Terminology from Balance Sheet & Income Statement 

Another really important thing to be aware of when you start a business, is what exactly is a Balance Sheet, and moreover, how is it different from an Income Statement?

 As always, we have to check out the definition of these two things in order to begin to understand it. 

So, what is a Balance Sheet:

The balance sheet displays the company’s total assets, and how these assets are financed, through either debt or equity. It can also be referred to as a statement of net worth, or a statement of financial position. The balance sheet is based on the fundamental equation: Assets = Liabilities + Equity. The balance sheet is divided into two sides (or sections). The left side of the balance sheet outlines all of a company’s assets. On the right side, the balance sheet outlines the companies liabilities and shareholders’ equity. 

And how about an Income Statement:

It is a financial statements that shows their profit and loss over a period of time.  The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities. The statement displays the company’s revenue, costs, gross profit, selling and administrative expenses, other expenses and income, taxes paid, and net profit, in a coherent and logical manner. The statement is divided into time periods that logically follow the company’s operations. It is most commonly organized monthly but, some companies use a thirteen-period cycle.

A few other accounting terms that are important are:

Assets: The total resources with monetary value owned by an individual or a business. They include things such as cash, stocks and bonds, real estate equity, money you are owed, and any property that could be sold. Assets can be found on your Balance Sheet. 

Current Assets: Assets that are expected to be turned into cash, sold, or consumed during the coming year. Current Assets include cash, accounts receivable, short-term investments, inventory, and prepaid expenses. Current Assets can be found on your Balance Sheet. 

Current Liabilities: Amount to be paid within one year for salaries, accounts payable, interest, and other debts. Current Liabilities can be found on your Balance Sheet.

Equity: The amount of your practice’s total assets you actually own (i.e., not financed with debt). Depending on the legal model and ownership of your practice, equity may be referred to as net assets, shareholder’s equity, or proprietor’s net worth. Equity can be found on your Balance Sheet. 

Expenses: The costs associated with providing services and running your practice over a period of time. Expenses can be found on your income statement. 

Net Income: The difference between total revenue and total expenses. Net Income is the same as Net Profit and reflects your revenues adjusted for the cost of running your practice, depreciation, interest, taxes, and other expenses. Net Income can be found on your income statement. 

Profit (also known as net income or earnings): The amount of money your practice makes after paying operating expenses, taxes, and other current expenses. Profit can be found on your Income Statement. 

Revenue: Money collected or that you expect to collect for providing services. Revenues can be found on your Income Statement. 

So, we can see some differences between theses accounting tools like:

• The balance sheet reveals the status of a financial situation at a specific point in time while an income statement shows the results over a period of time. 
• The BS reports assets, liabilities, and equity, while the IS details revenues and expenses that result in profit or loss.
• The BS is used by management to determine if a company has sufficient liquidity to keep going, while the IS is used to examine results.
• Creditors and lenders use the BS to see if a business is worth investing on for example, while the IS is used to decide if the business is making enough profit to pay off its liabilities.

In conclusion, we can tell just from reviewing these definitions, that knowing exactly what they are and why they are important can really help getting a new business on the right financial track. Accounting helps evaluating the performance of your business by tracking the expenditures and income, have quantitative financial information in order to make good business decisions. Also, it ensures “statutory” compliance, which will help you ensure that you follow the regulations and law in your state. Finally, it can also help to create a budget and future projections to continue planning the growth of your business in a sustainable way. 

Sources

1. Sources

Corporate Finance Institute. What is a Balance Sheet?      https://corporatefinanceinstitute.com/resources/knowledge/accounting/balance-sheet/Accessed on Nov 4, 2019.

Corporate Finance Institute. What is the Income Statement?   https://corporatefinanceinstitute.com/resources/knowledge/accounting/income-statement/Accessed on Nov 4, 2019.

American Psychological Association/ Corporate Relations and Business Strategy staff. https://www.apaservices.org/practice/business/finances/glossary  Accessed on Nov 4,2019.

Accounting Tools. The difference between the balance sheet and income statement https://www.accountingtools.com/articles/the-difference-between-the-balance-sheet-and-income-statemen.html Accessed on Nov 4,2019.

