Finances can be confusing, but involving business jargon can throw a whole new curveball into the mix.
While there may be some financially savvy first-time entrepreneurs, a recent study of small business owners conducted by Intuit found that 40% of small business owners consider themselves financially illiterate. At the same time, 81% of them are doing their business finances themselves. Even if you hire an accountant and especially if you utilize accounting software, it’s still important to understand the inner workings of your company’s finances.
Learning some basic financial terminology is an excellent place to start. You will eventually have to speak some of this language to answer financial questions about your company with an investor, partner, accountant, or auditor. Additionally, getting to know these terms can make it that much easier for you to plan and understand your business’s financial future.
Understanding these terms will give you a greater perspective on the financial health of your business:
We regularly use this term on Markaaz, as it’s one of the most common business health metrics. Cash flow refers to the relationship between cash entering and leaving a business. Positive cash flow means more cash entering a business than leaving it. Cash flow problems arise when you spend more than you make or don’t have sufficient cash to pay your short-term debts. Poor cash flow management can kill even profitable businesses.
Burn rate refers to how much money it takes to operate your business for a specific period, usually a month. It’s essential to keep track of this figure for new companies because revenue doesn’t always arrive on schedule, even with the most robust business model. Knowing your burn rate lets you know how much cash you need to run your business.
Current or liquid assets
Current or liquid assets are items that your business owns that are generally expected to be liquidated (turned into cash) within a year. The term “cash” is broader than you might expect in the financial industry. It includes hard currency (physical dollars and cents), money in your business account, and checks that you can deposit.
Of course, there are current assets besides cash because there are other items that your business would expect to liquidate within a year. For example, accounts receivable – all the money that your customers owe you in the short term – also count as current assets.
Other current assets include:
- Prepaid expenses
The bottom line
As part of your overall strategy, it’s vital to have a basic understanding of key financial terms to grasp how your company is faring financially. Additionally, being at least a bit financially savvy is always helpful when discussing your company’s past and future growth with colleagues, potential clients, and investors.
By maintaining some oversight of your company’s financial operations, you can increase its chances of success and continue doing what you set out to do in the first place: grow your business. Our upcoming Dashboard makes it easier to keep track of everything, giving business owners an at-a-glance view of all their business activity in one place. This includes connecting with accounting software to better understand your cash flow and other critical financial metrics.
Learn more about how the Dashboard changes the game for small businesses, and join Markaaz today!