer, you can have a clear idea of how much money you can generate through a single customer. It will give you a clear idea of how much money you have to invest in getting a new customer.
3. Customer Acquisition Cost
CAC (Customer Acquisition Cost) is the money you spend or invest in attaining a new customer. When you launch your startup with a new brand and an unknown product, your CAC can be high. You have to invest good money to scale your marketing efforts. It could be the cost of hiring competent marketing managers or purchasing the latest digital marketing tools.
The bottom line is that every startup requires a good amount of money in the initial phase of the business to acquire new customers. Once your potential customers start taking an interest in your brand, your customer acquisition cost will gradually decrease.
4. Return on Investment
Return on investment (ROI) is one of the most critical financial metrics that give you an idea of gain or loss through an investment. If you want to calculate your ROI for a new investment, you can divide the losses or profits by your total investment and multiply the final value by 100.
You will get your ROI in percent. Having a clear ROI helps you in making correct investment decisions. For example, if you have experienced a loss in a particular investment, you can invest your money somewhere else next time. It will help you attain more profitable results.
5. Customer Retention
Customer retention shows the percentage of the customers that you retained. It means those customers who continue their subscription to your service or product. A high retention rate means you deliver quality services and your customers are satisfied with your business.
Customer retention also shows the progress of your startup and how it is strengthing your place in the business market. If your customer retention rate is not high, then it means you have to modify your product or service or address customers’ issues more efficiently.
6. Net Income
Before explaining net income, you should know the difference between revenue and expenses. Revenue is the total money you produce through sales, which measures your startup performance. At the same time, expenses are the cost that you have to spend for your different business operations, including marketing, management, etc. Now net income is the difference between your expenses and revenue.
To increase your net income, you have to pay attention to your customer acquisition cost, lifetime value, investment return, and cash flow. It will help you increase the difference between expenses and revenue. It will also have a positive impact on the financial health of your business.
Business is the game of figures. Whether it is profit, loss, or anything else, your progress will be measured in the form of figures. So, you need to have good financial sense to make growth-driven business decisions that can keep you on the right track.
Also, you should invest in having a team of competent finance managers that will provide you with helpful business insights. It will help you prevent financial errors, so you will never misjudge anything related to your business finances.