Business Jargon Part 3

Discounted cashflow and return on investment – from my short series of definitions of business jargon, and what they mean in plain English

Discounted Cashflow

This is a complicated one. There’s even an equation: DCF-2 But in basic terms, it means working out what money will come to you eventually from a business or investment and comparing how much that money will be worth to you in future years compared with now.

If you’re running a small business, the important thing to know about discounted cashflow is that it is completely irrelevant, because you have no way of accurately predicting the future.

You don’t know what shape your business is going to take in 6 months’ time, let alone planning detailed spreadsheets for the next 3 years.

Return On Investment – ROI

ROI is a much more useful and more widely used term. In general use, it means making money from what you put into the business.

I often use the metaphor of a business as a machine, where you put in time, effort, skill, money and resources, crank the handle of the machine and out pours profit and enjoyment. It’s my Joy of Business metaphor, and the profit and enjoyment is your return on investment.

More technically, ROI is the amount you make from your business compared to the money you’ve put in, or the amount of gross profit you generate from a specific marketing activity.

For example, if an online shop spent £1000 on Google Adwords, and made back £2000 of gross profit, that would be a 200% ROI.

I hope that helps you cut through the jungle of business jargon – if you need any help clearing your strategic path, and you need some business advice, then you know who to call.

Business jargon Part 1 – Sensitivity analysis and KPI’s

Business jargon part 2 – Opportunity cost, scaleability and marketing collateral

Photo credit – Frederic Bisson from Flickr on a creative commons licence