How to measure your business financial position and performance | ||||||||||||||||||||||||||||
Now we are going to take detailed look at Financial Accounting. This branch of accounting usually provides information on cash movement in and out of the business over a period of time, termed Cash Flow . It also give information on profits generated or lost over a period of time, through what is termed an Income Statement as well as information on the business' financial position at a particular time by means of a balance sheet. Example cash flow statementLet us say, you spend 500 dollars to clear the land for a garden, plant and harvest your vegetables. You have successfully harvested your vegetables and are beginning to sell them. You have only been in business for one day, selling your vegetables. Assuming that you sold half of what you had for 350 dollars on the first day. At the end of your first day, your cash flow statement should to look like this:
Note that 350 dollars is not your profit, it is just the money you made after the first day of business. How much is your profit then?To determine the profit, we use the financial statement called Income Statement : Say that you spent 500 dollars to produce the vegetables you are selling. The 500 dollars include the cost of seeds, labor and initial cash investment and so forth. After one day in business, your profit or loss will be reflected as follows:
Note that although we made 350 dollars on our first day, our profit is only 100 dollars. This is because we have to take out the cost of producing and selling the vegetables. Now, how do we find out if we are wealthier at the end of the day than when we started earlier in the day?
Note that this is the value today. This is assuming that the remaining vegetables do not rot and loose value. If the vegetables rot after one day and loose their value, the balance sheet for the next day would be completely different. Remember this is the simplest form of these financial statements. The bigger and complex the business structure is, the more complicated the financial statements. |
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