Hello Aluxers! Isn’t it one of the best days to have a finance crash course?!
You’ve heard us say it over and over again:
So you better know your numbers if you want to win!
The thing is, most people get distracted and don’t know what numbers they should be keeping an eye on.
So we made a list for you! Here are the most important numbers in business!
Profit is the simplest measure of how well you are performing.
It’s the fundamental number you should always have in the back of your mind.
It’s frequently known as
Profit determines the best number to determine how well you are performing.
In accounting, there’s something called
Profit & Loss is the simplest way to bring everything together
It allows you to figure out if you’re making money or losing money.
As a new business owner, Profit is also the technical number you will be taxed on.
As long as you understand how much profit you’re theoretically making, you have a clear understanding of how much more you can invest
- thus increasing expenses - in order to grow the business and pay as little tax as it is legally required.
This is why Amazon pays very little tax despite bringing in so much money.
Fundamental business rule:
Revenue, Sales or Income - relate to the money the company is able to bring in.
You should be able to tell quickly just how much money you’re able to take out of the marketplace at any given time.
Revenue is what’s known as “The Top Line” - all the money coming in no matter how.
Sales is the money coming in from the sale of products and services.
Fundamental business rule:
If you are able to generate profitable sales, everything else falls in line.
Most businesses get caught up in all this financial mambo jumbo, but the most important part of the business equation is:
It doesn’t matter how good your business plan is, if you’re unable to sell any business will fail.
Most people confuse expenses with the cost of goods.
They think expenses are only how much money it costs directly to put together the product or service.
Total expenses bring in a lot more costs than what goes into what the customer is getting.
Every dollar coming out of the company pocket is an expense and it should be tracked.
People who are always quick to judge Apple for their expensive flagship phones lack an understanding of costs.
Why would a company charge $1500 for a device that if broken apart part by part, the sum adds up to only $490.50?!
It’s because you don’t understand how costs work.
Btw, this applies to every company out there that sells a product, we’re just using apple as an example
The company spends billions of dollars in research & development, spending a lot of money most of the time without a return,
in the hopes of having a technological breakthrough.
The same company is paying a ton of money to some of the best designers in the world
twerking everything about the device in order to have the best shape, functionality and feel the way it does when you use it.
There’s more to a product than the sum of the parts that end up in your hand, always keep that in mind.
The cost for a DVD is 20 cents, but the cost of making Avatar and putting it on a DVD is $237 million and 20 cents.
that allow you to do what you do and factor those in.
It’s a mistake most newbie entrepreneurs make: they don’t know what to charge because they don’t understand the costs.
For some of you, this might be the first time you’re hearing about EBITDA.
It stands for:
It’s used to establish a company's profitability relative to companies with similar business models.
We don’t want to make this video be too technical but If you wanna be in business, you need to get used to speaking the language of money.
By the way, we explain valuation in detail at the end of the video so make sure you watch it in full.
In order to determine the value of a company you basically calculate the EBITDA x what is called an “Industry Multiplier”.
This is why Alux as a media company is valued in the ballpark of $5 million right now.
It also helps us know how to focus our efforts and increase the value of the company.
It's a simple way to compare to companies and see who’s doing better.
Cashflow is an incredibly valuable metric to know no matter the business you’re in.
Cashflow is basically just how much money you’re left with on a month to month basis once you subtract expenses from the money coming in.
Both as an entrepreneur or real estate investor, cashflow is your go-to number to analyze if you’re making money or not.
Here’s an example:
You own a house that rents out for 3000 dollars a month.
So what are your expenses?
you might not need to do repairs every month, but every couple of years things break and need to be fixed.
you need to pay it just to be safe.
you’re paying someone to manage the property, so you don’t get the calls.
But, if you want, you can always do it yourself.
Every couple of months or years you’ll have to look for a new tenant.
In the meantime, the property stays empty. You need to factor this in.
In this case the monthly cashflow for the property is: $500.
This is how valuable an asset you have.
