11 Financial Money-Making Basics to Understand to Make Better Financial Decisions
Everyone wants to make money or be an investor…Here’s the key to learning business:
Speak the language of money, oddly you usually make more of it. Speak the language of investing, oddly you can invest better.
Get excited by private equity, taxes, metrics, and finances.
Learn the bare essentials. Then go put them into practice. THAT’S the key.
In economics and finance, arbitrage is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalize on the difference, the profit being the difference between the market prices at which the unit is traded.
When you take advantage of market inefficiencies, in other words, buy low sell high. Some examples of this could be:
- Purchase and undervalued cashflow business
- Rent a home and list it on Airbnb for more
- Buy a cheap wholesale truck in one location and sell it at market value in another
Profit and Loss Statement (P&L)
A P&L report also known as the income statement, is a business owner’s lifeline and shows your revenues, costs, and expenses. It’s like a report card and map for your business. Your balance sheet shows assets (what you own) & liabilities (what you owe), it’s your business’s medical chart.
Gross, Operating, and Net Profit Margins
Doesn’t matter whether you are a startup, a small business, or a larger corporation, it is important to have a solid understanding of key performance metrics such as sales, expenses, cash flow, and profit margins.
Now few different types of profit margin formulas can be useful when evaluating a company’s financial performance. The 3 most common are:
- Profit margin – what you sold (revenue) minus your costs to produce it (expenses)
- Gross profit margin = revenue minus cost of the product or service
- Operating profit margin = revenue – all operating expenses (payroll, office rent, etc)
Using other people’s money.
AKA: debt. It’s what you buy assets with instead of cash. You may be asking yourself, “What is leveraging equity in real estate?” In simple terms, real estate leverage is when you use debt to expand your potential return on investment.
Basically, it means you borrow money from a lender to purchase a property.
By leveraging equity, you can afford more real estate investments than you would by using your own money.
This is how investors buy real estate and businesses. Debt can be a powerful tool when you are financially literate.
As the saying goes “cash is king” and this certainly rings true for startups and small businesses. When there’s money in the bank, it can feel like the business is booming and you can tackle any challenge. And when it’s not tough sacrifices may need to be made.
It doesn’t matter how much revenue you are owed, if you don’t have cash flow, you can’t keep a business afloat, although, cash flow alone is a full proof indicator that a business is earning a profit.
- Cash Flow – Money coming minus money going out. Always needs to be a positive number.
- Cash Flow Statement – tracks cash flow over time and knows where every dollar is goes
Get excited by learning about private equity, finances metrics and taxes. Learn the basic essentials. Then go put them into practice, that is the key to getting better at business.