Financial Literacy: Terms You May Not Know But Should

April is Financial Literacy Month, so in honor of such, here's a quick review of a few relevant financial terms for business owners and entrepreneurs.

Financial literacy is the understanding of a variety of financial skills, concepts, and terminologies — it's the kind of knowledge that can better inform your actions and decisions about money, including your business's finances.

"Being financially literate enables you to make the correct choices for your business," says a post by Guidant Financial, which specializes in helping entrepreneurs secure funding to start, buy, or grow a business.  

Increasing your financial literacy can help in several areas of your business, from budgeting and cash flow management to building credit and hiring employees, and it can even impact your profitability.

Whether you're just starting as a business owner or looking for a refresher, here are seven financial terms worth learning about.  


Balance Sheet

A balance sheet is one of the most common types of financial statements, which are reports that show a business's performance and profitability. 

Listing your assets, liabilities and equity, a balance sheet showcases a business' financial position at a particular point in time.


Income Statement

Another important financial report is an income statement, also known as a profit and loss statement. 

On this statement is information about your company's ability to generate profit by increasing its revenue, decreasing its losses, or a combination of both.


Cash Flow Statement

A cash flow statement, as the name suggests, details how cash flows in and out of your business during a specific period, typically 12 months.

"Small business owners should know what these financial reports mean and how to use them to support data-based decision-making," advises Ken Boyd in a QuickBooks blog.


Business Equity

Equity is the difference between your business's assets and liabilities and is often used to determine the "true value" of a business.

"Equity is often included on a company's balance sheet, and analysts often use it to evaluate a business's financial health," the U.S. Chamber of Commerce explains in a post on its website. 


Liquid Assets 

The term "liquid assets" refers to cash or belongings (assets) that can quickly and easily be turned into cash if necessary. Typically, the more liquid your assets, the more financial flexibility you have.

An article by Guidant Financial explains that liquid assets are pivotal for every company. "Liquidity ensures that companies have enough cash to cover their expenses, but it can also provide a competitive advantage when liquidity across the economy is short."


Invoice Factoring

Also known as invoice financing, invoice factoring is an option for businesses with a significant number of outstanding open invoices. Companies specializing in invoice factoring can get your open invoices paid by purchasing the invoices at a discount.

"By raising capital this way, there is no debt, and the factoring company assumes the financial responsibility for collecting the invoice debts," says a Fundera blog by Nerdwallet.


Customer Acquisition Cost (CAC)

This is the amount of capital you spend to acquire a new customer. It takes into account the cost of sales and marketing resources dedicated to acquiring each customer, such as targeted advertising campaigns. CAC also includes the cost of the property or equipment needed to make the sale and convert the customer and the cost of your sales and marketing staff. 

"There's a lot to think about with your customer acquisition costs," says Neil Patel, co-founder of NP Digital, in a post on his website. He adds, "Businesses also need to consider things like additional customer service resources or implementing new technologies to support new customers."

In summary, your CAC is calculated by dividing the sum of all acquisition-related costs by the number of new customers gained within a specific period. "The lower your CAC, the more profitable your business can be," writes Mary Kate Miller in an article for Fundr magazine.


If you're eager to expand your financial knowledge further, we invite you to explore our previous article, 'New Business Owner? You'll Want To Know These Financial Terms'. It's a brief review that can help you deepen your understanding of some additional financial concepts.


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