11 Business Terms Every CEO Needs to Know for Smart Leadership

11 Business Terms Every CEO Needs To Know

Hello friends. When I first started my own small business, everything seemed very exciting. In the markets around us, where a new business was taking shape at every corner, in every street, I also felt that I had a great and innovative product. I had such a deep belief that if people would just buy it, I would become successful overnight. My dream was very big. But within a few months, the real ground reality began to dawn on me. I realized that just having a good product in the market or working hard day and night is not enough. While sitting in meetings, while talking about loans with the bank manager, and while getting accounts with my chartered accountant every month, some English words kept coming up that went straight over my head. I would just nod my head yes and yes, but inside I was terrified. I wondered why no one told me these 11 Business Terms Every CEO Needs To Know before starting my business? Gradually, I learned all this by staying up late at night, reading books on my own, searching on the internet and most of all, by my own experience in the market and suffering small and big losses. Today, I want to share some of those very personal things with you. This is not the book knowledge of an MBA from a big college, but valuable lessons learned from my own real experiences, the blows I have taken from the local market and my own mistakes. If you are also running a business, or are thinking of running one in the future, then these Business Terms will be very useful to you step by step.

Why is it important to understand these 11 Business Terms Every CEO Needs To Know?

When you are running a company, your attention is divided in many places. Where to source raw materials, how to talk to customers, how to protect staff – we often forget about this technical language of finance and management. But as a CEO, your responsibility is not just to sell products, but to look after the health of the entire company. If you understand these business terms well, then making business decisions becomes much easier. It is a kind of medical report card of your business, which shows you the true situation inside. I remember those days when I was happy just by looking at the sales figures, but I did not dare to look at the cost figures. These words showed me a mirror and showed me the right path.

Let me tell you, before moving on, which words we are going to discuss sincerely today. Here is a short list of terms that should be an integral part of every small and big business owner’s daily work and thoughts:

Useful in everyday management: 11 Business Terms Every CEO Needs To Know

To turn any dream into a reality and become a long-term racehorse, daily management must be absolutely strong. Let’s understand the basic business terms that you will find useful every day.

1. Working Capital

Working capital, in simple terms, is the cash you need in your pocket or bank to run your business on a daily basis. Suppose you have a nice cloth shop in your main market. You buy raw materials from the factory and then prepare them and sell them to customers or small traders. But it usually takes two to three months between the time the goods are sold and the payment money comes back. During this period, you have to pay the shop rent, light bill, staff salary, tea and water expenses on time, right? The cash that should always be on hand to meet these daily expenses and keep the business cycle going is called working capital. Initially, I did not pay much attention to this matter. I had invested all my savings in the interior of the shop and stocking it. Then once, when there was a new demand in the market during the festive season, I had no cash left to buy new goods. I was very stressed. That’s when I first realized that without working capital, even a well-run business can grind to a halt overnight.

2. Cash Flow

This word sounds big and corporate, but it’s actually very simple and basic. Cash flow is a direct and clear account of how much cash comes into your business every month and how much actually goes out. Many new entrepreneurs and CEOs think that profit is cash flow, but in reality, it’s not like that at all. You may see a huge profit of lakhs of rupees per month on your account books, but if customers haven’t paid yet and most of your goods are on credit, then you don’t have any cash to spend. If the money is going faster than it is coming, then understand that trouble is about to come. A friend of mine was doing a very good business, his goods were selling very well, but due to the non-payment of bills from customers, his cash flow was completely ruined. Finally, he had to close his business. Profit is just a pretty figure, but positive cash flow is the real lifeblood of a business.

3. Gross Margins (Gross Margin)

GrossMargin is the profit you have after deducting the direct raw material costs involved in making your product. For example, if you sell something worth Rs 1000 and the cost of raw materials and labour required to make it is Rs 600, then your gross margin is said to be Rs 400 or 40 percent. From this Rs 400, you have to deduct the remaining office expenses, marketing and your own profit. If your margin is very low, then no matter how much you work hard all day and sell, you will end up with nothing at the end of the month. In my initial journey, I had thought of capturing the market by selling goods at very cheap prices to make a name for myself in the market and attract customers. But then I lost sleep at night because the costs were constantly increasing and the margin was nonexistent. That’s when I realized that one cannot survive long in the business world without a proper margin.

4. Operating Leverage

This is a bit of a technical term, but it is very important for every CEO to understand it. Operating leverage is that golden phase where your sales are continuously increasing but your expenses are not increasing at the same rate. Suppose you have created a software product or an online course. It cost you Rs 5 lakhs to create it once and it took a lot of time. Now whether you sell it to 100 people, 1000 people or 10,000 people, your original cost of creating it will remain the same. As your sales increase, your profits increase directly and very quickly. When my business started to grow gradually, I happily noticed that now I don’t need to add new staff or a bigger office every time I add a new customer. This is the true operating leverage, which can change the fortunes and profitability of your company overnight and give you true financial freedom.

Important Business Terms Related to Growth and Customers

Once your business is established in the market and your car is on the track, then you have to think about how to make this small sapling a big tree. For this, understanding customer behavior becomes very important. These terms are not limited to just books and bank accounts, they are also an integral part of your marketing, your sales policy and your growth strategy.