This is also the part of the video where we recommend you a book,
but by this point in time you’ve probably already read Rich Dad Poor Dad, by Robert Kyiosaki,
Last week we recommended THE BOOK on REAL ESTATE INVESTING by Brandon Turner from the bigger pockets podcast,
we even have a dedicated list of real estate books.
Pick any of them and go to alux.com/freebook.
If this is your first time signing up, you’re getting a free audiobook thanks to audible.
Pricing correctly can make the difference between making a fortune and going under.
It doesn’t matter if you’re cutting hair, selling art, financial services or bottles of water in the desert, you need to understand the laws of Supply and Demand.
Your job is to determine how much your product or service is worth to the market.
People vote every day with their wallets.
If they’re not paying what you’re asking, you’re either overpriced or you’re not talking to the right people.
This is how much you’re making with each product sold.
In the case of flipping houses, if you buy a tomato for $1 and sell it for 1.50, then your gross margin is 50 cents.
You should know your gross margins, because it allows you to figure out how quickly you can multiply your money.
The higher the margin the more quickly a business grows.
When calculating it, you deduct from the amount you’re getting from your clients all the direct costs associated with the product.
If you’re selling tomatoes out of the back of your car, the price of the car isn’t a direct cost,
but the bulk tomatoes as a well as the reusable hemp bag you’re selling them in, are.
Total inventory means how many pieces of products you have waiting to be sold in your storage or warehouse.
If you’re selling dresses at $200 a piece and you’ve got 100 dresses in storage, that means you have $20,000 worth of inventory.
Total assets takes it beyond inventory.
In this case, total assets groups together everything that has value and could be liquidated if it came to it.
The car, the dresses, the cash, the laptop… everything.
To keep up with the Apple example we gave earlier:
Apple total assets for the quarter ending March 31, 2020 were $320 Billion.
Out of this amount, almost $100 Billion is in cash on hand.
If you were to work for the next 5 hours continuously at 100% performance,
How much money could you make for your company?
You’d think that that’s your value per hour... But you’d be wrong.
You see, we don’t always perform at 100%, so you have to factor in your laziness .
How many hours did you work last year? Do the math we’ll wait.
On average do you work 8 hours in a business day? More? Less?
On average, there are 260 working days in a year.
Multiply 260 times Your daily hours number and that’s how many hours you worked last year.
Divide the money you brought home last year by the total number of hours and you’ve got your real hourly rate.
This is your value to the marketplace. If you want to get rich, you need to increase this number.
This is a big one, isn’t it. Let’s do this.
Btw: if you’ve got debt right now, this is a great opportunity for you to refinance that debt.
Simply go to a different bank and ask them for an offer.
Interest rates are at an all time low, meaning that you can basically get a new loan to pay the previous one, because it’s cheaper.
You’re saving money in the process.
As you’ve learned by now, there are 2 types of debt:
like when you borrow money to purchase a house that brings in rental income.
like when you borrow money to pay for a PS5 & a new flat screen tv.
Even more important than these 2 is
your ability to get your hands on capital if you required it.
Either through banks or Directly from other people.
Every entrepreneur and investor should be able to tell at any point in time how much money they owe and how much money they could borrow.
This allows you to see whether or not you can access different opportunities.
Equity is simply
If there are 2 co-founders in a new start-up, you might own 50% of the company at this stage.
Lets say an investor jumps on board and purchases 30% of the equity.
Now your original equity stake of 50% get’s diluted to 35%.
Meaning the investor and your co-founder can technically vote you out if they wanted to or can overrule your decisions.
This is why understanding equity is so important.
It works the same way in real-estate.
You put 20% down to purchase a property and the remaining 80% comes from the bank.
When you’re paying a mortgage, what you’re doing is actually buying back equity in the property from the bank.
If the property is cashflow positive, your renters are buying you that equity.
These are two of the most commonly used acronyms in the business world.
Return of Investment means how much money you got back from an investment made in percentages.
Let's say you own an online store with our friends at Shopify, and you’re trying to sell hand-made necklaces, but were unable to sell any so far.
You decide to invest $1000 into marketing, buying Facebook ads.
The ads go live, you spend all your advertising dollars and manage to sell 15 necklaces at $100 a piece.
