profit profit is the simplest measure of how well you're performing it's the fundamental number you should always have in the back of your mind it's frequently known as the bottom line if you added together all the money coming in subtract all the expenses required to have that money come in what are you left with profit determines the best number to determine how well your performance and accounting and there's something called profit and loss profit and loss is the simplest way to bring everything together and figure out how well a company is performing financially 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'll 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 legally required this is why Amazon pays very little tax despite bringing in so much money a fundamental business rule you're not taxed on how much money you're making you're taxed on how much money is left after your expenses.
revenue and sales revenue sales or income relate to the money the company is able to bring it you should be able to tell quickly just how much money you're able to make out of the market space 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 a fundamental business rule sales solve everything if you're able to generate profitable sales everything else falls into line most businesses get caught up in the financial mumbo jumbo but the most important part of the business the question is how much money can you bring it how many sales did you make how many products did you sell it doesn't matter how good your business plan is if you were unable to sell any business will fail
expenses most people confuse expenses with the cost of goods they think expenses are only how much money it costs directly to put together a product or service total expenses it brings 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 cost why would a company charge $1500 for a device that if broken down part by part the some adds up to only $490.50 it's because you don't understand how costs work by the way 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 and development spending a lot of money and most of the time without a return in hopes of having a technological breakthrough with the same company is paying a ton of money to some of the best designers in the world tweaking everything about the device to have the best shape functionality and feel the way it does when you use it what if we start to add in the cost of building a headquarters insurance amortization the cost of electricity market. Storage rent on retail locations and furniture for those places cetera there's more to a product in a sum of the parts that end up in your hands always keep that in mind the cost of a DVD is $0.20 but the cost of making avatar and putting it on a DVD is $237000000.20 every entrepreneur needs to learn to identify all the expenses that allow you to do what you do and factor those set it's a mistake most newbie entrepreneurs make they don't know what to charge because they don't understand the costs.
keep it down for some of you this could be the first time you're hearing about you but tough it stands for earnings before interest taxes depreciation and amortization it's used to establish a company's profitability relative to companies with similar business models we don't want to make this video too technical but if you want to be in business you need to get used to speaking the language of money so why is this number so important how do you know how much your company is work 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 eBay top times what is called an industry multiplier this is why a lax as a media company is valued in the ballpark of $5000000 right now it also helps us to know how to focus our efforts and increase the value of the company it's a simple way to compare to companies and to see who is doing better.
cash flow cash flow is an incredibly valuable metric to know no matter the business you're in cash flow 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 a real estate investor cash flow is your go to number to analyze if you're making money or not here's an example you own a house that runs out for $3000 a month so what are your expenses the mortgage $1500 a month property taxes $350 a month repair is about $100 a month you might not need to do repairs every month but every couple of years things break and need to be fixed insurance $200 a month you need to pay it just to be safe management $250 a month you're paying someone else to manage the property so you don't get the calls but if you want you could always do it yourself vacancy let's say $100 a month every couple of months or years only to look for new tenants in the meantime that property stays empty you need to factor all of this and cash flow equals income minus outcome in this case the monthly cash flow for the property is $500 this is how valuable of 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 probably already read rich dad poor dad by Robert Kiyosaki 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 a luxe.com slash a free book if it's your first time signing up you're getting a free audio book thanks to our friends at audible.
price 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 people will pay any price if the value they're getting outweighs the cost 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 your eyes are overpriced or not talking to the right people.
gross margin 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 150 your gross margin is $0.50 you should know your gross margin because it allows you to figure out how quickly you can multiply your money the higher the margin the more quickly a business grow 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 your car isn't a direct cost but the bulk tomatoes as well as the reusable have the bag you're selling them in our.
total inventory and total assets 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 $20000 worth of inventory but total assets takes it beyond inventory in this case total assets of groups together everything that has value that 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 of 3/31/2024 $320000000000 out of this amount almost $100000000000 in cash on hand.
price for one hour of your time. If you were to work for the next 5:00 hours continuously at 100 percent performance how much you value would you generate how much money could you back for your company you'd think that's your value per hour but you'd be wrong you see we don't always perform at 100 percent so you also 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 for 8:00 hours of the business day more or less on average there are 260 working days in a year multiply 260 times your daily hours number and is that so many hours you work 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 market place if you want to get rich you need to increase this number.