5. CAC (Customer Acquisition Cost)

The days when you open a beautiful shop and sit down and customers start walking in front of you are completely gone. In simple terms, today, the cost of acquiring a new customer is called CAC, or customer acquisition cost. If you spend Rs 50,000 on marketing and advertising on Instagram or Facebook and out of that you get 50 new customers who buy from you, then your CAC for acquiring a customer is Rs 1,000. When I first started advertising on social media, I just invested money but never realized how much it actually cost me per customer. When I calculated it later, my eyes were opened, because the profit I was making from a customer in the whole year was more than what I was spending on selling my product to them for the first time. This was a mistake that taught me a big lesson.

6. Unit Economics

Unit economics is the direct profit or loss at the level of a single product or a single customer. In this, you don’t have to do any big calculations for the entire company, just see if the small thing you are selling is profitable in itself or not. If your unit economics are broken, then the more business you do, the more you sell, the more losses you will have to incur. This was explained to me very well by a very experienced senior mentor of mine, who said, “Brother, if it costs you 10 rupees to make a samosa and you are selling it for 9 rupees to capture the market, then you can never become rich by selling a thousand samosas a day, on the contrary, you will soon become a debtor. That is why it is very important to make a profit at the unit level before taking any business model to a large scale. This rule should never be forgotten.”

7. Churn

Churn is the rate at which customers stop using your product or service and go to your competitors. This is a number that many business owners avoid looking at because it directly shows the flaws in you and your service. Suppose you have 100 regular customers every month and out of them, 5 customers stop using your service every month, then your churn rate is said to be 5 percent. Always remember that it is easier and much cheaper to keep your old customers happy than the huge cost of bringing in new customers. Once my company’s churn rate suddenly increased a lot. I couldn’t sleep at night. I put my ego aside and called those old customers myself and politely asked why they were upset. That’s when I came to know about some serious flaws in my product. The churn rate is a kind of fire alarm that wakes you up in time and saves you from a big disaster.

8. Product Market Fit

This is a big, catchy, and overused term in the world of business and startups. Product market fit is when you create something magical that people really, really need and want.When this happens in a business, you don’t have to push hard for sales or advertise too much. Market demand itself pulls your product out of the market. In my early days, I used to make things that I liked, that satisfied my mind, but no one really needed them in the market. I failed repeatedly. Then I started going among the customers, listening to their problems and providing services that solved their problems. Since then, I proudly believe that I have found my product market fit. This is a wonderful feeling that every founder and CEO must experience.

Business Terms of Finance and Future Planning

By now you must know that statistics are not just for keeping accounts of the past, but they are always very useful for planning for the future. To move forward, you need to clearly know how much time and cash you have left, so that you can prepare for the coming storms in advance.

9. Burn Rate

Burn rate is how much money your company uses from its bank account every month to cover its daily expenses, especially when the company is not yet making a profit or is running at a loss. This term is often heard in today’s startup world. If you have a total investment of Rs 50 lakh in your bank account and you spend Rs 5 lakh on rent, salaries and marketing every month, then your monthly burn rate is said to be Rs 5 lakh. Knowing this gives you a reality check and makes you realize where wasteful expenses are being incurred and how you need to reduce them immediately. At one time, my burn rate was so high that I used to dread waking up every morning and looking at my bank balance. Controlling expenses is the first step.

10. Runway

Runway is a term directly related to burn rate. Just as a large plane needs a long runway on the ground before taking off, your business also needs some time before reaching the peak of success. Runway is the period of time for how many months your company can survive with the money you currently have in the bank if no new income or new investment comes in. If you have 50 lakh rupees in hand and a burn rate of 5 lakh, then your runway is said to be exactly 10 months. Within these 10 months, you have to somehow either make the business profitable or arrange money from a new investor. Correct calculation of runway always gives me peace of mind and gives me a clear goal to work towards. It does not let you stay in the dark.

11. EBITA

The full name of this is Earnings Before Interest, Taxes, and Amortization (or EBITDA which also includes Depreciation). All these business terms are scary, right? I used to get scared at first hearing such a big name. But don’t worry, it is very easy to understand. In simple terms, this is your basic profit that has not yet been calculated by the interest on the bank loan, the government’s income tax, and the depreciation expense of your property. This figure clearly shows you and your investors how strong the company’s core business and its operations are. How much money is it actually making from its daily work. When I first went to the bank to take a big loan to expand my company, the bank manager sat in front of me and checked my EBITA first. This is what determines the true value of your company in the market and in the eyes of the bank.

My final thought and the journey of business

Friends, running your own business is not a game of one or two days. It is a long, tiring but also very exciting journey in which new ups and downs keep coming every day. Initially, all these words seemed to me just a formality and heavy English words. But as my time passed, experiences increased and sometimes I had to drink bitter sips of losses, I fully understood that these Business Terms are really the accurate health card of your business. If you do not know the statistics of your own business, then it can definitely be said that you are shooting arrows in the dark with a blindfold on.

I sincerely believe that every CEO, founder or small businessman should understand the meaning of these Business Terms in depth. No matter how smart an accountant or manager you have hired, if you know these basic financial things, you will not trust anyone blindly and will be able to make much better decisions for the future. No one can cheat you in accounting, and your confidence will always be high. There is no shortcut to success in business, but correct knowledge will definitely make your path easier.

I have got great joy and satisfaction today by sharing these real experiences of my life with you through words. It often happens that we get so immersed in the daily work of our business, ordering goods and meetings that we completely forget to look at these important figures. If you make these words a part of your daily conversation in your office, then I am sure that you will get a lot of help in growing with stability. Let us all keep learning from each other and keep moving forward. This journey never ends, it just gets more and more interesting.