The Lemonade Stand
It’s a hot August afternoon. Dick and Jane open their lemonade stand to catch the coming home from work trade. They get Molly and Tom to mix the lemonade, serve drinks, and collect cash while they drum up customers. Molly’s older brother, James, is in charge of getting the lemonade supplies and helping things go smoothly. Another day of basic business.
In any business, owners provide the funds. Managers buy equipment, inventory, and other assets. Managers, in conjunction with owners, develop plans and set goals. Those goals include making a profit. The owners and managers may also decide they want to sell a quality product at a high profit, donate a percentage of profits, and/or research new technology.
As the business operates, revenue comes in from the sale of goods. The goods cost money, so some profits go to buy more goods and the equipment to run the business. Profits also pay the managers for their effort and reward the owners for the risk they took.
As the lemonade stand grows, it may need more help from the outside world to thrive. It needs to borrow money for working capital to manage its cash flow and meet its obligations. If the managers weren’t preparing financial statements before to track progress and identify weak points, they must now. They have to communicate to the outside world. To help show good faith to creditors, they might have external auditors review financial statements. Now, a wide variety of users access the various statements to help them make their decisions. When the lemonade stand grows into a nationwide franchise, the financial statements will be enshrined in a glossy annual report complete with a statement from the president, a management letter, and other trappings of success.
They are still just financial statements showing the gozinta and gozouta. There are just more accounts, more options, and more footnotes explaining the arcane ins and outs of accounting.
As complicated as these things can get, it’s important to remember that the basic business is still there.