Finance (The Personal MBA Summary #3)

 In this one we are going to discuss about some finance things which is quite important in businesses as well as in personal life too.

         Thus, this blog must read if you have some interest in personal finance or in analyzing businesses. 

So, let's dive straight into this ✌

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1) Profit Margin: -

Quote: -

        I never lost money by turning a profit.

                                              ~Bernard Baruch 

 Profit margin is the percentage and is defined as expressed as bellow.

Revenue-Cost/ Revenue * 100 = Profit margin

 ·The higher the profit margin higher/stronger the business.

                                      The higher the price then higher will the revenue and if higher the price, then cost will be low, thus if cost is low then % profit margin will be higher, which is quite good for a business.

2) Value Capture: -

Quote: -

        You can get anything you want in this life if you help enough other people get what they want.

                                                                                                                ~Zig Ziglar

         People buy because they believe they are getting more value in the transection than they're paying/spending.

e.g., Movies are great, but would you pay $500 for two hours of entertainment? 

        Would you spend $999,999 in order to make $1 million; most people won't bother.

People want more value to capture from the product or offer than they are spending.

3)Valuation: -

Quote: -

       The whole value of dime is knowing what to do with it.

                                                                        ~ Ralph Waldo Emerson

   Valuation is an estimate of total worth of a company.

    Higher Revenue = Higher profit margin=Higher bank balance=Higher Valuation

The more promising of your company's value the higher or more money you'll able to command for every share you sell to investor.

             If you own the business and don't intend to sell it, then company valuation becomes less important.

Quote: -

       Lack of money is the root of evil.

                                                   ~Mark Twain

4) Cash-flow Statement: -

Cash tends to move in three primary areas-

     ·Operations (selling offers and buying inputs)

     ·Investing (Collecting dividends and paying for capital expenses)

     ·Financing (Borrowing money and paying it back)

5) Four Methods to increase Revenue: -

Quote: -

        Money is plentiful for those who understand the simple laws which govern its acquisition.

                                                                           ~Geroge S. Clason, Richest Man in Babylon.

There are only four ways to increase your business's revenue-

     · Increase the number of customers you have.

     · Increase the average size of each transaction by selling more.

     · Increase frequency of transaction per customer.

     · Raise your prices.

6) Pricing Power: -

Quote: -

       You can determine the strength of a business over time by the amount of agony they go through in raising prices.

                 ~Warren Buffett.

If you'd lose less than half of your customer, it's probably a good move to double your current price.

     If people have choices, then don't increase your price but if you are offering something unique then doubling your current price is quite meaningful.

7) Overhead: -

Quote: -

       Beware of little expenses, a small leak will sink a great ship.

                                                                                      ~Bemjamin Franklin

Overhead is the minimum ongoing required to done operations in businesses (little expenses) like rent, salaries, utilities, equipment, repairs etc.

               The lower will your overhead the less will be revenue required to continues its operations.

8) Costs: Fixed and Variables: -

Quote: -

       Watch the costs and the profits will take care of themselves.

                                                                         ~Andrew Carnegie

           ·   Fixed costs are the cost that are not changeable that is Rent, Salaries, etc. these are the costs you must pay.

           ·   Variables costs are those which you can changeable that is Raw Materials etc.

9) Incremental Degradation: -

Quote: -

      Quality, Quantity, Quantity: when you don't see, how you can afford to keep it up? When you compromise, you become commodity and then you die.

                                                             ~Gary Heisenberg

  You have to buy high quality raw materials to make high quality product.

           Control your costs but don't compromise with your quality of product and also don't undermine the reason customers buy from you in first place.

10) Breakeven: -

Quote: -

It is unusual and indeed abnormal for a company to make money during the first several years of existence. The initial product and initial organization are never right.

                                                                               ~Harvey S. Firestone

11) Purchasing Power: -

Quote: -

      The job of entrepreneur is to make sure that the company does not run out of cash.

                                                                                                               ~William A. Sahlman

   Purchasing power is the sum of all in hand cash or all liquid assets (can be sell within one year) that includes your cash, credit and any outside financing that's available.

                · All truth is found in cash account.

12) Opportunity Cost: -

Quote: -

       Businesses are more than any other occupations is continual dealing with the future, it is continual calculation, an instinctive exercise in forecast.

                                                                    Henry R Luce

Opportunity cost is the value you're giving up by making a decision, we can't do everything at once.

              We can't be in more than one place at a time and spend same dollar on two different things.

13) Sunk Cost: -

Quote: -

       If at first you don't succeed, try, try again, then quit. There is no point in being a damn fool about it.

         ~W.C Fields, Comediun

Don't continue to pour concrete into a bottomless pit, if it's not worth the additional investment, walk away, you never have to earn buck in the same way you lost it.

            If the reward isn't worth the investment required to obtain it or the risk, don't invest.

14) Internal Control: -

Quote: -

       If something cannot go on forever, it will stop.

                                                             ~Herbert Stein

Benefits of tracking your financial and operation data over time-

    1) Notice pattern in your revenue, cost and value steam.

    2) Preventing from theft and fraud.

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So that's it for the finance, there is many more about it but if you know only this stuff and evaluate business according to it then it won't disappoint you, in simple word "you can go with it".

    But I recommend you know all finance stuff that is balance sheet, P&L Statement and all other things because these are important in terms of numbers. The things we discussed above are kind of theory in finance, so learn to read balance sheet etc.

So that's it, if you like this one then do share this to your social media and your mates those are interested in finance.

Social Media handles: -

Twitter: - (1) Akshit Thakur (@Axit682) / Twitter

LinkedIn: -https://www.linkedin.com/in/akshit-thakur-34779122a-