Seven Financial Concepts for Business Owners

Strengthening your knowledge of financial terminology can help inform your decisions in several areas of your business, from budgeting and cash flow management to building credit and hiring employees.

In a nod to April's Financial Literacy Month, here's a quick refresher on seven financial concepts that are relevant to small business owners and entrepreneurs.

Balance Sheet 

A balance sheet is a type of financial statement that reports on a business's performance and profitability. 

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

Income Statement

Another type of financial statement is the income statement, also known as the profit and loss statement. 

This statement contains information about your company's ability to generate profit by increasing revenue, decreasing losses, or a combination of both.

Cash Flow Statement

As the name suggests, this type of financial statement outlines how cash flows in and out of your business during a specific time period, typically 12 months.

A QuickBooks blog emphasizes the importance of understanding each type of financial statement.

"Small business owners should know what these financial reports mean and how to use them to support data-based decision-making," writes Ken Boyd, co-founder of AccountingEd.com and owns St. Louis Test Preparation.

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," explains a post by the U.S. Chamber of Commerce on its website. 

Liquid Assets

The term "liquid assets" refers to cash or assets that can quickly and easily be turned into cash. Typically, the more "liquid" you are, the more financial flexibility you have.

Liquid assets are pivotal for every company, according to a post by Guidant Financial, which specializes in helping entrepreneurs secure funding to start, buy, or grow a business.

"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. Invoice factoring companies work to 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," explains a Fundera blog by Nerdwallet.

Customer Acquisition Cost (CAC)

CAC refers to how much a business spends on acquiring a new customer. Your CAC could include expenses related to sales and marketing dedicated to acquiring that customer, i.e., targeted advertising campaigns, capital spent on property or equipment needed to make the sale and convert the customer, and the cost of your sales and marketing staff. 

There is a lot to think about when it comes to customer acquisition costs, says Neil Patel, co-founder of NP Digital, on his website. "Businesses also need to consider things like additional customer service resources or implementing new technologies to support new customers," he says.

To measure CAC, basically, you divide 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.