Businesses can be complicated to understand. Breaking it down to the key components that all businesses share can make it easier to understand how they work.
All businesses have the same main goal: to make money.
What Makes Us Choose To Buy From A Company?
For a business to be successful, it needs to create value for its customers. Value can be created in different ways: through a service or product.
Businesses provide these things to meet the needs of customers.
A value proposition is a statement that a business provides to customers, indicating what they will offer and how it will provide value to potential customers. It answers the customer's question of "why" they should buy from a certain business, and not from someone else.
Strong Value Propositions:
Are short and concise
Differentiate a business from it's competitors
Example: Walmart's value proposition is "Save money, live better." This delivers a promise of low prices, convenience, and consumer satisfaction.
A Balancing Act
A balance sheet is used by businesses to record and track its operations. It keeps track of the financial success of a company, through three main categories: assets, liabilities and equity.
Assets: include things that benefit a company, such as cash, inventory, property, or equipment. These would all be examples of tangible assets because they are physically present. Intangible assets include patents, copyrights, licensing agreements, and brand recognition.
Liabilities: include debt that a company owes, usually cash. A liability is an obligation that a company has to another party. Examples of liabilities include loans, mortgages, accounts payable, and payroll.
Equity = assets - liabilities. This is the actual monetary value of a company.
Handling The Cash
Cash flow is the flow of money that goes in and out of a business.
An inflow of cash refers to money coming into a business, such as revenue through sales.
Outflow refers to cash going out of a business, through expenses such as utilities, inventory, or other businesses that support a business.
The goal is to have a positive cash flow, meaning there is more money coming into a business than there is going out.
The income made from sales is called revenue.
Revenue = cost of product or service x number of sales.
Revenue includes the cost to make the product or provide the service.
This refers to the amount of money a business actually earns from a sale.
Net Profit = revenue - expenses
A large reputable company has several franchises operating under their name. Franchises involve a license for the franchisee to use the brand and sell goods. Where would franchises be found on a balance sheet?
Accounts Payable And Receivable
Accounts receivable refers to the amounts a company is owed for products or services they provide. Examples include credit that a company lends, or a service that is billed monthly. It is money that is anticipated to be paid to the company, usually from customers.
Accounts payable is when the company owes money to others, such as the bank, other companies or contractors.
When a company's accounts receivable decreases, their cash flow increases, as they are receiving the actual cash for previous sales.
When accounts payable decreases, the cash flow decreases, because money is leaving the business to pay others.
Judy works as an accountant for a small cafe. A delivery truck has just delivered a large order of food and supplies but the cafe doesn't have to pay for it until the end of the month. Where would this be recorded on the cafe's balance sheet?
Choosing to enter the world of business, whether it's working for one or starting your own, will involve many new concepts and terms. Having a grasp on these fundamental ones is a great start!
Try making a list of things that affect your own cash flow to get an idea of how it applies to business.
Think of yourself as a business and keep track of the expenses you have and any money you make.
Remember, it may not be recorded as one on a company's balance sheet, but people are the greatest asset to a business!
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