Cash flow is the business's ability to pay for things and is often referred to as the lifeblood of a company, because if it used well it can generate more cash. Cash flow can be measured on the balance sheet of a company by looking at the relationship between current assets and current liabilities. As a rule a business with considerably more current assets than current liabilities will have better cash flow.
So what does a balance sheet show?
Typically it would contain things a business actually owns such as equipment, cash and buildings – these are known as fixed assets. If the Business is owed anything, this on a balance sheet is interpreted as current assets. These usually comprise of money owed by customers, stock, pre-payments and/or investments. Another line item you would expect to see on a balance sheet are a business’s current liabilities – this is what the business owes. Liabilities can be short term (due within one year) or long term. Short term liabilities can include outstanding payments to suppliers and accrued salaries. Long term liabilities can be debt with a maturity greater than 12 months.
The balance sheet must by law include the elements shown above underlined. However, what each includes will vary from business to business.
Earnings are usually the best indicator of a company’s profitability. Below are some of the terms used with a brief explanation of what each actually means?
Revenue: this reflects the company’s sales of products or services; leasing or renting, property or equipment.
Cost: this indicates expenditure required to generate the revenue.
Gross Profit: This is the Company’s revenue minus its costs equals its gross profit (or it could be its loss) To give an example, if a company makes 12k in revenue but to generate tat revenue it has cost them 8k then their Gross Profit would be 4k.
Expense: These are charges not directly relating to producing a good or a service. These can be things such as salaries, rent, advertising etc.
Net Profit: Profit made after taxes have been paid.