tax debts credit and interest rate this is a big one isn't it let's do it dat equals how much money you. Reddit equals your ability to secure low interest rate equals how much you're paying in exchange for those loans by the way 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 meeting you can basically get a new loan to pay the previous one because it's cheaper your saving money in the process as you've learned by now there are 2 types of debt good debt and bad debt good debt makes you rich like when you borrow money to purchase a house that brings in rental income and Baghdad makes you poor like when you borrow money to pay for a PS 5 and a new flat screen TV even more important than these 2 is credit your ability to get your hands on capital if you require 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 Bora this allows you to see whether or not you can access different opportunities.
equity equity is simply what percent of the whole you all if there are 2 co founders and a new start up you might own 50 percent of the company at this stage let's say an investor jumps on board and purchases 30 percent of the equity now your original equity stake of 50 percent gets diluted to 35 meeting the investor and your co founder can technically vote you out if they wanted to or can over rule your decisions this is my understanding equity is so important it works the same way in real estate if you put 20 percent down to purchase the property and the remaining 80 percent comes from the bank when you're paying a mortgage what you're doing is actually buying back the equity in the property from the bank if the property is cash flow positive your renters are the one buying you that equity. Number 12 R. O. Y. and R. O. T. E. these are 2 of the most commonly used acronyms in the business world R. O. Y. is return on investment R. O. T. is return on time return on 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 handmade necklaces but were unable to sell any of them so far you decide to invest $1000 into marketing buying Facebook ads the ads go live you spend all of your advertising dollars and managed to sell 15 necklaces at $100 apiece your investment brought in a total of 15 times 100 or $1500 you invested 1000 and made 1500 you made 500 Bucks meaning a 50 percent return on 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 at.
prospects sales conversion and a number of clients we bundled up these 3 because they're connected prospect so the number of potential clients you're able to reach these are people who you believe would buy your product or service but you're not 100 percent correct out of the prospects you reach out to just a portion will choose to transact with you this is called a sales conversion this metric helps to identify how many people out of 100 prospects are you able to turn into customers the number of clients is pretty self explanatory how many people you're actively doing business with but when it comes to your clients it's important to mention the pair to distribution statistically speaking 20 percent of your clients are bringing in 80 percent of the revenue identify these 20 percent and make sure to solidify that relationship as well as using them as a template when it comes to prospecting in the future.
customer acquisition cost and lifetime value of customer here's where things get super interesting and these 2 numbers could make or break your business use them right and you can build $1000000000 company in the shortest amount of time customer acquisition cost equals how much money does it cost you to bring in a new customer lifetime value of customer equals how much money the average client will spend with your business 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 and you found a gold mine you simply spend as much money as you can bring in as many customers as possible because this arbitrage right here is positive in the case of physical products you need to make sure the customer acquisition costs are lower than the profit you're making on each product to sell in the case of digital products your acquisition cost to 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 our VPN services like our partners at NordVPN they run on very small margins if you go to a lax.com slash a VPN you can get a 3 year subscription for 70 percent off it costs 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 the trust with the customer are you over the long haul they will make enough money to keep growing the company.
growth and valuation. What does your business do a year over year are you growing are you bringing in more clients how many more every entrepreneur should be able to tell how he or she is performing compared to the previous year but be careful it's easy to show big growth numbers if you're doing small numbers to begin with we always see these examples when start ups come to us for investment we grew our paying customer base by 50 percent this year well yeah you had to customers and now you have 3 and 1 of those 3 is your mom there are 3 stages in the evolution of every company 1 traction starting to get the ball rolling to grow you have momentum this is the time to blow it up and 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 value 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 how much would it cost someone money time and effort to build from scratch what you've got or how much is your customer base and brand worth to someone else who has the knowledge or infrastructure to monetize it it all boils down to the buyer's ability to continue to monetize and grow your company the first 1 is a lot more generic while the second 1 has a bit more sophistication to it when Facebook bought Instagram for $1000000000 people were shocked they didn't understand that Facebook had everything set up to monetize and grow their user base exponentially last year Instagram alone generated over $20000000000 in revenue that's more than you to different people can get different results from the same source 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's the most valuable number in your business what do you use to measure your success the last part of this educational but. He lies in the conversation that follows in the comments afterwards so answer this one and leave any question you might have in the comments ourselves and the dedicated members of our community will jump right into your house and for those of you still around we have course have a bonus for you it's not always about the numbers here's the truth if all you care about is numbers that you're losing the soul that's driving real gross numbers are incredibly important once you figured out the core of the business you first create a business and grow through the optimization of numbers not the other way around you need to provide value to people who need it they'll pay for it unless you're able to solve this problem it doesn't matter how good your number optimization efforts we know this was a more technical and 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 to those of you stuck around until the end to manage to get a nugget of gold out of this
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