The company?s assets or the means to run the company is equal to the obligations to be paid by the company, equity and retained earnings. The tangible assets can be calculated in terms of money while intangible assets cannot be. Tangible assets are machines, buildings, land and other physical things. While non-tangible assets are the good will of the company, copyright or patents and brand name.

Long term liabilities and short term liabilities will change the financial statement. Long term liabilities enter as debts + interest for that year, while the short term liabilities enter as total debt payable for a period. Equity is the initial money invested in the business.

The most important thing to look for in the balance sheet is the debt to equity ratio. If debt is more than equity it means that if the company does well then the shareholder gets rewarded well and otherwise vice versa. It is like risk vs. return trade-off. So, one needs make sure that the company is doing well in clearing its long term debts over a period of time. It means the debts and interests it pays from year to year are decreasing. Otherwise it is a bad sign. If the company has lesser debts compared to equity then it is a balanced company. The returns can be less but it will be stable.

The book value is easy and quick to calculate. With the availability of online finance related websites like Yahoo Finance one can find the balance sheet, assets and share capital of a company. From this information one can find the book value of a stock by subtracting the debt to be paid to debt holders, tax and preferred shareholders? pie from the accounting value of company?s assets. By dividing this value by the total number of outstanding shares, one can get the book value per share.

The book value per share can also be supplemented with the P/E ratio when comparing two companies. Some times the company?s financial are so good that the book value per share is larger than the market price at which it is trading. Then the stock is undervalued. As we know from the world?s famous investor of all time, Warren Buffet, that we need to buy fundamentally sound stocks at the cheapest possible price. Some times reverse can happen. But at any time the share price will be higher than book value per share. But if it is too high and the company?s future growth is not as predictable then it is better to leave the stock.

Your business as an entity is an “individual” like you. The life blood of your business is capital. Too much of it will hemorrhage your business to death through pilferage or cash losses, wastage or stock losses, mark down of prices because of inability to sell on time cum market price fall, and obsolescence. Inadequate capital can create coma in your business as well-a situation of having little and paying more. This way you are not able to take advantage of discounts on bulk buying, overdue debts not being paid on time, fines and penalties incurred for not making mandatory payments, etc. If you are like me, you need to understand or read the pulse of your business financials inside out (you must not necessarily be an accountant/expert or be very good with figures to do this) to be able to plug holes in whatever area(s) you deem important. This way your business will never go into coma or suffer high blood pressure as the case may be under your nose. If you can buy and sell you can x-ray your business too.

Now let's get down to brass tacks. Your business came about with a seed in the form of an idea. Usually this idea is seen as an intangible asset. It cannot be quantified immediately you commence business operations. Over time we can call this idea “goodwill” because it has gone from idea to a business with your reputation attached. Here people can believe and see what your business is and worth. The business can now be valued on the basis of Best Of Judgment (BOJ). It may be subjective but quite understandable.

The money you personally introduce into the business via savings to run it daily (i.e. working capital) or buy assets is treated as equity in the business. You may “borrow” from friends, relations, banking institutions, and so on to augment your equity contribution. This we will call “debt capital.” You will pay this debt at an agreed future date but not without a price to pay (i.e. cost of capital or interest). The lender's willingness and risk of lending you that money is the interest you have to bear. This is the opportunity cost of the lender not using that money elsewhere. That interest is simply an expense in your operations.

We will then translate the foregoing into a simple arithmetic:

(1.) EQUITY= ASSETS No Liability to Creditors or Lenders

(2.) EQUITY + DEBT= ASSETS Have Liability to Creditors or Lenders

From (1) above if your business fails (God forbid!) you are On Your Own (OYO). But with a good business plan from the outset and religious adherence to it you are sure to succeed. From (2) above you are not only responsible to yourself but to your lenders and creditors. You MUST not fail because the headache of having to explain to outsiders what went wrong will add insult to injury!

I am going to explain another important part of this article-Profitability and Cash flow. Profit is Revenues/Sales/Turnover(less returns) minus Cost of Sales. The profit here is because Sales is greater than Cost of Sales. Loss is possible and do arise. That is Sales is less than Cost of Sales using the above formula. Please you can always substitute either “Revenues” or “Turnover” where I have “Sales.”

PROFIT = SALES - COST OF SALES, sales > cost of sales

LOSS = SALES - COST OF SALES, sales

The above explanation is GROSS PROFIT/LOSS only. A step further will give you NET PROFIT. This is Gross Profit minus Expenses reasonably incurred in bringing in sales.

NET PROFIT = GROSS PROFIT - EXPENSES.

NET LOSS = GROSS LOSS + EXPENSES.

Mind you, “overhead expenses” will be added to “gross loss” to arrive at “Net Loss”. Your expenses simply increased your loss during a specified period. In computing Gross Profit/Loss many expense items are taken into consideration-those involving “cash” and “non-cash” items.

Cash Flow, on the other hand, determines how cash buoyant you are at any giventime-itis your liquidity level status. Cash flow is the movement of cash “in” and “out” of your business. It shows at any point in time how liquid your enterprise is. The importance of cash to the healthy growth or survival of your business should be taken seriously. This single factor can either make or mar your business. There are cases of business failures resulting from cash flow problems. This is also what is known as liquidity problem- i.e. no enough cash to do business when the need arises. Again the simple arithmetic for this is:

Beginning Cash Balance + Cash Inflow (Receipts) - Cash Outflows (Payments) = Ending Cash Balance

Therefore, there is no way the “Profit/Loss” of a business operation for a particular time period will always be the same as the “Cash Flow” of that same period. It is imperative to note that profit is actually a function of the judicious management of your business cash flow. The flow of cash- inflow and outflow- should be properly managed. The rule is: Cash Inflows should be accelerated while Cash Outflows should be decelerated when necessary.

In summary, if you understand why doctors examine and check their patients thoroughly, then you too need to examine your business operations in order to save its life! Always remember that your entrepreneurial, leadership and excellent skills will determine the level of your success and wealth in your business.

You Will Excel!