Imagine you have a life-long dream, this dream is about opening a business of your own, however, just as you’re about to do so you realize it involves way more than you thought; overwhelmed, you give up.

According to smallbusinesstrends.com the startup rate at four years is about 44%, this means almost half of businesses don´t succeed after for years. However, there must be a reason why this happens, in this PBL I will try to go through what a new business needs when its still fresh and new in order to survive.

One of the first things to determine (and very important too) is to make sure that you will have enough money to face the first start-up months. If you don´t have financial resources, your business will have a hard time finding its footing. It is very important to be realistic about the time it will take for profit to make up for the cost, usually there are losses to endure the first two years and you need that “cushion” money to soften those blows. To make sure you have the right amount of funds you have to estimate your financial needs before starting the business. 

The first step is: figure out your expenses, which can be divided in two, “one-time start-up expenses” and “recurring expenses”.

The first category includes items such as legal and professional costs for incorporating or registering your business; starting inventory; licenses and permit fees; office supplies and equipment; long-term assets, like as machinery, a vehicle or real estate; consulting services; and website design.

The second category “recurring expenses” includes items such as salaries, rent or lease payments, raw materials, marketing costs, office and plant overhead, financing costs, maintenance and professional fees, etc. 

Now that you know the amount you will need you can starting-capital you actually have available for use, which is your starting capital. For this, you Estimate how much starting capital you will have and the amount of revenue you’ll be able to generate each month during the start-up period. To calculate the latter, research your potential market and industry averages to come up with realistic numbers.  

Finally, plug your estimated financial resources and your estimated expenses into a set of financial projections for your business. A look into your projections will show if you’ll have a financial shortfall.

But what about the legal requirements to open a new business?

Of course these depend on your location since everywhere in the world has different regulations. We will take a look into Latin America and Europe as examples.  

• In Latin America: 

First, you should establish a Legal Domicile, which is an address in order to determine the business jurisdiction of origin and the tax and legal regulations applicable to it. It is also important for all official communication between the business and authorities.

It is also recommended to appoint a person as the legal representation of the company, this means signing documents, supervise that all legal requirements are met legally, etc. This position usually takes the name of Manager, Director or Administrator of the company.

All Latin American countries allow shareholders who are natural or legal persons, local or foreign of the country where the company will be incorporated. It is required for them to be registered before the establishing of the company. This process can vary depending on the country and even the type of person.

It is also necessary to determine your social capital (after having determined your business activity along with its human and legal composition). This is the capital to be invested on your projects and commercial intentions. This helps third-parties understand the company and as a guarantee of how the company will respond in different scenarios. Generally, most countries require that, at the time of the incorporation of the company, 25% of the share capital be integrated (deposited), the remaining being integrated within the next two years. After this, it will not be necessary to have all the capital to invest at the time of the formation.

And finally, opening a bank account is essential. This serves different purposes: letting costumers pay for goods and services, you to pay suppliers, and legal requirements like taxes. Business and personal accounts should be separated.

• In Europe:

First, you need to know the rules that apply and the relevant “national contact point” (e-government portals that allow businesses to get the information they need and administrative procedures online) to set up a company in the specific country you are in.

If you are an European Union citizen you have the right to: set up your own business in any EU country, Iceland, Norway or Liechtenstein and your are also entitled to open a subsidiary branch of that EU-based business that is already registered in any EU country.

As for requirements: 

These vary depending on the country however, the EU seeks that all countries meet certain targets for the setting up of new companies, like.

• setting up in no more than 3 working days
• costing less than EUR 100
• completing all procedures through a single administrative body
• completing all registration formalities online
• registering a company in another EU country online (through the national contact points.

When it comes to funding there are several EU funds available for businesses. Owners can check them at the startup Europe cluband search for funding opportunities.

There is also the DigitaliseSME, which is an EU-funded project that supports the digital transformation of small and medium-sized companies ​as well as of mid-caps in Europe.

