Financial Metrics every business owner should know:

1/ Break even Your breakeven number tells you: How many units of a product you need to sell before you make a profit

Example: You own a bakery that sells loaves of bread Your costs to run the bakery daily are: • $100 for raw materials • $500 for labor • $100 for marketing • Total = $700 If you sell each loaf of bread for $5, How many do you need to sell before you break even each day?

$700 / $5 = 140 loaves You need to sell 140 loaves of bread before you make your first $1 in profit

2/ Profit Margin Profit is calculated as: • Sales • Less • All expenses

Profit Margin: Tells you how much of your sales are converted into profit Another way to think about this: Profit Margin tells you for every $1 in sales how much profit you made

To calculate your Profit Margin You take profit and divide it by revenue which gives you a percentage (%) This percentage (%) is your Profit Margin

To calculate your Profit Margin You take profit and divide it by revenue which gives you a percentage (%) This percentage (%) is your Profit Margin

Example: In 2021, Apple’s profit was $95 billion and its sales were $366 billion If you calculate Apple’s profit margin, you get 26% = $95 billion / $366 billion Another way to think about this: For every $1 in sales Apple made, it made $0.26 in profit

3/ Fixed Costs

Fixed costs are costs that you will have to pay for your business regardless of how well you do

Example: You run a restaurant and pay rent of $5,000/month If your sales are slow in the winter months, you still have to cover your rent of $5,000 If your sales are hot in the summer months, you pay the same rent of $5,000

Your rent cost stays the same no matter what happens to your business This is a fixed cost!

4/ Variable Costs Variable costs are costs that fluctuate based on your sales If you sell more product, variable costs go up If you sell less product, variable costs go down

Example: If you run an eCommerce business, your largest variable cost is inventory If you sell a lot of product, you will need to buy more inventory→ your costs increase If you sell less product, you will need to buy less inventory → your costs decrease

5/ Gross Profit (Not to be confused with Profit) Gross Profit tells you how much revenue is left over after you pay for variable costs It is calculated as: • Sales • Less • Cost of Goods Sold

Gross Profit covers the fixed costs of your business, and whatever is left over is Profit Therefore, the higher the Gross Profit the better

Gross Profit covers the fixed costs of your business, and whatever is left over is Profit Therefore, the higher the Gross Profit the better

6/ Sales Growth Revenue cures 99% of problems in every business

Your expenses are increasing? →You need higher sales Want to pay higher wages? →You need higher sales Want to make more profit? →You need higher sales

Every business is evaluated on how it’s growing And there is no better metric to evaluate growth than

Sales Growth

Sales growth can be measured: • Week over Week • Month over Month • Year over Year Really anytime line – take your pick

Example: Apple’s revenue in 2021 grew by 33% to $366 billion from $275 billion in 2020

7/ ARPU

ARPU stands for Average Revenue Per User It tells you how much revenue you make from every single customer This is typically calculated on a monthly basis

If you want higher revenue, the easiest way to get that is to raise your prices

Price increases will increase ARPU

Example: In 2019, Netflix increased its monthly price for the premium plan from $13.99 to $15.99 The effect of this was: Netflix had a higher ARPU and therefore, higher revenue

8/ Burn Rate If you run a startup that has raised money from investors, knowing your burn rate is critical Your burn rate tells you how much money you’re spending over a certain period

If your burn rate is too high, You have to bring it under control by reducing expenses or increasing sales

To calculate burn rate: Look at the cash balance of your business on the first day of the month, and look at your cash balance at the end of the month

If your cash balance decreased, that’s how much cash you burned during the month

Financial metrics to know: • Break-even • Profit Margin • Fixed Costs • Variable Costs • Gross Margin • Sales Growth • ARPU • Burn Rate