We talked in one of the recent mini-series episodes about understanding finance and gaining financial knowledge to generate the revenue you deserve. Today we are going to take it one step further and gain some of that financial knowledge. We are going to focus on understanding the 3 key financial terms that you need to know in order to run your business.
I always say that if you can take care of your personal finances, you should be able to take care of the basics when it comes to business finances. Business finance isn’t complicated at the start. Eventually it will become more complex and that’s when you hire help. Until then, you need to understand the 3 basic terms to get you going.
1. Revenue: this is money coming into your business. Also known as cashflow because you want cash flowing into your business. Anything you do to generate money coming into your business, this is your revenue.
2. Profit: this is the money leftover from your revenue after you pay your bills and monthly expenses.
3. Expenses: those bills that you have to pay for your business, including your own salary, are expenses. They usually are reoccurring, meaning they happen monthly, quarterly, or annually. You have to generate enough revenue to pay for your expenses in order to have a sustainable business.
Ultimately, these are the 3 key terms you need to know. You see? Not bad at all.
Now that you know the 3 terms, create a revenue target and start moving your business towards that goal. Also make a list of extra expenses you want to add to your business. Maybe you need to add to your headcount or you need some additional tools to support the sales process. Take your list of extra expenses you want to add to the business, then set your revenue target to exceed the monthly expense of the first item on your list. Once you achieve that revenue target for 3 months consistently, you can consider buying that item and you should have the ability to pay for it each month as a result.