Moneymaking Basics

As the complexity of your job increases, it's easy to lose sight of the fundamentals. If your business acumen doesn't develop, you can stumble -- focus too much on revenue growth and overlook cash, or focus too much on cash and overlook growth.

That's why you should never consider it beneath you to revisit the moneymaking basics. They should be front and center in your diagnosis and decision making in every job you have.

Here are the basics:

• Cash

No business survives long without it. You should know how much cash your business generates and how much cash it consumes.

What are the sources of it? What drains it? What's the timing of the inflows and outflows and how is it changing? More revenues (sales) often means more cash. But growing a business consumes cash. How fast can the company expand without straining its cash flow?

• Margin

When people talk about the bottom line, they generally mean net profit margin -- the money the company earns after paying all its expenses, interest, and taxes. But gross margin is important, too.

Gross margin -- the difference between a product's selling price and what it costs to make the product (the "costs of goods"), expressed as a percent of the selling price -- can signal important shifts in a business. When PC makers saw their 32 percent gross margins decline to 20, they knew (or should have known) the competitive landscape had changed.

You have to know how changes inside or outside the business affect gross margin. Are there new entrants in the market who are winning customers? A competitor who's found a clever way to reduce costs and prices? A change in the pricing power of suppliers?

• Velocity

Velocity refers to speed, turnover, or movement.

How much revenue do you turn over, or generate, for each dollar of inventory? If you have $1 million in inventory for the year and revenues of $10 million, your inventory velocity is 10. This tells you how fast you're moving raw materials through the factory, turning them into finished products, and moving those products off the shelf to customers. The faster, the better.

Service businesses can track velocity, too. For banks, velocity of equity -- how much revenue is generated per dollar of equity -- is a useful measure. The concept applies to every business.

• Return

Margin multiplied by velocity equals return. If your return is lower than your cost of capital, your business is likely to be in trouble. That's when shareholders get concerned.

How do you boost your return? See if you can boost your margin or increase your velocity -- or, better yet, both.

• Growth

Every business needs to grow to stay in business. How do you grow in a way that keeps the other aspects of moneymaking in balance? There's no formula -- people with business acumen figure it out.