And finally, I would like to address a Forbes article on how to build a successful business. In this article, the author uses the experience of Seth Goldman and Barry Nalebuff, founders and owner of Honest Tea (a $100 million enterprise9 to compile a list of tips and advice to succeed in business.

1. Create and build something you believe in. (believe in your purpose)
2. Create and build something radically better and different, not just the 10% more.
3. Start until you can survive imitation, prepare to be copied, establish a system of “continuous innovation”.
4. Always have reserves of money, don´t be wasteful. This “cushion” can save you later
5. Never give up control for “growth”, you could end up losing your vision and culture.
6. Never budge from your vision, core values and purpose, but be flexible in the value propositions, products and services you offer in order to execute your purpose.
7. Learn how to operate with a small budget, figure out how to make it work.
8. Building a business is preparing systems for the long-haul and focusing on small connected steps instead of trying to “sprint” your way to the top.
9. Balance your family, health and work. Take care of yourself.
10. Build the company and the brand as if you will own it forever, not as a disposable project.

References:

Business Development Center. How to Determine your New Company’s Financial Needs. https://www.bdc.ca/en/articles-tools/start-buy-business/start-business/pages/determining-financial-needs-new-business.aspx Accessed on Oct 15, 2019.

Mandsfield M. 2019 STARTUP STATISTICS- The Numbers You Need to Know. Mar 28, 2019. https://smallbiztrends.com/2019/03/startup-statistics-small-business.html Accessed on Oct 14, 2019.

Dempsey C. 2019 A Lawyer’s Guide to Starting Your Business in Latin America August 5, 2019. https://www.nearshoreamericas.com/lawyers-guide-starting-business-latin-america/ Accessed on Oct 14, 2019.

European Commission. Points of Single Contact. https://ec.europa.eu/growth/single-market/services/services-directive/in-practice/contact_en Accessed on Oct 14, 2019.

Wagner E. 2014 10 Rules to Build a Wildly Successful Business, Forbes. January 14, 2014. https://www.forbes.com/sites/awsmediaandentertainment/2019/09/12/how-to-thrive-in-todays-disrupted-media-markets/#6e4410f570ed Accessed on Oct 14, 2019.

• Why is oil demand still prominent?

The oil industry is still one of the most profitable and relatively stable industries ion the world. Although we are all aware of the dangers of the massive use of oil and exploiting of the environment in order to obtain it, there is still the demand for it. Why is this?

Firstly, we can deduce that it is due to the fact that oil and its derived products are basically everywhere in the world, from plastic bottle to the fuel boosting planes, oil use is everywhere. So, it is possible to change this and replace it with alternative fuel however, this involves a great effort involving, culture, government and social efforts.

According to an article in the IEA:

“The United States will drive global oil supply growth over the next five years thanks to the remarkable strength of its shale industry, triggering a rapid transformation of world oil markets according to the International Energy Agency’s annual oil market forecast. By the end of the forecast, oil exports from the United States will overtake Russia and close in on Saudi Arabia, bringing greater diversity of supply.

https://www.iea.org/newsroom/news/2019/march/united-states-to-lead-global-oil-supply-growth-while-no-peak-in-oil-demand-in-si.html

While global oil demand growth is set to ease, in particular as China slows down, it still increases an annual average of 1.2 mb/d to 2024, according to the report, Oil 2019. Still, the IEA continues to see no peak in oil demand, as petrochemicals and jet fuel remain the key drivers of growth, particularly in the United States and Asia, more than offsetting a slowdown in gasoline due to efficiency gains and electric cars. “

https://www.iea.org/newsroom/news/2019/march/united-states-to-lead-global-oil-supply-growth-while-no-peak-in-oil-demand-in-si.html

This tell us that although the oil demand is not necessarily increasing it remains stable, our mission is to understand how to make the demand for alternative fuels just as or greater than the demand for oil.

• What are the positive& negative outcomes of the crisis?

The outcomes for this are several and different:

On one side we have the environmental side of the problem. It is no lie nor made up tale that we have an environmental crisis in our hands. It is expected that by the year 2050 we will face an environmental catastrophe if measures are not taken to protect the environment and the by that time climate change will be irreversible.

