This is a Clilstore unit. You can link all words to dictionaries.

Business diagnose in 3 steps

In this Unit students will know about/ be able to/ be aware of the three most important account statements in a business:

1.- Cash flow statement.

2.- Profit and Loss statement.

3.- Balance sheet statement.


This lesson has 8 SECTIONS:

Section 1: Introduction.

Section 2: Preliminary images.

Section 3: Language aids. Vocabulary searching.

Section 4: Abstract.

Section 5: Slides presentation -Power Point- "Business diagnose in 3 steps".

Section 6: The concepts in depth. The text explanations.

Section 7: The concepts in depth. The videos.

Section 8: Your turn to practice a bit.


SECTON 1.- INTRODUCTION. 

When you start or run a business, you need to keep checking how it is going on. And you should keep asking 3 kind of questions like these:

a) "do we have money to pay it today, or the next month?",

b) "are we making profits or are we loosing money?",

c) "how much does it really worth my company?".

The answers to these questions, in accounting terms, are called statements because they "affirm" the information you are asking for.

There are three main relevant informations  or statements that help you to diagnose the economic situation of a company or business.

1.- Cash flow statement.

2.- Profit and Loss statement.

3.- Balance sheet statement.

Only to have a taste of it, now you can go to label n.1 and have a look on some images, so as you keep them in mind while reading the introduction.

Why three statements?

Because they represent different points of view and as a consequence they "show" different accounting information. As in real life we need three dimensions to see the reality, we also need to "look at" the business through these three "filter lents" to get a real image of the business. Business, as Reality, is complex and dinamic, and has many faces and interweaving factors, changes, movements. Each statement provides a specific "focus" through which a specific information is drawn or obtained. The three different statements "say" or "show" something specific about the business in accounting terms.

The Cash flow statement "look at" the business through a "filter" or "approach" like this: "money comes in - money comes out". And here money means hard cash, banknotes and coins, money in hand, not just "expected earnings or incomes". Because from a certain "slant" or "perspective" it can be said that business is "all about money". Money in fact represents the economic worth or value. So, the "flow" of the money does give us one of those relevant informations to help us "see" the reality of a business. What does Cash flow look like in a tangible information? Simple: two-column document, with one column showing the "cash inflow" and the other showing the "cash outflow". And that is it, regardless any other considerations, any other "focuses", "approaches".

The Profit & Loss statement is the answer to this question: "does it generate profits?". So here, a more dinamic and global approach is taken. From this point of view, all the economic movements in the business are also put in two columns:  those increasing the profits and those reducing the profits. In accounting terms, and generally speaking, we talk of  revenues or "incomes" and "expenses". And here we see the different "focus", because not every cash "inflow" represents an "income" in profit terms. For example you can borrow money from a bank. Certainly you have that money at your disposal, but it has not been "generated" by the business. In fact it does not owns to the business and, more over, it has to be paid back to the bank.

The Balance sheet statement, as the term expresses, does answer the question of the weight and proportions of the business, and gives "at a glance" an accurate idea of the business worth or value. As in a weight balance or scales, all the elements or movements are placed on two plates: on one plate all that is owned by the business, and on the other plate all that is owed by the business. In accounting terms we call them "Assets" and "Liabilities". Ideally in a healthy business the "Assets" weight should exceed the "Liabilities" weight. That excess is called "Equity" and belongs to the owners of the company, who are called the Shareholders. As the "Equity" is something that belongs to others, this element is put in the same plate along with the Liabilities, the whole thing resulting like that: "Assets = Liabilities+Equity".

 

We will hopefully see in this Unit how to place any given "economic element or operation" in the correct "side" of each statement.


 

SECTION 2.- Two preliminary images: a "machine" and a "patient".

a) The business as a machine:

First, it is a good idea to imagine a company or a business as a "machine" that needs "power" to function and finally make its products. Power here is economic means like raw materials, other products, money, employees´work, or even ideas. Once the company takes enough power, it can start up and run/go on over the time. And as long as the company "manages" well all this power, the business keeps going on and on and on, and the machine is able to produce its "goods" (products for the market).

b) The business as a patient.

If you think of a company or a business as a "patient", you can compare those informations (we were asking about at the beginning) with a clinical health checking from three different points of view. As with a patient, you can check and consider different and relevant symptoms or signs, like terperature, the heart beat rhythm, the breathing, the aspect of the skin, if there is some pain anywhere... All the symptoms together will help you to identify how is the patient´s health situation or state in that moment, and take some sound decisions accordingly.

All along the lesson we can repeatedly come back to those two comparisons to try to understand all the concepts we are studying.

 


 

SECTION 3.- Some language aids.

There is some vocabulary we need to be familar with, before going over the lesson.

Your first task is then to look up 40 words or concepts.

You will work in groups of 4 people so that each student has only 10 words to look up. Then, all can take advantage of the result of the searching at any time along the lesson.

Once you finish, you should make a list of the 40 words with a summarized meaning that can help you at any moment.

