Finance Basics: Starting the Business (B)
What is initial financial statement? What is the initial balance sheet? What is the difference between investor and the Company? Learn through the step-by-step Business Case Study.
Posted: Jun 2009
STARTING THE BUSINESS
Before any business can begin to operate, it needs a starting point:
The initial financial statements
• show the establishment of the company.
• are the starting point before the business begins to operate
INITIAL FINANCIAL STATEMENTS
When establishing a company, you need:
• a balance sheet and
• a cash flow
Since the business is not operating yet, there is no profit & loss statement.
• Shows where the money for the business is coming from (cash inflow).
• There is no cash outflow, as no business decisions have yet been taken.
INITIAL BALANCE SHEET
• Is drawn up before the beginning of any business related transactions
• Shows how the business is being financed
INVESTOR VS. COMPANY
It is important to distinguish:
• The Investor as an individual and
• The Company in which he is investing
In order to fully understand the basic financial concept follow the next business case study.
STARTING UP THE BUSINESS
Jerry Smart (JS) decided to get involved in business. He decides to start with a 10 days practice run, involving smaller stakes, in order to understand the basic financial principles.
JS decides to join in the Fast Food business near school and will test the idea for just ten days, using savings of $100. The new company is called JS Fast Food.
JS wants to have full financial accounts prepared for JS Fast Food each day, in order to understand the process and properly assess the progress of the test run.
KEY TIPS before starting up the Business:
• Liabilities are the sources of funds and can also be understood as what the copmany owes.
• The Shareholder, as the investor of capital, is different from the company.
• Assets are the uses of finds, and can also be understood as what the company owns.
• Before the business begins trading, all investment is held as cash on the assets side of the balance sheet.
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