When you start entering the business world, you will have to employ several business concepts in daily operations. If you are unaware of them, then they will start giving you challenges to operate your business effortlessly. It is vital to be familiar with these concepts for meetings with other company owners and communicate with suppliers and customers.

Knowing these concepts not only makes your knowledge sound but also increases your understanding of the relevant industries as well.

Let us know them closely to become a successful business person.

Customer Lifetime Value (LTV)

This concept is a factor by which the customer’s value can be ascertained. This value tells the frequency of customer interaction with a brand. The lifetime value gets up if a customer communicates with a brand for a long duration and buys its products.

On the other hand, a customer with a one-time purchase and did not return has a lower lifetime value. Most businesses make efforts to preserve their high-value customers. It is because such things cost a lot to attract fresh customers and adapt them into high-value customers.

Formula to calculate customer lifetime value

Customer Lifetime Value = Average of total order x Average Number of Purchases made in a Year x Average Retention in Years

Customer Acquisition Costs (CACs)

This concept refers to the amount of business capital, which is utilised to acquire a new customer. It includes business resources, sales and marketing efforts. For example – a personal loan lender invests money and resources to promote its personal loans to acquire customers. The cost of resources will be counted as CACs.

The lower the business’s customer acquisition costs, the more lucrative that business is. Today’s business owners do online advertising, allowing them to focus on a narrow group. On the other hand, TV or print advertising do not give better results. They touch the broader aspect, which can lead to a loss. Maintaining a proper ratio of customer acquisition costs and lifetime value is necessary. This ratio is called unit economics.

Formula to calculate CACs

CAC = (Cost of Sales + Cost of Marketing) / Number of Customers Acquired

Unit Economics

The comparison of Customer Acquisition Costs and Lifetime Value is called unit economics. This amount is determined by the investment made in a single unit and its revenue. Every customer is considered a unit. For profitability, customer lifetime value must be higher as compared to customer acquisition cost.

It clarifies that it is profitable if the cost acquired in getting a customer is less than the value received from the customer. In contrast, if the costs to acquire are extraordinary but its lifetime value is short, it is nothing but a loss.

Formula to calculate Unit Economics

Unit Profitability = Customer Lifetime Value – Customer Acquisition Cost

EBITDA – Earnings before Interest, Tax, Depreciation, and Amortization

EBITDA is what when the business’s operating expenses are deducted from its income. In fact, this is its simple definition to understand the basic concept of EBITDA. Precisely, EBITDA is the profit of a business before subtracting earnings, interest, tax, depreciation and amortization. These are also assumed as the possible expenses in a business.

You cannot calculate EBITDA on a daily basis. It is usually counted after a specific duration of a few months or yearly. It is to calculate the net income of a business. It does not tell the complete picture of the business’s financial condition. However, it does tell what a business can do as all expenses are deducted from income to calculate EBITDA.

For example- many small businesses take debt to speed up business operations and get growth. But that is deducted from income while calculating EBITDA.

Here is the formula to calculate EBITDA –

EBITDA Margin = EBITDA / Revenue

(COGS) Cost of Goods Sold

Entire expenses and costs included in the product’s direct sale are called the cost of goods sold. It comprises of several kinds of expenses such as:

• Packaging
• Inventory
• Raw material
• Labour production cost
• Shipping
• Direct labour
• Distribution cost, etc.

You can estimate the business’s gross profit with the help of COGS. Furthermore, to calculate profit of the business itself, subtract these costs from its total revenue.

The dissimilarity between the beginning and ending inventory of a business is the significant factor in the cost of products sold. Businesses do this calculation at the end of an accounting year. It is not possible to calculate the actual profit of any business without calculating this cost.

A commercial enterprise learns how to reduce the cost of its sold goods through this cost. For example, if the labour production cost is high, what changes should be made to cut this cost? That directly reduces a business’s overall cost. Today, some businesses are reducing their COGS by using AI tools to replace manual labour.

Here is how to calculate COGS

Cost of Goods Sold = (Beginning Inventory + Purchases) – Ending Inventory

Business credit

Business credit scores are just like personal credit scores. They determine whether a business can qualify for financing and determine its creditworthiness. However, it is important to maintain business credit. For this, it is vital to try a few tips.

For example, you can create a credit history with a business credit card. But make sure to make your credit card payments on time. This creates a good credit history, and you can qualify for any kind of loan. Unfortunately, due to some financial conditions, the credit rating of a business sometimes goes down.

For poor credit situations, some financial products are available. They help improve business credit scores. For example, Featherloans loans for bad credit are one such loan product. These loans provide funds to businesses with poor credit ratings. By paying its affordable instalments on time, the credit rating of a business can be converted into a good credit rating again.

Conclusion

A small business owner should know all these business concepts. Other than that, it is also vital to update yourself with time. The business world is quite volatile. Every day, something new arrived into the marketplace. In such a situation, you must update your knowledge by adding new business concepts.