Tuesday, September 11, 2007/
Money flows into a company, circulates within it, then moves on. It’s an endlessly fascinating story.
Accounting is a money story
Last week I talked about learning the learning the language of accounting. Now let’s get on with why you should. Accounting tells a money story about an organisation.
Think about a business; yours, if you like. While you’re thinking about it, in your mind move back far enough so you can see it all laid out before you.
Much of the business “story” is represented in the form of money. Over there you have a table – what is its value? In that drawer is an IOU from you to the bank (loan agreement) – what is the outstanding amount? That customer just bought something from you. How much did they pay? What did it cost you to provide it? And so on.
Maybe it’s just me, but this always reminds me of the movie The Matrix where you could, if you looked really hard, see the real world in the zeroes (0s) and ones (1s) streaming down the screen. As you mentally look around your business, its reality is represented Matrix-like by dollar signs.
Economics 101: Capitalism. In essence, money (often called ‘capital’) flows around the globe looking for an investment opportunity that will maximise the return and minimise the risk (of loss) to the owner of the funds. If the return is not sufficient, the funds move on.
Consider then your business as the circle in the following diagram. Looking from right to left, funds flow into the business. We will colour-code these sources of funds as “yellow”: we like a colourful story. (In future blogs we will review these sources of funds in detail).
The sourced funds (“yellow”) are then put to work (employed) in the business. We will colour-code the use of funds by the business entity as “green”. (We will discover their story in future blogs).
In our diagram, the for-profit business aims to maximise the amount of funds internally generated and thereby increase its value – spin the funds cycle more efficiently and ever faster. The not-for-profit is intent on using its funds efficiently. I think I’m getting excited.
Next week: Creating a financial storyboard which we can use to tell the money story of any organisation. Where will those “ins” and “outs” appear and how exactly will they interconnect?
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