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Business looked good so you borrowed the money to buy

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Unformatted text preview: p between income statement, balance sheet, and cash. Start with $100, which we’ll call capital. At the beginning of this exercise, your balance sheet has assets of $100 — the money — and capital of $100. Assets are equal to capital plus liabilities. A summary of the simple financial statement at this point is shown in this first illustration, Case Starting Point. HURDLE: THE BOOK 14.6 ON BUSINESS PLANNING SIMPLE CASE STARTING POINT The simple financials show a hypothetical widgets business as it starts. If you buy a widget for $100 and sell it for $150, you should end up with $50 profit, which is what your income statement covers. Sales minus costs are profit. You should have $150 in the bank. Now your balance sheet shows the same $100 in original capital plus $50 in earnings, which are equal to the $150 you have in cash as an asset. The next illustration shows you how the financials look right after that sale. Buy another widget for $100 and sell it again for $150, and now you have $200 in the bank. Do it again, you have $250 in the bank. Your income statement shows sales of $450, cost of sales of $300, and profit of $150. At this point your business has sold three units and made $150 profit. In theory it has $250 in the bank. ONE WIDGET SOLD This table shows the financials after the first sale. NOW WITH THREE WIDGETS SOLD Now the company has sold three widgets and made a profit. Adding Some Realism Now go back a step and make the situation more realistic. For example, most sales of products to businesses are on terms, with the money generally due in 30 days. So if you sold that widget on credit you don’t have $150 in the bank. You still have $50 in your bottom line, but now you have nothing in the bank. Instead, a customer owes you $150, which is what we call “Accounts Receivable.” Compare the One Widget Sold illustration to the Selling on Credit illustration on the next page. This is what really happens to the huge number of businesses that sell to other businesses. Knowing you can buy a widget for $100 and sell it for $150, you get your wi...
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