Financial terms can often appear complex when you are new to doing business, as they utilize the most syllables to describe a single concept.

According to Strategist cum Business Astrologer Hirav Shah, here are five financial terms to understand, ensuring you comprehend your finances for smooth business operations.

Achieving financial independence or financial freedom can seem daunting, especially when faced with complex financial terminology. However, with dedication and education, anyone can gain a solid understanding of financial concepts and take steps towards achieving financial independence. Don’t let the complexity of financial terms discourage you from pursuing your financial goals.

5 Crucial Financial Terms

1. FICO Score

What is FICO and How Does it Affect Your Credit Score?

Fair Isaac Corporation, FICO, is a company that created the methodology used to calculate a credit score. Different factors determine your scores, such as the total amount owed, payment history, and credit history length. FICO scores usually range between 300 and 850, with the higher scores enabling you to get better terms on your next credit card or loan. Entrepreneurs with scores lower than 620 can find it more challenging to secure credit at favorable interest rates. It’s essential to keep your personal finances in good standing if you want to receive loans to invest in your business. This is usually done by keeping up on credit card payments and being reliable for other costs.

2. Lien

Understanding Lien: What It Is and How It Works

Lien refers to a creditor’s legal claim to the collateral you pledged as security for a loan. It serves to guarantee an underlying obligation like loan repayment, where the creditor can seize the asset when you do not satisfy the debt.

A tax lien is a statutory lien created by law rather than by contract. It is a legal right that allows tax authorities like the Internal Revenue Service (IRS) to seize your assets when your company fails to pay taxes owed. The designated government entity typically holds your assets for liquidation to address the tax debt. Moreover, it can use a tax lien to charge you penalties on the amount owed. The IRS typically utilizes liens as a final resort after exhausting all other options, such as installment repayment plans, collection, and settlement.

3. Commercial Umbrella Insurance

What is Commercial Umbrella Insurance and Why Do You Need It?

Commercial umbrella insurance is a policy offering an additional layer of liability protection by covering costs that exceed your other liability coverage limits. For instance, a client sues your company for $1 million for being liable for his or her injury, but you only have $800,000 in liability coverage. Commercial umbrella insurance complements this coverage by making up for the $200,000 shortfall subject to your policy’s coverage limits.

Notably, umbrella insurance does not come as a stand-alone coverage since it functions in conjunction with your other liability coverage. However, it covers similar costs as business liability insurance, including attorney fees, medical expenses, and damages when your business faces a lawsuit.

4. Balance Sheet

Understanding the Importance of a Balance Sheet for Your Business

A balance sheet refers to vital information that shows your business’ net worth at any given period in a snapshot. In addition, it summarizes your company’s liabilities and assets to reflect your enterprise’s financial health. Aside from the balance sheet, the income statement and cash flow statement are essential to creating a financial statement.

If your business has shareholders, the financial statement should also include a statement of shareholders’ equity. With this information, you can prove that your company is a reasonable credit risk, enhancing convenience when applying for a loan. In addition, it allows investors and lenders to see that you have a well-balanced company with liabilities and assets. They can also know that you have positive cash flow and will possess the capital to make expected repayments.

5. Cash Flow Projections

Cash Flow Projections: How to Create and Use Them for Your Business

Cash flow is the operating cash amount that flows through your business and influences your business’ liquidity. Your cash flow reports show activity for a certain period, typically one month or one accounting period. Keeping tight cash flow control is critical because new businesses generally have limited ready cash before their growth generates more working capital.

Cash flow projections refer to educated and accurate plans you make for your business’s future by looking at previous cash flow patterns. These patterns offer comprehensive insight into when and how you obtain and spend your money.

One of the ways to establish the patterns is through the cash basis of accounting, such as via the Automated Clearing House (ACH) network. This network enables you to transfer funds from one account to another electronically. Hence, you do not have to deal with credit cards, eChecks, wire transfers, or physical checks, making it safer and more secure. You can also enjoy lower ACH processing fees than credit card transactions or wire transfers to suit high-risk and low-risk merchants. In addition, you can track your cash flow patterns by studying the ACH payments reflecting all the funds you receive and send, including customer invoices and employee paychecks.

Final Word

Achieving financial independence may seem like an impossible feat, but with the right methods and mindset, it is attainable. Learning about financial freedom strategies is essential for anyone who wants to take charge of their finances and improve their quality of life. While money may not be the key to happiness, having financial stability can provide the resources needed to pursue your goals and dreams. By understanding financial terms and making informed decisions, you can create a solid plan for your business and pave the way for success and stability. Start taking control of your finances today!

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Sure, money isn’t everything, and it won’t make you happy on its own, but what if you had the financial resources you needed to take control of and improve your life?

Hirav Shah concludes by saying, “Understanding these terms enables you to make appropriate financial plans and decisions for your business. In addition, you can utilize them to make intelligent and systematic moves for your business’ development, facilitating stability and success.