Skip to 0 minutes and 5 seconds When we look at a business through a financial prism we see two things. On the one side of the business we have the resources it owns to generate profits– things like properties, machinery, computer systems, vehicles, goods to sell to customers, cash at the bank, and so on. We call these assets. Assets have to be paid for from somewhere. When we start the business we may put money into it ourselves, and this investment is called capital or equity. Capital is what the business owes to the owner– or owners, if there is more than one. A balance sheet shows this relationship as assets equals capital. Let’s start off by setting up a business that sells cameras.
Skip to 0 minutes and 54 seconds We put 5,000 pounds into the business. This could be in the form of shares if we form a company, especially if there is more than one owner. Let’s say we have 1,000 shares costing five pounds each. We use this money to buy 10 cameras that cost 500 pounds each. We saw last week that profit is the difference between the cost of buying or producing a product or service for our business and the sales price.
Skip to 1 minute and 27 seconds Let’s say we sell our cameras for 800 pounds cash each. So we make 300 pounds on each camera, a total of 3,000 pounds. This profit belongs to the business owner. We have the choice of withdrawing the profit from the business or reinvesting it to speed up growth. If we reinvest it now, we have 8,000 pounds and can buy 16 cameras at 500 pounds each. If we can make 3,000 pounds profit from selling 10 cameras, we could make 30,000 pounds profit from selling 100, 150,000 pounds profit from selling 500, and so on. Business owners therefore see that growing the business can generate more profits. But to be able to buy and then sell more cameras, we need more capital.
Skip to 2 minutes and 17 seconds You’ve seen how the initial investment of capital in a business links through to profit and assets, and how this link can be shown on a simple balance sheet. We’ve established that in this example, as for all growing businesses, they will reach a point at which more capital or funding is needed. But what sources of funding for growth are there?
Assets and capital
The relationship between assets and capital is at the heart of any business and its balance sheet.
In the next few steps of this course we will explore how businesses can find funding to finance their growth. Before we do this though, it’s essential to understand the difference between assets and capital.
- Assets are the things a company owns that allows it to generate profits.
- Capital is the money invested in a business, and which pays for the assets.
As Alice explains in this video, if a business is to grow it will eventually need to find more capital to invest in more assets.
In this video we introduce the example of a camera business that is looking to grow. After you’ve watched the video, take a look at the document provided in the downloads section on this page. This provides some more detail about how assets and capital would appear in this business’s balance sheet. We’ll return to the same business over the next few videos.
Over the next few steps in this course we will look at a number of common methods companies use to find the cash they need to pay for expansion.
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