You made 500 bucks, meaning a 50% return on your investment.
Congratulations, you should write a book on how to make money using Facebook ads like everyone else these days.
Return on time is very similar.
The difference is, instead of dollars spent, you’re factoring in the number of hours you’ve put in.
We bundled these 3 up because they’re connected.
These are people who you believe would buy your product or service.
But you’re not 100% correct.
Out of the Prospects that you reach out to, just a portion choose to transact with you.
This metric helps you identify
The number of Clients is pretty self-explanatory: how many people you’re actively doing business with.
When it comes to your clients, it’s important to mention the Pareto distribution.
Statistically speaking: 20% of your clients are bringing in 80% of the revenue.
Identify this 20% and make sure to solidify that relationship as well as use them as a template when it comes to prospecting in the future.
Here’s where things get super interesting and these 2 numbers could make or break your business.
Use them right & you can build a billion-dollar company in the shortest amount of time.
So, why do we make it a priority for you to know these 2 numbers:
If the Lifetime value of a customer is higher than the customer acquisition cost, then you’ve found a gold mine.
You simply spend as much money as you can, bringing in as many customers as possible because this arbitrage right here is positive.
In the case of physical products: you need to make sure
on each product you sell.
In the case of digital products your acquisition cost simply needs to be lower than the price.
This is why some software companies can get away with offering incredibly large discounts.
They’re not interested in making money off of you right away, but they know that over the long run, they’ll get their money’s worth.
An example you might be familiar with are VPN services, like our partners at NordVPN.
They run on very small margins.
If you go to alux.com/vpn you can get a 3 year subscription for 70% OFF.
It cost less to get a 3 year plan than their competitors charge for a single year,
but they know that once you become familiar with their service and they build that trust with the customer,
over the long haul they will make enough money to keep growing the company.
What does your business do year over year?
Are you bringing in more clients? How many more?
Every entrepreneur should be able to tell how she is performing compared to the previous year.
But be careful:
We always see these examples when start-ups come to us for investment:
Well yeah… you had 2 customers and now you have 3… and one of the 3 is your mom…
There are 3 stages in the evolution of every company:
1. TRACTION - starting to get the ball rolling
2. GROWTH - you have momentum, this is the time to blow it up
3. MATURITY - this is where you have to secure what you’ve built until you’re ready to do it all over again
In terms of valuation, there are a lot of ways to evaluate a company.
It differs from industry to industry and it’s super hard for us to give a cookie-cutter method.
But we’ll do our best!
Your company is worth as much as someone else is willing to pay for it.
Fundamentally, it boils down to very basic math:
It all boils down to the buyer’s ability to continue to monetize and grow your company.
The first one is a lot more generic while the second one has a bit more sophistication to it.
When Facebook bought Instagram for $1 billion, people were shocked.
They didn’t understand that Facebook had everything set up to monetize and grow the user base exponentially.
Last year, Instagram alone generated over 20 billion dollars in revenue.
That’s more than YouTube.
You need to start thinking like this, you need to be able to speak numbers as fluently as you speak English.
Which brings us to today’s question:
What do you use to measure your success?
The last part of this educational video lies in the conversation that follows in the comments afterward.
So answer this one and leave any question you might have in the comments.
Ourselves or our dedicated community will jump to your help!
For those of you still around, we have a bonus for you:
Here’s the truth, if all you care about is numbers you’re losing the soul that’s driving real growth.
Numbers are incredibly important
You first create a business and grow it through the optimization of numbers, not the other way around.
Unless you’re able to solve this problem it doesn’t matter how good your number optimization is.
We know this was a more technical & direct educational approach when it comes to the Sunday Motivational video,
but we want to continue our mission to educate and inspire the new generation of entrepreneurs
and sometimes you have to go through this type of information and develop the knowledge you have if you want to be able to move up to the next stage.
Hopefully, we didn’t bore you guys to death and at least those of you who stuck around until the end managed to get a nugget of gold out of this video.
To you, the true Aluxers, we say Thank you! If the Return on Time was there for you today,
please write ROT in the comments as well as your take on these technical videos.. We can’t wait to hear from you!