Small business owners often have a great idea and skills in a certain area, but they may not be as experienced in the financial side of running a company. A deep understanding of business finance is crucial for making informed decisions and generating sustainable long-term growth.
In this article, we’ll cover a few of the most important financial terms for small business owners to be aware of. Make sure to check out our website if you’re interested in an sba 7a loan for your small business.
Return on Investment
Return on investment is one of the most important metrics for businesses of all sizes, and it can be applied to a wide range of investments. In general, it represents the amount of money you get back for a given expense.
For example, if you generate $150 in profits on a marketing campaign that cost $100, you would have a return on investment of 50%. In other words, every dollar you spent brought in an extra 50 cents along with covering the cost of the campaign. Of course, return on investment can also be negative when a project loses money.
Goodwill
Determining the value of a business can be a complex process, and it isn’t always reducible to the value of its assets. Companies develop strong relationships with their customers, and accountants quantify those intangible factors in the form of goodwill.
Depending on the business in question, goodwill could include anything from the perceived value of the brand name to the trust of a given audience. While it’s essentially impossible to precisely evaluate a company’s goodwill, the figure itself can be calculated as the difference between the value of a company and the value of its tangible assets.
Gross Margin
Revenue provides insight into a company’s scale, but it doesn’t say anything about its profitability. A business that makes $50,000 in annual sales on $40,000 in expenses isn’t as profitable as one that sells $25,000 on just $10,000.
Margins can be calculated as either a percentage or a flat figure, which corresponds to total profits. For example, the company with $100,000 in sales and $90,000 in expenses would have a margin of $10,000 or 20%, while the company with $25,000 in sales and $10,000 in expenses would have a margin of $15,000 or 60%.
You don’t need to be an accounting expert to run a small business, but it’s critical to understand the financial side of your company. These are just a few of the most important terms to be aware of as a small business owner.
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