One example of the terrible effects of the intense use of oil are oil spills. According to the EIA most to these are mistakes or accidents , however these events mean intense loss for not only the industry, but also for the flora, fauna indigenous from that place and the area reached by the spill; it also affect other industries like the fishing and tourism industries.

Another negative effect is HYDRAULIC FRACTURING or “FRAKING”. This technique basically means rock which requires large amounts of water, and it uses potentially hazardous chemicals to release the oil from the rock strata. In some areas, significant water use for oil production may affect the availability of water for other uses and can potentially affect aquatic habitats. Besides, faulty well construction or improper handling may result in leaks and spills of fracturing fluids.

The oil industry is both a water and soil pollutant but although it represents a big support for the economies of poorer countries that can’t afford venturing into alternative technologies just yet, it also represents job creation and business opportunities that stimulate economies. However, it is not sustainable or even enough in quantity in the long run.

• How to increase suitable fuel consumption and stop oil demand growth?

There are several ways to set the replacement of oil usage in motion like:

Government policies: Activism and collective effort to make governments apply legal protection to limit the misuse of oil and its by-products. Like, improving social transportation, limit the use of plastics, limit the companies to be more ecological and use more sustainable methods in their production.

Alternative fuels: Although costly, there are several of them and companies developing them. Ethanol, natural gas, electricity, hydrogen, propane,. biodiesel, methanol, etc.

The Guardian. 50 People who could save the planet. The Guardian. ttps://www.theguardian.com/environment/2008/jan/05/activists.ethicalliving Accessed on Sep 23, 2019.

Martin, J. 2019. Sane environmental laws boost the economy, too. July 10, 2019. New York Post. https://nypost.com/2019/07/10/sane-environmental-laws-boost-the-economy-too/ Accessed on Sep 23, 2019.

Since the beginning of time man understood that the exchange of goods and services (commerce) was a way to get what he needed. Trade went from exchanging an apple for a few berries in the primitive age, to barter (which was the directexchange of goods and services) in the first great civilizations, to what we ultimately know as Commerce today. Eventually, man created different systems to regulate this essential part of society, some with disastrous consequences others flourishing, however all flawed in some way of another. Mankind also created Governmental systems in order to regulate the society that surrounded him, and along the way both found each other and began working together to create the economic atmosphere we know today. So, what does economy mean? And how is it related to commerce and even more so, how is it related to government?

• Economy:

According to the Cambridge dictionary, Economy can be defined as “the system of trade and industry by which the wealth of a country is made and used…the careful use and management of money or of time, energy, words, etc.”(Cambridge Academic Content Dictionary, 2019) .

So, we can tell that the concept of economy is directly related to commerce, management of resources, money and even industries; it is involved in almost every aspect of a functional (and even dis-functional) society. Now, since government is a system or group of people that officially control a country, it is only natural that it somehow becomes entangled with the economic activity of it. Governments’ purpose as entities in the simplest term, is to protect people from conflicts, and to provide law and order. Countries need to protect their citizens and economic prosperity is also found in that spectrum, governments have created alliances with each other and that also has contributed to the need of managing economic growth on a greater scale. 

The Four main Purposes of the government in a market economy are:

1. Efficiency: e.i. the government should attempt to correct market failures like monopoly and excessive pollution to ensure efficient function­ing of the economic system.
2. Infrastructure: Infrastructure enhance, directly or indirectly, output levels or effi­ciency in production. Essential elements are systems of transportation, power generation, communication and banking, educational and health facilities, and a well-ordered government and political structure; due to the high costs of these the government is responsible for procuring them
3. Equity: government programs promote equity use taxes and spending to redistribute income toward particular groups.
4. Economic Growth or stability: governments rely upon taxes, expenditures and monetary regulation to foster macroeconomic growth and stability to reduce unemployment and inflation while encouraging eco­nomic growth.

Macroeconomic policies for stabilization and economic growth include fiscal policies (of taxing and spending) along with monetary policies (which affect interest rates and credit conditions). Since the development of macro­economics in the 1930s governments have succeeded in bringing inflation and unemployment under control.

