# Finance Basics for Product Managers  ## Metadata - Author: [[Eloi Pardo]] - Full Title: Finance Basics for Product Managers - Category: #articles - Summary: Product Managers need to understand finance basics like revenue, costs, and margins to make informed decisions. Knowing key metrics like GMV, ARPU, and EBITDA helps assess a company's financial health and profitability. Cash flow management is crucial for product launches and sustaining a company's financial position. - URL: https://medium.com/@eloipgdc/finance-basics-for-product-managers-9ef97355a4fa ## Highlights - **Revenue**: refers to the total amount of money a company generates from its activities. It is the top line of a company’s financial statement and represents the total income before any deductions, expenses, or taxes are considered. ([View Highlight](https://read.readwise.io/read/01hxf6ez2q9a07q4b45t17tk3e)) - **Net revenue**, also known as net sales or net income from sales, represents the actual amount of money the company retains from its sales activities after accounting for returns, allowances, and discounts. ([View Highlight](https://read.readwise.io/read/01hxf6fgzm273ysc4ejjz1gpg0)) - The **selling price** is what customers pay to acquire the product or service. It encompasses all the costs associated with production, distribution, marketing, and the desired profit margin for the seller. ([View Highlight](https://read.readwise.io/read/01hxg91vy6rhhx54586re2t1am)) - For example, if a company sells 1,000 units of a product for $10 each (selling price), its revenue would be $10,000. But if the company gives $500 in discounts and experiences $200 in returns, its net revenue would be $9,300 ($10,000 — $500 — $200).  ([View Highlight](https://read.readwise.io/read/01hxf6hn4g59eh6x0mbhjybgb2)) - **Income**: is a broader term that includes all sources of funds received, which can encompass revenue as well as other types of earnings. such as interest, dividends, rental income, and more. It’s a broader term that includes all sources of funds coming into an entity. ([View Highlight](https://read.readwise.io/read/01hxf6kae7bxtk42qn0y0dm1qj)) - **GMV**: a metric commonly used in e-commerce and marketplace businesses. It represents the total value of goods or services sold on a platform over a specific time period before accounting for any discounts, returns, or refunds. It includes the total amount customers pay, regardless of the company’s own revenue after deducting its commission or fees. ([View Highlight](https://read.readwise.io/read/01hxg942yd8rj26w8ygaq8y426)) - **ARR / MRR**: metrics often used by subscription-based businesses. ARR refers to the annualized value of recurring revenue generated by a company’s subscription products or services. MRR represents the the monthly value of recurring revenue generated by subscription products or services. They do not take into account one-time sales or non-recurring revenue streams and provide a predictable view of a company’s future revenue. ([View Highlight](https://read.readwise.io/read/01hxg9607ph9vbnvygk4fr9rzf)) - **ARPU**: a metric commonly used in subscription-based or user-focused business models. It represents the average amount of revenue generated from each individual customer or user. It is calculated by dividing the total revenue generated by the total number of customers or users. ARPU helps businesses understand the value they are generating from each customer on average. ([View Highlight](https://read.readwise.io/read/01hxg9c2vs0qp4sb71wfc78rdn)) - **Variable Costs**: Costs that change in relation to the level of production or sales. Variable costs are expenses that change in direct proportion to the level of production or sales. As a company produces more or sells more, variable costs increase, and as production or sales decrease, these costs decrease as well. Variable costs are directly tied to the quantity of goods or services being produced or sold. Raw materials, direct labor costs, production supplies, and sales commissions. These costs can fluctuate based on the company’s operational activity. ([View Highlight](https://read.readwise.io/read/01hxg9gyv5b7prx8t5jg5xan9n)) - **Fixed Costs**: Costs that remain constant regardless of production or sales volume. These costs remain constant regardless of the quantity of goods or services a company produces or sells. Fixed costs are associated with maintaining the basic operations and infrastructure of a business. Rent, salaries of permanent staff, insurance premiums, depreciation of fixed assets, and utilities. These costs are typically incurred regardless of whether the business is producing or selling anything.  ([View Highlight](https://read.readwise.io/read/01hxg9j8fkm17859psh4rn8bk1)) - **Cost of Goods Sold (COGS)** is a financial metric that represents the direct costs involved in producing or manufacturing a product. It’s a crucial element in determining a company’s gross profit and assessing the profitability of its core operations. COGS includes expenses directly associated with the production process and the creation of products or services. ([View Highlight](https://read.readwise.io/read/01hxg9kwf9crrhr5ja963t8359)) - **Gross profit** is the difference between a company’s total revenue (or total sales) and its cost of goods sold (COGS). It represents the amount of money left over from sales after deducting the direct costs associated with producing those goods or services. *Gross Profit = Total Revenue — Cost of Goods Sold (COGS)* ([View Highlight](https://read.readwise.io/read/01hxg9mzp8xsknws8j5b5qtzh9)) - **Gross margin**, also known as gross profit margin, is expressed as a percentage and represents the proportion of gross profit relative to total revenue. *Gross Margin = (Gross Profit / Total Revenue) * 100* ([View Highlight](https://read.readwise.io/read/01hxg9rasgvpw7sg39gqeyfyxz)) - **Contribution margin** provides insights into a company’s profitability, particularly in relation to its variable costs. It helps companies assess the potential profitability of individual products, services, or business segments. The contribution margin helps determine the extent to which sales cover variable costs and contribute to covering fixed costs and generating profit. *Contribution Margin = (Total Revenue — Variable Costs) / Total Revenue*  ([View Highlight](https://read.readwise.io/read/01hxg9v8zy8nqqc6f87rar2572)) - **Markup** refers to the difference between the cost of a product or service and its selling price. It is often expressed as a percentage and represents the amount added to the cost to determine the final selling price. Markup is a common concept in pricing strategies and is used by businesses to ensure they cover their costs and generate a profit. If a product costs $100 to produce and the standard markup is 50%, the selling price would be $150 ($100 + 50% of $100) ([View Highlight](https://read.readwise.io/read/01hxg9x59pfpazeg53p6b2xzw4)) - **EBITDA** stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization.” It is a financial metric that provides insight into a company’s operational profitability by excluding certain non-operating expenses. *EBITDA = Earnings + Interest + Taxes + Depreciation + Amortization* Where: • Earnings refers to a company’s operating income. • Interest represents the interest expenses the company has incurred. • Taxes represent the income taxes the company is liable to pay. • Depreciation represents the allocation of the cost of tangible assets over their useful life. • Amortization represents the allocation of the cost of intangible assets over their useful life.  ([View Highlight](https://read.readwise.io/read/01hxg9ykn5p3znrke0hbqngkg0)) - EBITDA provides a clearer view of a company’s operational profitability by removing the effects of financing decisions (interest expenses) and accounting methods (depreciation and amortization) as well as tax policies. ([View Highlight](https://read.readwise.io/read/01hxga18mjx3zaa8aj904qymwd)) - A **balance sheet** is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It presents a summary of a company’s assets, liabilities, and shareholders’ equity, showing how the company’s resources are financed and how those resources are allocated. The balance sheet follows the fundamental accounting equation: *Assets = Liabilities + Shareholders’ Equity* ([View Highlight](https://read.readwise.io/read/01hxga473n4g1dgdstajrjm7pn)) - **Assets** are the valuable resources a company or individual possesses. They can be physical items like cash, property, and inventory, or intangible, like patents and brand reputation. Assets contribute to future financial benefits and value creation. ([View Highlight](https://read.readwise.io/read/01hxga6d516s69kgf98jwy1qtc)) - **Liabilities** are the financial obligations a company or individual owes to external parties. They encompass debts, payable amounts, and commitments to fulfill in the future. Liabilities reflect the financial responsibilities that need to be settled over time. ([View Highlight](https://read.readwise.io/read/01hxga6fgk8eyqbkk183aw6h92)) - **Cash Flow** refers to the movement of money into and out of a business over a specific period of time. It represents the net amount of cash and cash equivalents generated or used by a company’s operating, investing, and financing activities. Cash flow is a crucial indicator of a company’s financial health and liquidity, providing insights into its ability to meet short-term obligations, invest in growth, and generate profits. ([View Highlight](https://read.readwise.io/read/01hxga4dwx4ashj6qn7z45yyyq)) - Launching a new product may require significant upfront investment, affecting cash flow in the short term. By monitoring cash flow and coordinating product launches with finance teams, product managers can ensure that the company’s financial position remains healthy and sustainable. ([View Highlight](https://read.readwise.io/read/01hxga6q2xks2rdnpvk1c3ydsp))