Categorized | Advice


Posted on 12 October 2008

What we are talking about here…
For those of us who are not studying finance – we are talking about the basic financial models that help to keep projects and businesses “on track”.
Why it is important…
Money makes the world go round – looking after it makes sure it is not wasted. It also helps us to know when we are about to run out or over spend.
What you need to know…
The basic financial model is the “Profit & Loss Account” or “P&L”. It basically charts how much money we have coming in, how much we are spending and how much is left. Looked at over time it looks like this:

Month 1 Month 2 Month 3
Money in (revenue) 100 100 100
Less money out (expenditure) 30 30 30
=>Money left (profit) 70 70 70
Cumulative profit 70 140 210

You can change the definitions if it is a project with a set budget but the principles are the same.

The other important model is the “Balance Sheet”. This is a way a business can calculate its total “worth” – basically what it owns in the form of assets (money in the bank, machinery, buildings, debtors) and what it owes – it’s liabilities (such as tax to pay, VAT, money owed to suppliers, creditors).

At the end of the day, financial controls are about the flow of money in and out of a business, organisation, project or group (e.g. family).

Accounts are a snapshot of an organisation’s position on a set day (the year end accounts).

The next steps…
If you want to know more about financial planning and controls – you could do worse than go and look at a simple book on the subject!

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