One of the primary objectives of every business owner is to attain high profitability. So, when designing your product or service, it would be best to apply various finance principles.
This way, your selling price will be higher than your purchase price. In turn, it will be easier for you to make profits. But what are the principles of finance?
Generally, there are numerous finance principles. But it’s upon you to know the most suitable principles that favor your business.
This article gives a detailed explanation of the five common principles of finance.
Principles of Risk and Return
Typically, if you want to obtain a substantial return on investment, you have to invest more.
Simply put, spending more when developing and designing a product increases your chances of getting bigger returns. For example, if the purchase price is $10 and the selling price is $20, you’ll obtain a profit of $10 for each unit.
On the other hand, if the buying price is $200 and the selling price is $400, you’ll obtain a $200 profit for each unit. Thus, the more you invest the better.
Nevertheless, note that getting a substantial return on investment is not a guarantee. Think about it. At times, your product/service may not pick in the market. And you may end up losing your investment.
Even so, do not give up on your business when this happens. Ultimately, the principle of risk and return simply means, “You need money to make more money.”
Cash Flow Matters
The next principle of finance is cash flow. Money flowing into and out of the company/business is known as cash flow.
So, your business’s cash flow can either be positive or negative. Suppose your business’s total monthly revenue is $500 and the expenses are $200; this means you have a positive cash flow of $300.
You can also have a negative cash flow when your costs are greater than your revenues. When designing a product, always ensure that the expenses are way less than the returns you expect from selling the business.
Occasionally, new business owners experience a negative cash flow in the first few years. It always takes some time before your business starts obtaining substantial profits.
So, if you are a new business owner, be patient. However, if you keep on getting a negative cash flow, it might be time to review your product. Ensure that your product’s expenses are not putting a financial strain on your business.
All new and aspiring company owners should take the time to understand several aspects of cash flow. Subsequently, they will be able to come up with the right products.
Analyze the total costs you need to make your product available in the market. Do not overlook the small costs. Include every aspect involved in the design and manufacture of the product.
Often, financial experts call this the ‘startup cost.’ Fortunately, for software products, the only costs incurred are labor costs. Once you figure out the total startup costs, you can proceed to the next step.
Never ignore this principle. It is vital to understand how cash flow works before you start operating your business.
Time Value of Money
Another finance principle is time value for money. When calculating your startup costs and coming up with your selling price, consider the time taken to manufacture and design the product.
Remember, time is an important aspect; so, put a price on developing the product. For example, you can add $20 to the product’s selling price to cater to the time factor.
Additionally, always consider everyone involved in the project, from the design manufacturer to the delivery guy. All these people need compensation for their time.
Therefore, before you develop a particular product, consider the time value for money. Doing this puts you in a better position to receive high profits.
Current market price
Before making your product available in the market, always consider the current market price. Often, this principle applies to products that are already on the market.
Your selling price should be slightly less than or more than the market price. If you set a higher price than the market price, no one would be interested in buying your product. Keep in mind that you have to be realistic when coming up with the price.
It will help if you conduct thorough research on your competitor’s prices. Only then will you know your best-selling price.
Usually, the market price dictates your selling price. Thus, make sure your product’s design brings you substantial profits, even with the current market prices.
Conflicts of Interest
Every person involved in the business should have similar financial goals. Otherwise, there would be conflicts of interest. And in turn, the product would not be able to deliver maximum profitability.
Business owners should employ a team focused on making the business successful. This way, it will be much easier to put a price tag on your products.
These five principles of finance work towards increasing your business profits. Understanding and implementing them when designing your products is key.
Remember, the price of a product significantly influences consumers’ purchase decisions. Moreover, incorporating these principles into your business can help you attain a positive cash flow, even in your business’s early years.
Benefits of applying the principles of finance
Substantial increase in sales
Applying all the relevant finance principles to your business helps you increase sales. Through these principles, you can set the best prices for your products.
By analyzing the market price and the value of your products, business owners can sell their products at budget-friendly prices.
As a result, you attract a large customer base. A wider clientele, in turn, leads to an increase in sales, revenues, and profits.
Rapid business growth
Getting a negative cash flow is undoubtedly frustrating for new business owners. Luckily, applying the right financial principles can help you expand your business quickly.
Once you have an attractive selling price that gives you a high-profit margin, you will likely gain a large customer base.
All you need to do is increase your products’ awareness and visibility through a reliable marketing strategy. When you do this, you will get surprised at how fast your business will grow.
Improve cash flow
Incorporating your business’s best finance principles helps you improve your cash flow. A positive cash flow is very important for your business.
However, during the early stages of a company, it might be impossible to obtain a positive cash flow since your products are still new.
As seen earlier, one way to improve your cash flow is by analyzing the expenses and expected revenues before designing the product.
Doing this helps you cut down on production costs and puts you in a better position of gaining more profits. Positive cash flow leads to an increase in revenues and profits.
Know your startup costs
When starting a business, it is very important to identify your startup costs. Knowing the exact business startup costs will help you plan financially.
Consequently, this enables you to avoid making losses and unnecessary expenses. Remember, it would be best to break down your startup costs for easier understanding.
Identifying your business’s initial investment also makes it easier for you to obtain a loan if you are looking for one.
Also, it will help you estimate the return on investment. Normally, the more the startup costs or investment, the larger the return on investment.
If you are an aspiring company owner, it is essential to know, understand, and apply finance principles when designing your product.
These principles are important for the success of your business. Some of them include cash flow, risk and return, time value for money, and market price.
Today, there are numerous finance principles, so ensure you know the relevant principles that work for your business.