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7 Financial Terms Every Business Owner Should Know

Since 2004, April was designated by the US Congress as the National Financial Literacy Month. Through National Financial Literacy month, government organizations, schools, businesses, and many other entities raise awareness about the importance of financial literacy.

 

Why is Financial Literacy Important?

National Credit Union Administration (NCUA) states that “financial literacy is key to understanding how to save, earn, borrow, invest, and protect your money wisely. It is also essential to developing short- and long-term financial habits and skills that lead to greater financial well-being.” There is no doubt that we all know that business and money cannot be separated and are tied to success. Therefore, financial literacy crucial for those who are managing the finance of a company.

 

7 Important Financial Terms

 

Burn Rate

Burn rate is an important term to understand for startups and new entrepreneurs as it plays as a metric of performance and valuation for companies creating an understanding of monthly cash spending before driving profit.

 

Burn Rate – is a measurement, a rate at which companies use the available cash for business operations.

 

Certified Check

While taking care of business finance, you may have come across vendors requesting a certified check instead of a regular check. Through paying using a certified check, it prevents payments from failing due to insufficient funds. On the other hand, the business receiving the certified check can avoid the risk of check bouncing and accounts receivable from not properly depositing on the due date. However, you have to note the cost of issuing a certified check and requiring an in-person visit to the bank.

 

Certified Check (or certified cheque) – is a type of check that banks verify that a sufficient fund exists in the bank account to clear the amount stated on the check and is set aside for that specific check, so it doesn’t bounce.

 

Grace Period

Manually managing finance often causes human errors missing out on payment deadlines without any harmful intention. Accordingly, some invoice allows for a grace period that will enable payments to be made past the payment deadline without charging penalty.

 

Grace Period – is a short period after the payment deadline that allows the payee to make payment without a late fee, penalty, or legal action.

 

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Gross Margin

Gross margin is essential as it can measure the production costs related to a business’s revenue and measure the company’s efficiency. Moreover, the higher the gross margin, the more capital a company retains on each dollar of sale.

 

Gross Margin (also called gross profit) – is net sales revenue minus the cost of goods sold (COGS)

 

Maturity Date

Starting a business usually requires a loan, borrowing money. Accordingly, it is natural for companies to have a certified debt instrument with a maturity date. It is essential to be aware of this date in advance to ensure the debt is paid off by the maturity date to prevent having collectors from coming after the business.

 

Maturity Day – the final date that a debt instrument must be paid off.

 

Profit Margin

Profit margin is the most commonly used profitability ratio to ensure that the business is making revenue.

 

Profit Margin – is the difference between the cost of making a product or service for the business and the price at which it is sold.

 

Return on Investment

A common performance measurement to evaluate the result of the investment across the organization ensures a positive return from the investment to grow the business.

 

Return on Investment (ROI) – is a performance measurement to evaluate if the result of the investment.

 

Did you know?

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Here are some additional financial literacy resources:

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