As a natural products brand owner, it's essential you have a firm grasp on baseline financial knowledge, even if it's not your zone of genius. But, you can't know your numbers until you know financial terms and how each applies to your business. These are the terms investors expect you to know inside and out when pitching your product.
Profit margin represents what percentage of sales has turned into profits. The percentage figure indicates how many cents of profit the business has generated for each dollar of sale.
Gross margin is a company's net sales revenue minus its cost of goods sold (COGS). It is the sales revenue a company retains after incurring the direct costs associated with producing the goods it sells and the services it provides. The higher the gross margin, the more capital a company retains on each dollar of sales, which it can then use to pay other costs or satisfy debt obligations.
Gross Margin = Net Sales – COGS*
*COGS = Cost of Goods Sold
Operating margin—also known as operating income margin, operating profit margin, EBIT margin and return on sales (ROS)—is the ratio of operating income to net sales, usually presented in percent.
Operating Margin = Operating Income/Revenue
The cash available for day-to-day operations of an organization. Strictly speaking, one borrows cash (and not working capital) to be able to buy assets or to pay for obligations.
The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. The ratio is used to evaluate a company's financial leverage. It is a measure of the degree to which a company is financing its operations through debt versus wholly owned funds.
Debt-to-Equity = Total Liabilities/Shareholder Equity
A measure of economic strength that estimates the number of times an individual dollar changes hands in a given period of time. It is calculated by dividing gross domestic products (GDP) by money supply.
Velocity = Gross Domestic Products/Money Supply
Profit and Loss Statement (P&L)
The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs and expenses incurred during a specified period, usually a fiscal quarter or year. The P&L statement is synonymous with the income statement. These records provide information about a company's ability or inability to generate profit by increasing revenue, reducing costs or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement or expense statement.
Days of Inventory
The days sales of inventory (DSI) is a financial ratio that indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales.
DSI is also known as the average age of inventory, days inventory outstanding (DIO), days in inventory (DII), days sales in inventory or days inventory and is interpreted in multiple ways. Indicating the liquidity of the inventory, the figure represents how many days a company’s current stock of inventory will last. Generally, a lower DSI is preferred as it indicates a shorter duration to clear off the inventory, though the average DSI varies from one industry to another.
DSI = (Average Inventory/COGS) x 365 days
DSI = Days Sales of Inventory
COGS = Cost of Goods Sold
Pro Forma Financial Statement
A pro forma financial statement is one based on certain assumptions and projections (as opposed to the typical financial statement based on actual past transactions).
A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.
Return on Equity (ROE)
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. ROE is considered a measure of how effectively management is using a company’s assets to create profits.
Return on Investment (ROI)
Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.
ROI = (Current Value of Investment – Cost of Investment)/Cost of Investment
Cash Conversion Cycle
The cash conversion cycle (CCC) is a metric that expresses the time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales. Also called the Net Operating Cycle or simply Cash Cycle, CCC attempts to measure how long each net input dollar is tied up in the production and sales process before it gets converted into cash received.
CCC = DIO + DSO − DPO
DIO = Days of Inventory Outstanding
DSO = Days Sales Outstanding
DPO = Days Payables Outstanding
The total debt-to-capitalization ratio is a tool that measures the total amount of outstanding company debt as a percentage of the firm’s total capitalization. The ratio is an indicator of the company's leverage, which is debt used to purchase assets.
Total Debt-to-Capitalization = (SD + LTD)/(SD + LTD + SE)
SD = Short-Term Debt
LTD = Long-Term Debt
SE = Shareholders’ Equity