To help get all you new and hoping-to-be CEOs started on the right financial footing to ensure confidence from your team and your investors, here are some basic finance terms that every good entrepreneur should know.
Net earnings and net income both fall under the “bottom line” description. You may hear people talk about “affecting the bottom line” of the company and this is simply any action that may increase or decrease the company’s net earnings, or overall profit. The term “bottom” is in reference to the typical location of the number on a company’s income statement, below both revenues (top line) and expenses. Needless to say, this is an important term to know.
Gross margin is expressed as a percentage and represents the percent of total sales revenue that a company keeps after subtracting the cost of producing its goods or services. The higher the percentage, the more the company keeps on each dollar of sales (that will eventually go toward paying its other costs and obligations). In simple terms, if a company’s gross margins are 25 percent, for every dollar of revenue that is generated, the company will retain $0.25 before paying its overhead, which includes salaries, rent, and more.
Fixed versus Variable Costs:
A fixed cost is exactly what is sounds like, a cost that does not change with increases or decreases in the volume of goods or services that are produced by your company. These costs are obviously the easiest to predict and plan for. Rent, salaries, and utilities all usually fall into this category.
Variable cost are just the opposite. They can vary depending on a what a company is producing and as a result are much harder to forecast.
Equity versus Debt:
The “equity versus debt” comparison may seem silly to some, but you would be surprised at how many people I have come across who have no idea what either really means. Equity is simply money obtained from investors in exchange for ownership of a company, while debt comes in the form of loans from banks that must be repaid over time. Both are necessary for growth, with their own pros and cons. Equity versus debt is a critical decision for any entrepreneur and it is important to know the difference as the future of your business may depend on it.
Leverage can be interpreted a couple different ways. In the financial world, leverage is most commonly known as the amount of debt that can be used to finance your business’ assets. In simple terms, the amount of money you borrowed to run your business. The balance you want to strike as an entrepreneur is that of your debt and equity. If you have way more debt than equity, you will be considered “highly leveraged” aka “very risky” to potential investors.
Capital Expenditures (CapEx):
Capital expenditures are any items purchased by your business that create future benefits. Basically, if something you bought is going to be useful to your business beyond the taxable year in which you purchased it, capitalize the item(s) as assets in your accounting. Examples include computers, property, or acquisitions.
Concentration is simply the measure (usually a percentage) of how much business you are doing with a specific client or partner. Relying on one or a couple of clients and partners to do business is a prime example of over-concentration. This is a losing strategy for any business because if something goes wrong with those limited relationships your business will be in serious trouble. Focus on keeping low concentrations for your accounts and investors will be impressed.
The number one, single most important thing you must do - on social media, on your website, just everywhere – is be yourself. Customers of every generation are looking for reality. Your real personality, conveyed through genuine, unique content helps you appeal to customers. Authenticity is consistently ranked among a brand’s most important qualities by Gen Xers, Millennial and Gen Z customers.
Consumers expect content to be appropriate to the platform it appears on. A fantastic Instagram post may fall flat on Facebook, and vice versa. Most small business owners who are doing their own marketing don’t have the available time or resources to shine on more than one platform: it’s better to choose the one most relevant to your customers and focus your energies there. With that in mind, take the time to make sure you know the best practices for posting content and engaging with other users – things like having the right number of hashtags can make a meaningful difference.
Social selling continues to grow, as companies learn how to convert interest into sales via social media and messaging apps. Selling is the third most important thing you can do on social media: the first is to maintain an authentic presence, and the second is to listen to and engage with your customers. Keeping everything in proportion will ensure you’re not seen as too pushy or overly commercial on social media.
Influencers are those individuals people listen to online: they tend to have large followings on at least one social media platform, and they may have their own YouTube channel. In influence marketing, you pay an influencer to talk about your company, and they do so as part of their regular content. Choose an influencer to work with based on the size of their reach as well as their relevance to your customers. Top influencers command top dollar, but you don’t necessarily have to spend a lot of money to cash in on the influencer marketing trend: particularly for those businesses that depend on local traffic, look for up-and-coming aspiring influencers in your market – just make sure to check out their content prior to signing any deals!
Livestreaming & Video
Facebook has made livestreaming video absolutely mainstream: users have broadcast everything from surprise marriage proposals to natural disasters in real time. Look for ways to use livestreaming to promote your business: retailers who have livestreamed crowds waiting for the doors to open for a sales event have seen traffic spikes as a result. Not all video needs to be live, either: for service companies and B2B firms, informative, instructional video will continue to be a very powerful marketing tool.
The popularity of Alexa, Google Home and other digital assistants makes it crystal clear that every website must be optimized for voice search. Google tells us a full 50% of all searches happen on mobile devices, and of those searches, 20% are voice searches. Think about how a customer would ask Siri to find a business like yours, and make sure those terms are featured strategically throughout your content.
Data Driven Marketing
Almost every major digital platform has increased the number and robustness of their analytical tools over the course of 2016. Take advantage of these tools to deepen your understanding of who your customers are. Data is valuable, but it also has its limitations: as a business owner, you have to apply your own perspective and insight to the numbers. For best results, you want to look at your data regularly. This will allow you to spot trends faster, making you more responsive to your customers.
Automation and Chatbots
The last trend is one that will actually make small business owners’ lives a little easier. Automation allows you to schedule content, advertising and other digital assets to appear specifically when and where you’d like it to. Dynamic advertising will show customers the specific products they’d been browsing on your website while they’re on other platforms: it’s often the extra nudge they need to buy. Chatbots are basically pre-recorded messages you can set up to reply to common questions that may come in through a messaging app, such as what time your business opens or a returns policy.
Ready to Rock? Reading the trends list can make digital marketing seem a little overwhelming. The key is to remember to be yourself, pay attention to how the tools you’re using work, and let data guide your decision making process.
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