---
name: financial-literacy
description: Manage personal and business finances including budgeting, cash flow, financial statements, and basic FP&A.
domain: mindset
---

# Financial Literacy

Framework for personal and business financial management: budgeting, cash flow, financial statements, and basic financial planning.

## When to Use

- Managing personal or startup finances
- Understanding business financial health
- Making budgeting or investment decisions
- Reading and analyzing financial statements
- **When NOT to use**: Complex financial modeling (use model-building skills), or tax/legal matters (consult professional)

## Financial Statements

### 1. Income Statement (P&L)

**Structure**: Revenue - Costs = Profit

| Line Item | Example |
|-----------|---------|
| Revenue | $100,000 |
| - COGS | -$20,000 |
| **Gross Profit** | **$80,000** |
| - Operating Expenses | -$50,000 |
| **Operating Income (EBITDA)** | **$30,000** |
| - Interest/Taxes | -$5,000 |
| **Net Income** | **$25,000** |

**Key metrics**: Gross Margin %, Net Margin %, Burn Rate.

---

### 2. Balance Sheet

**Structure**: Assets = Liabilities + Equity

| Side | Example |
|------|---------|
| **Assets** (what you own) | Cash $50K, AR $20K, Equipment $30K |
| **Liabilities** (what you owe) | Loans $40K, AP $10K |
| **Equity** (owner's stake) | $50K |

**Key**: Always balanced. Cash is king.

---

### 3. Cash Flow Statement

**Three sections**:
1. **Operating**: Cash from day-to-day business (revenue - expenses)
2. **Investing**: Cash from buying/selling assets (equipment, acquisitions)
3. **Financing**: Cash from loans, equity, dividends

**Key metric**: Free Cash Flow = Operating CF - Capital Expenditures

---

## Budgeting

### 50/30/20 Rule (Personal)

| Category | % of After-Tax Income |
|----------|----------------------|
| Needs (rent, food, bills) | 50% |
| Wants (entertainment, dining) | 30% |
| Savings / Debt repayment | 20% |

---

### Zero-Based Budgeting (Business)

**Method**: Every dollar of revenue is allocated to a category. Ending balance = $0.

**Example**: $100K revenue allocated:
- $50K salaries
- $20K infrastructure
- $15K marketing
- $10K R&D
- $5K reserves

---

## Cash Flow Management

| Principle | Why |
|-----------|-----|
| **Know your burn rate** | Monthly cash spent (crucial for runway) |
| **Extend payables** | Pay vendors as late as possible (without penalty) |
| **Accelerate receivables** | Get customers to pay sooner (annual plans, invoicing early) |
| **Build cash reserves** | 3-6 months of expenses in the bank |

**Runway formula**: `Runway (months) = Cash / Monthly Burn`

**Example**: $300K cash, $50K/month burn → 6 months runway.

---

## Financial Ratios

| Ratio | Formula | Healthy Range |
|-------|---------|---------------|
| Gross Margin | (Rev - COGS) / Rev | 50-80% (SaaS) |
| Net Margin | Net Income / Rev | >10% |
| Current Ratio | Current Assets / Current Liabilities | >1.5 |
| Debt-to-Equity | Total Liabilities / Equity | <2 |
| CAC Payback | CAC / (ARPA × GM%) | <12 months |

---

## Common Rationalizations

| Rationalization | Reality |
|-----------------|---------|
| "I'm not a numbers person" | Financial literacy is a life skill, not a math test. Learn the basics. |
| "My business is profitable, I don't need to track" | Cash flow (not profit) kills businesses. Track it. |
| "Budgeting is too restrictive" | Budget = visibility. You can't manage what you don't measure. |
| "I'll worry about finances later" | Later is too late. Cash flow problems compound fast. |

## Red Flags

- You don't know your monthly burn rate (business) or spending (personal)
- You don't have a budget (no spending plan)
- You confuse profit and cash flow
- You don't review financial statements monthly
- Your runway is <3 months (emergency mode)

## Verification

- [ ] Income statement reviewed (revenue, costs, profit)
- [ ] Cash flow tracked (burn rate, runway)
- [ ] Budget created (50/30/20 personal or zero-based business)
- [ ] Key ratios calculated (gross margin, net margin, current ratio, CAC payback)
- [ ] Cash reserves checked (3-6 months of expenses)
- [ ] Financial statement review scheduled (monthly cadence)