(I copy the list here below so that you can click on the words and easily find the meaning in the dictionaries open in the right side of the screen. Some advisable dictionaries for you are IATE / Word Reference / Cambridge Dictrionary, but you may explore any others).

I also strongly suggest the use of this one: Lexipedia. You will find there interesting views of the words and its synonims and anthonyms.

 

These are the 40 words:

1.- Profit

2.- Benefit

3.- Statement

4.- Asset

5.- Liability

6.- Own/to own

7.- Owe/to owe

8.- Earn/earning

9.- Spend

10.- Expense

11.- Income

12.- Revenue

13.- Tax/taxes

14.- Loss

15.- Equity

16.- Firm

17.- Shareholder/Stakeholder

18.- Customer

19.- Purchase

20.- Rate

21.- Lend

22.- Borrow

23.- Account

24.- Worth

25.- Goods

26.- Increase

27.- Reduce

28.- Trust

29.- Management

30.- Loan

31.- Current

32.- Long term/short term

33.- Bottom line

34.- Solvency

35.- Liquidity

36.- Bankrupcy

37.- Take on

38.- Take out

39.- Supplier

40.- Creditor


SECTION 4.- ABSTRACT.

Before you go to the Presentation and the 3 videos, let us make here a summarized overview.

There are three relevant informations to diagnose the business health. 

Companies are obliged to register and reflect those three informations in three specific documents. These documents are called "statements" because they "affirm" something.

1.- Cash flow statement. In other words, how much money comes in and comes out, how much is available, at hand, to pay off your debts and obligations, at a given moment. Here, when we say "money" we mean hard money, money in hand, touchable money in the form of banknotes and coins at our disposal, not just mere expectations or credits.

2.- Profit & Loss statement. This document expresses how does the business "go on" or how does it "work" or "function". That expresses the ability to generate or produce "profits". If we think of the business as a "machine", we say the business works well when it produces more "energy" -for us "profits"- than the "power" it spends -for us expenses or liabilities-. When the business works like that, then it is able to grow and has a bright future. But if the business spends more power -liabilities- than the energy -profits- it produces, then the business is in fact dying, and that situation may turn into a "bankruptcy". This approach is more focused on the "performance", the "efficiency". 

We can also think of the busines as a "patient". A healthy person -for us a patient- has a lot of strength to do many activities, walk or even run if he likes it. That is because the amount of nutrition and rest that he gains everyday is well enough to develop all his activities. He is always producing more energy than that he spends doing his activities. His strenght exceeds always the energy he spends. So we say he is healthy. On the contrary, when something is going wrong, he cannot do his normal activities. He suffers an illness. Because his body is not doing well, he cannot recover the energy he spends. In that situation, every time he tries to spend his energies working, walking or running, he losses the more and more strenght, becoming weaker and weaker. He could even die.

3.- Balance sheet statement. Like with a weight balance or scales, this document represents or shows "at a glance" the balance between the size or weight of the two main magnitudes we have been (somehow) considering: The Assets -incomes, earnings, or positive valuable aspects- and the Liabilities -debts, expenses or obligations- of the business at a given moment. The view and comparison of both Assets and Liabilities gives us a very clear idea of what is worth the business, and help us to take decisions for the future. 


SECTION 5.- SLIDES PRESENTATION -POWER POINT-.

Now you can go to the link given in label n.2 to see the presentation "Business diagnose in 3 steps".

Once you have had a look on this presentation, you can go to Section 6.


 

SECTION 6.- THE CONCEPTS IN DEPTH. THE TEXT EXPLANATIONS.

Now you will have to follow in a sequence the labels n. 3, 4 and 5. Before clicking on each label, please notice you must follow the STEPS shown below: 1st-2nd-3rd.

The three links will send you onto a financial web page, "Investopedia". When you click the link the page will be open in a new window.

In each link you will see, on your left, a brief text with an explanation of the concept and, on your right, a video. You may want to have a look on the written explanations -very good idea- before clicking on the video.

So, first you should go and read the written explanation on investopedia. When you have done it, you can go on Section 7 for the videos.

Follow these STEPS:

1st.- Open WORDLINK:  To do so, open a new window in your browser, and write this direction in the navigation bar: multidict.net/wordlink.

2nd.- Come back here to Clilstore, click on each of the labels number 3, 4, and 5 below, copy the url from the navigation bar and paste it in WORDLINK, in the correct field (inside that field you will see "type or copy the web page address (url) to here").

3rd.- Then you can navigate the page inside Wordlink, to be able to consult the dictionaries.


SECTION 7.- THE CONCEPTS IN DEPTH. THE VIDEOS.

Now you can go again to the page "investopedia" using the labels 3, 4 and 5 below, and see the videos.


SECTION 8.- Your turn to practice a bit.

Now go to the label n. 6 and try to put each economic movent in the correct "side" of the statements

 

 

Short url:   http://multidict.net/cs/3720