Skip to content Skip to sidebar Skip to footer

Financial literacy for SMBs – a basic guide

Balance sheet. Income statement. Cash flow statement. Liquidity. ROI. If these phrases leave you feeling confused and frustrated about your small business’ health then you are in the right place. We will review some of the basic terms for any small business to understand their financial health and learn how to grow our understanding of small business finance.

What is financial literacy?

Being financially literate means that you understand how to manage your money and you are not left at the end of the month wondering what happened to everything you earned. By learning about the basics of finance, you can limit your debt and live within your means. Let’s look at the basics of financial literacy.

STEP 1: Understand the jargon

When looking at financial statements, there may be words which you may not be familiar with. By looking them up in a financial dictionary, you can get a better understanding of the financial terms used in the different statements which are important to understanding the financial health of your business. You can also view the translated terms here.

STEP 2: Look at the statements.

There are three statements which are important to understand. These statements will be used to show investors the health of your business and can also be part of the application for a loan. The three statements are:

  • Balance sheet: This document will let you know what your company owns (assets), what your company owes (liabilities) and what shareholders have invested into the company (shareholders equity) at a set point in time.

The equation for a balance sheet is:

Assets = Liabilities + Shareholder equities.

To see a trend, you need to compare the current balance sheet with previous periods of balance sheets. It is important to note that a balance sheet should always be balanced. You can find the net worth of a business by using the following equation:

Net worth = assets – liabilities.

  • Income statement:  This document is also known as a profit and loss statement. It shows you the ability of your business to make a profit. It examines your income, expenses and profits.
  • Cash flow statement: This document looks at all the cash your company has received and spent in a certain time period. It can help you to determine if you can pay bills, salaries etc.

STEP 3: Ask your accountant questions

Now that you have a general understanding, you can ask your accountant questions concerning what you see in the above statements. Your accountant should be able to guide you with your business finances.

STEP 4: Check your credit score

When you want to apply for a loan or speak to an investor, it is important to know your personal credit score and your business’ credit score as this will have an impact on the amount that is lent or invested in you.

There are also many free courses offered which will help you to continue to build your financial literacy. One platform is the Money Academy.

By working through the four steps, you will be on your way to improving your financial literacy. 

Proudly brought to you by the NSBC

Get the best business tips delivered to your inbox!

© NSBC Africa 2023. All Rights Reserved.