As a small and medium-sized business (SMB) owner in a busy and fast-paced world, you may think hiring a finance representative or outsourcing your accounting is enough for your business. However, as an SMB owner, you must understand that being financially literate will increase your success rate of growing your business. The research conducted by the University of South Florida found a correlation between financial literacy and financial difficulties. As an SMB owner, it is essential to improve your financial literacy to understand your business entirely.
Here are 7 key terms you should familiarize yourself with to improve your financial literacy and continuing your direction of growing your business:
To ensure smooth business operations, you want to maintain a good relationship with your suppliers and other essential service providers. One way to do it is by properly maintaining accounts payable without any delays – yes, this means paying your bills and invoices on time!
Accounts Payable (AP) – the money your business owes to a supplier or another company that has provided you with goods or services to run your business. For example, the payments to suppliers, accountants, marketing agencies, and more depending on the nature of your business.
No words are needed. As an SMB owner, what is more exciting than receiving payments!
Accounts Receivable (AR) – the money that your business has to collect from your customers in return for providing them with a good or service from your company.
According to a study by US Bank, 82 percent of small businesses fail because of poor cash flow management. Understanding and managing the cash flow with complete visibility is vital to the growth of your business.
Cash Flow – a measurement of how your company is doing by taking how much the company has made and subtracting the expenses. If it’s positive, it’s a good sign, but when it’s negative, you must figure out why and improve it as soon as possible.
To operate with minimal fraud in your business, you should consider establishing a payment approval workflow at an early stage. Don’t worry if you are concerned about delays by implementing payment approval due to physical and geographical limitations.
Payment Approval Workflow – an approval procedure that takes place before a payment goes out from the company. The owner or the right representative from your business approves all payments initiated within the company.
If you have only operated within Canada, you will most likely be unfamiliar with this term. However, it’s important to understand if you wish to expand your business into the United States (USA).
Automated Clearing House (ACH) – an electronic funds-transfer system run by the National Automated Clearing House Association (NACHA) to electronically transfer funds from one bank account directly into another bank account without using a check or getting assistance from a bank representative.
On the other hand, if you have only operated within the USA, you will most likely be unfamiliar with this term. However, it’s important to understand if you wish to expand your business into Canada.
Electronic Funds Transfer (EFT) – the process of electronically moving funds from one bank account directly into another bank account without using a check or getting assistance from a bank representative. However, you cannot use EFT to send money to businesses outside of Canada.
Did you find account receivable exciting? Then this will be even more exciting for you, as an owner, to make your payment collections process more efficient with better cash flow.
Pre-Authorized Debit (PAD) – a convenient way to collect your payments. Instead of waiting for the payments to be received by your business, you can use the pre-authorized debit agreement to have your customers agree in allowing your business to automatically collect payments from their bank account on the due date.
Now that you have understood and improved your financial literacy, don’t you want to make your business even more efficient?
Don’t hesitate and start your