Back with the business!

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The second most voted topic was business key terms. Let's see what you know and what surprises you today.

Business Key Terms, Part 1, let’s go!

“All truth is found in the cash account.” – Charlie Bahr.

Cash Flow Cycle:

The Cash Flow Cycle outlines how cash circulates in a business. Picture your business’s bank account as a balloon. To make it expand, keep adding air and ensure no holes.

More inflow and less outflow mean a larger balloon. Boost revenue and cut expenses.

To boost cash flow, speed up client payments, and limit credit. Getting paid quickly improves cash flow cycles. Ideally, get paid before buying materials or delivering services. 

Extending credit is common, but remember, you’re a business, not a bank – collect payments promptly.

“If something cannot go on forever, it will stop.” –Herbert Stein.

Cash Flow Statement:

You have to review financial reports to understand a company's performance. But where to start?

Josh Kaufman, author of “The Personal MBA,” suggests the Cash Flow Statementbecause it is simple. It reviews a company’s bank account over a period, like a checkbook ledger: deposits and withdrawals.

Each Cash Flow Statement covers a specific time: a day, week, month, or year, depending on its purpose. Shorter periods help ensure the company doesn’t run out of cash, while longer periods track performance over time.

Cash moves in three main areas: operations (selling and buying inputs), investing(collecting dividends and paying for capital expenses), and financing (borrowing and repaying money).

Cash Flow Statements track these sources separately, clarifying cash flow origins.

Investors often use “free cash flow” to evaluate companies: This metric comes from the Cash Flow Statement, the amount of cash from operations minus capital expenses.

“Lack of money is the root of all evil.” –Mark Twain.

Profit:

Business is about what you keep, not just what you make.

Profit is a straightforward concept: earning more than you spend. For a business to survive, revenue must exceed expenses. Otherwise, it won’t last.

Profit also provides a buffer against unexpected events. More profit means better handling of uncertainty and more options to adapt.

“Remind people that profit is the difference between revenue and expense. This makes you look smart.” –Scott Adams.

Profit Margin:

Profit Margin (often “margin”) is the difference between revenue and spending, expressed as a percentage. Formula:

((Revenue - Cost) / Revenue) x 100 = % Profit margin

If you spend 1$ to get 2$, that’s a 50% Profit margin. If you can create a product for 100$ and sell it for 150$, that’s a profit of 50% and a Profit margin of 33%. 

Your Profit Margin can’t exceed 100%, which only happens if you sell something at no cost.

Profit Margin differs from “markup,” which compares price to total cost. Formula:

((Price - Cost) / Cost) x 100 = % Markup

If something costs $1 and you sell it for $2, your markup is 100%, but your Profit Marginis 50%. Markups can exceed 100%, depending on the price and the total cost of the offer.

Businesses use Profit Margins to compare offers. They favor high-margin offers and eliminate low-margin offers to cut costs.

“I never lost money by turning a profit.” –Bernard Baruch.

Standard Operation Procedure:

A Standard Operation Procedure (SOP) is used for repetitive tasks or common issues.

Well-defined SOPs reduce friction and save time solving already-solved problems.

Avoid bureaucracy in SOPs! They should streamline tasks. If SOPs require effort without value, it’s friction.

Review SOPs periodically—every 2 weeks to 3 months. Update outdated, wasteful, or unnecessary steps.

“The measure of success is not whether you have a tough problem to deal with, but whether it’s the same problem you had last year.” –John Foster Dulles.

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Last thoughts:

“The Personal MBA” by Josh Kaufman is the best book I have ever read on key business terms. I can’t recommend it enough!

The ProfitZine will cover many of them, mainly the ones that can be useful for the majority of businesspeople, but we will be here all year for all.

“Little by little, one travels far” – Spanish Proverb.

-> If there’s any key term you would like explained, feel free to reply to this email. 

The ProfitZine is here to help!

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