Finance Terms to know

Finance Terms to know

1. Revenue drivers- The ways you separate your customers from their money.

  1. High - You offer several products or services (not common during the start-up stage) 
  2. Low - You offer one or a few products or services.

2. Volumes - The amount of products or services you sell.

  1. If you have high margins (such as with cars or houses), you only have to sell fewer of these to be profitable.
  2. If you have lower margins (such as with cups of coffee and other services or merchandise), you will have to sell more (higher volumes) to reach break even (BE).

3. Margins - This is a formula and it is expressed as a percent.

Sales - costs = contribution margin
(Please note that these margins differ based on industry.)

  1. The higher your margins, the fewer products/services you have to sell to make your economic model work. The IT industry is one example with high margins.
  2. The lower your margins, the more you will need to sell to reach break even.

4. Operating leverage - This refers to how much of your expenses is tied into your fixed costs.

  1. Fixed costs are those you have to pay each month no matter how much or how few sales you have. Examples include rent, insurance, and salaries.
  2. Variable costs vary in relation to sales. They include cost of goods (COGs), labor, and credit card fees. You only pay for them when you make a sale.
  3. The lower your fixed costs, the lower your risks. You also have lower profits when you reach break even. This is where you want to be early on in your venture. This is why bootstrapping is important.
  4. The higher your fixed costs the higher your risks. You also have greater profits with high operating leverage. The example Ken gives includes the airline industry. The hospitality industry is another example. 

5. Break Even (BE) - The point in time where an entrepreneur doesn't lose any money or make any money. Income that you earn after you reach BE is profit.

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