Income and expenses are reported on the P & L or Profit and Loss report. Income is the money the flows into the organization and can emanate from one source or many. Income can be reported by its source, often categorized by product or service, geographically, or by customer. However it is reported or in whatever detail, it is summarized by the term Revenue.

Expenses are usually divided into two major categories. The first is referred to as cost; this can be cost of goods sold (COGS) or cost of sales (COS). This first type of expense is related to the manufacturing or the service delivery process and all of the raw materials required. The second type of expense is referred to as general and administrative and refers to those costs that are not directly related to the sale of a product. In other words, these costs would likely exist even if we didn’t have a sale in the current period. These items include executive salaries, office rent, insurance, advertising, marketing, property tax, interest payments, tax, etc.

The P & L is also called Operating Statement, Statement of Operations, or Income Statement. In general it measures the profitability of the entity. If we add up all of the Revenue and subtract all of the Expenses, we are left with Net Profit (or Net Loss if it is a negative number). In the not-for-profit world, this is called a Surplus (or deficit).

Value, debt and ownership, are described in another document called the Balance Sheet. This is the “picture” of what the enterprise looks like at a particular date, much like what the day looks like at the moment a photograph is snapped. The first part of the Balance sheet shows the assets, or all the items of value, both tangible and intangible. These include cash, money owed to the organization, inventory of raw materials and finished goods, patents, furniture, equipment, etc. These assets are usually things we have used our cash to acquire or will eventually change to become cash. The other part of the
Balance Sheets describes how we got all the “stuff” or assets. The two major ways we get assets is by borrowing money or raising it through investors.

Cash is the oxygen of the organization. Without cash, the organization dies just as is true for an organism deprived of air. The cash flow statement illustrates how cash moved in and out of the enterprise over a period of time.

The market is a description of who is buying the organization’s products or using its services. This can be described in many ways such as consumer or product categories, geographic strata or any other way that may be helpful to the organization or its stakeholders.

In summary, Business Acumen or Financial Literacy is the understanding of what these reports are and what decisions or circumstances affect them.