In a busy and fast-paced world, as a small and medium-sized business (SMB) owner, 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. In fact, the research conducted by the University of South Florida, they’ve found a correlation between financial literacy and financial difficulties. Therefore, as an SMB owner, it is important to increase financial literacy to have a full understanding of your business that you have started with your passion.
Here are 7 key terms you should familiarize yourself with to improve your financial literacy and continuing your direction of growing your business:
1. Accounts Payable
You want to maintain a good relationship with your vendors and other important service providers to ensure smooth business operations. 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) – it’s the money that your business owes to a vendor or another business that has provided you goods or services to run your business. For example, you may have APs to suppliers, accountants, marketing agencies, and more depending on the nature of your business.
2. Accounts Receivable
No words needed, as an SMB owner what’s more exciting than money coming into your business, aka accounts receivable!
Accounts Receivable (AR) – it’s the money that your business has to collect from consumers in return of providing them with goods or services from your business.
3. Cash Flow
In order to sustain and grow your business, it is critical to understand and manage the cash flow of your business. Understanding your business cash flow will ensure that money coming in (AR) and money going out (AP) always leaves you with money in the bank to be able to keep the lights on, pay employees, etc.
Cash Flow – a measurement of how your company is doing by taking how much your 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.
4. Payment Approval Workflow
In order to operate a fraud-free business, you should consider establishing a payment approval workflow at an early stage. Are you worried about delays caused by physical and geographical limitations? Don’t worry solutions such as Plooto can take your payment approval workflow online to make your work efficient.
Payment Approval Workflow – a common approval workflow procedure that takes place before a payment goes out of the company’s bank account to have you, the owner, or the right representative from your business to approve the payment requested by an employee.
5. Automated Clearing House (ACH)
If you’ve 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 to 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 cheque or getting assistance from a bank representative.
6.Electronic Funds Transfer (EFT)
On the other hand, if you’ve 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 to Canada.
Electronic Funds Transfer (EFT) – the process of electronically moving funds from one bank account directly into another bank account without the use of a cheque or getting assistance from a bank representative. However, you cannot use EFT to send money to businesses outside of Canada.
7. Pre-Authorized Debit (PAD)
Did you find AR exciting? Then this will be even more exciting for you as an owner to make your AR process more efficient for better cash flow.
Pre-Authorized Debit (PAD) – a convenient way to collect your AR. A customer is agreeing to allow you to automatically collect payments on due dates instead of waiting for the payments to be sent to you.
Now that you’ve understood and increased your financial literacy don’t you want to make your business even more efficient? Plooto is your all-in-one AP and AR solution that can be used if you operate in North America and with Plooto you can even make international payments.
Don’t hesitate and start using Plooto now!
Here are some additional financial literacy resources that you could read through: