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For any business owner, having the right information constantly to hand and a solid business model firmly in place is absolutely essential. This is something that applies every bit as much to traditional retail outlets as to ecommerce businesses. Moreover, when a company has both types of outlets, it becomes even more important. The right business model and all the information readily available is most essential for developing an effective cash flow, meaning that all your financial obligations can be met exactly when they need to be met.
Total profits alone will not offer this. Total profits are only available when they have all come in in the form of hard revenue. If payments are due before this, then you have a cash flow problem on your hands. FastFACTR, an invoice and debt factoring company out of Utah, say that this is the primary reason for the interest in their services.
An invoice factoring service is there to pay invoices when they come in, under the understanding that the value of the invoice will be paid back to the factoring company once that invoice has been paid by a client or customer. This is not a short-term solution, but it can get small companies over the hump of early cash flow issues, allowing them to grow to the point where they no longer need invoice factoring.
Planning for financial future – and even working out if you have a cash flow issue at all – is however something that requires analysis of overall costs and revenues as well as by what point in the month or year those costs and revenues come along. Nevertheless, to do this effectively, you need to consider unit economics. But what is that?
What are Unit Economics?
Unit economics are a specific business model, one which conceives a company’s revenues and costs in terms of each individual product unit. Companies that use unit economics always refer back to the “basic unit”.
Naturally, this can be a single product, service, or subscription. Naturally, the “units” on offer from a particular company will vary a great deal, but unit economics will often take into consideration more than one basic unit. And what makes for a basic unit depends on what approach you take.
Why are Unit Economics Important?
To better explain what unit economics are and just how they work, it might well be best to outline some of the advantages of the unit economics approach and why they are advantages.
Units Economics Shows and Predicts Real Profitability
It is a great idea to know how profitable your business is when it boils down to selling one unit at a time. Each individual unit will have a profit margin and a cost. This data is all you need to determine how many units you should produce in order to achieve profitability.
You Can Optimize the Product Itself
A product will have variable and fixed costs, depending on what it is. By analyzing each individual unit, you can work out what these are and expand the numbers for projected sales. This shows how effective your pricing policy is.
Unit Economics Provide a Clearer Picture of Company Performance
Of course, marketing and reach are vital for increasing profitability and simply selling more units. But by knowing the total profitability for each individual unit, you can assess market sustainability and how viable your company actually is.
Total profitability will be something of an aggregate of the profitability of each different unit that you sell. Nonetheless, the biggest advantage of unit economics could be simply that it allows you to ultimately choose the right units.
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