Starting a business in the United States can be daunting, especially when it comes to financial terminology. At Remitly, we support aspiring entrepreneurs by simplifying business finance. In this guide, we cover four foundational financial metrics to help you begin.
Key Financial Terms for Small Businesses
Understanding cash flow, ROI, MRR, and purchase orders can provide insight into how your business operates and grows.
What is Cash Flow?
Cash flow measures the amount of liquid cash moving into and out of your business. It shows your company’s liquidity—its ability to meet expenses and plan for the future. This excludes revenue that is not immediately available, such as credit-based sales.
Positive cash flow can also be a good indicator of operational health and may influence investor interest.
Return on Investment (ROI)
ROI evaluates how profitable an investment is. It’s calculated as:
(net profit / cost of investment) * 100 = ROI (%)A 200% ROI means every $1 invested returned $2 in profit. While straightforward, ROI is best interpreted alongside timing and other metrics like IRR.
Monthly Recurring Revenue (MRR)
MRR refers to consistent monthly income from subscriptions or repeat services. MRR is valued for its predictability and helps track long-term stability. Building MRR into your model can support business valuation.
Examples include:
- Contracts: Monthly agreements with fixed terms.
- Auto-renewing subscriptions: Renew automatically unless canceled.
- Complementary products: Add-ons designed for regular use.
What Are Purchase Orders (POs)?
Purchase orders document details of transactions between businesses and vendors. They include item descriptions, quantities, costs, and delivery timelines.
They serve to:
- Prevent miscommunication or duplicate orders.
- Help plan for inventory and expenses.
- Prepare budgets in advance.
POs differ from invoices. POs confirm the order details and are legally binding once accepted. Invoices, which are issued later, request payment and are not binding documents (source).
In-Depth: Cash Flow
Cash flow statements break income into three categories:
- Operating activities (CFO): Sales and production-related revenue.
- Investing activities (CFI): Expenses or gains from capital investments.
- Financing activities (CFF): Loan inflows or repayments.
This structure helps distinguish between healthy reinvestment (CFI) and operational strength (CFO).
Cash flow differs from profit: it excludes non-cash items like depreciation or credit sales.
As a KPI, strong cash flow from operations demonstrates a business’s efficiency and financial health.
Return on Investment: Context Matters
ROI is powerful for decision-making. But when compared with IRR, ROI offers a simpler backward-looking perspective, while IRR helps predict future performance across different scenarios.
Growing Your MRR
MRR improves business forecasting and boosts appeal to lenders or investors. Tactics to build MRR include:
- Long-term agreements.
- Subscription renewals.
- Products that require periodic purchases.
This steadiness may lower loan interest rates or attract investment.
Role of POs in Financial Planning
POs streamline procurement and inform budget and inventory management. They clarify what’s incoming and help vendors prepare for delivery and demand.
Summary: Using These Metrics Strategically
Cash flow, ROI, MRR, and POs form the basis for data-driven financial planning.
How to Apply These Metrics
- Plan cash use based on PO timelines.
- Use ROI data to make future investment decisions.
- Let MRR forecasts inform your growth strategies.
- Combine POs with subscription models for predictable income.
FAQs
How does ROI differ from profit margin?
ROI measures profit relative to investment; profit margin measures profit relative to revenue.
What’s in a balance sheet?
Balance sheets list assets, liabilities, and shareholder equity.
How does EBITDA relate to cash flow?
EBITDA and cash flow from operations are similar but CFO includes changes in working capital.
Which finance terms are essential for small business owners?
Cash flow, ROI, MRR, and purchase orders are all foundational to managing finances.