INFLATION: Inflation is the increase in the prices of goods and services over time. Inflation reduces the purchasing power of each unit of currency.

Although through history there have been many (classical economists like Adam Smith and J.S. Say) advocates for the practice of laissez faire which refers to the free function of the market system in the absence of government, American economist Paul Samuel-son stated, “An ideal market economy is one where all goods and services are voluntarily exchanged for money at market prices. Such a system squeezes the maximum benefits out a society’s available resources without government intervention”. 

Even though the laissez faire practice boosted western capitalist economics in the 19^th century, when the Great Depression hit in 1929 it became clear that the government’s involvement in the economy was imperative. A few years later following British economist J.M. Keynes’ ideas, governments in most countries began getting involved in economics by collecting income taxes, regulating monopolies and providing social security in the form of pensions or compensations in case of unemployment. Therefore, in modern times any government in the world, is involved in the economic affairs of its’ nation.

Accordingly, governments set economic rules known as regulations, collect taxes, and take on spending money too. As it began after the economic catastrophe of the Great Depression, governments are supposed to use public funding to provide services that anyone has the right to access, such as health care, social security, education, i.e. and it should regulate the private sector of these services as well. Through setting regulations and rules (legislations) a framework or standard of how the market should operate is created and delimited. Things like ensuring an employer pays fair wages to his employees or stablishing property rights, regulating tariffs and even using economic issues to make international negotiations that are outside of economics. An example of this can be President Donald Trump warning Mexico to implement extra tariffs on Mexican exported goods with the intent of making Mexico compromise in the issue of illegal immigration.

Another very recent example of a government directly managing an economical market is the issue known as “Brexit” which is the United Kingdom’s exit from the European Union, which represents many changes and could even have international impact due to the UK being the fifth biggest national economy in the world. This issue could affect the world’s markets and cause uncertainty which also creates instability. Which is why when bad decisions, mishandlings or misconduct in the economic sphere happen from the government it raises the question of how much should it really be involved in the economy of a country?; once corruption or simply incompetence leads to misfortune in a society’s economy, that trust is broken and the regular cycle of approval is broken. This is why it is the responsibility of the government to ensure proper and functional regulations are put in places, especially since a country’s needs change overtime.

But what exactly is a regulation?

Well, according to the Merriam- Webster dictionary, “Regulations, also called administrative laws or rules, are the primary vehicles by which the federal government implements laws and agency objectives. They are specific standards or instructions concerning what individuals, businesses, and other organizations can or cannot do. Market economies need clear rules to function efficiently. Without a legal framework establishing and enforcing property rights and the “rules of the game,” our free enterprise system could not exist.”  Moreover, the international Organization for Economic Co-operation and Development (OECD) has come to the conclusion that regulations are often necessary for a well-functioning, market-based, capitalist society, but they do not always live up to public expectations or achieve their social goals. Meaning regulations are not always good or have a good impact and like so the lack of regulation can also have the same effect. Two very clear examples that express this duality are two urgent situations currently happening in the USA. The 2^ndAmendment stablishing very broad regulations on gun use, and the lack of environmental laws in place, both of these issues triggered by tragedies like the Mass Shooting problem and the recent California fires which have led to even more pollution that requires fixing tapping into tax-payer funding.

Ultimately, it is very clear that it is all a connected cycle-like thing, people have problems and those problems need fixing, the government is expected to solve those issues it has to step in with solutions that have economic implications. Sources:

Sources:

• Cambridge Dictionary. https://dictionary.cambridge.org/dictionary/english/economy Accessed September 12, 2019.
• US History, 2019. The purposes of government.USHistory.org https://dictionary.cambridge.org/dictionary/english/economy Accessed on September 12, 2019.
• Nipun S. Role of the Government in a market economy. Economics Discussion. http://www.economicsdiscussion.net/government/role-of-the-government-in-a-market-economy-economics/26174 Accessed on September 12, 2019.
• Economy. What do governments actually do?. Economy.nethttps://www.ecnmy.org/learn/your-government/the-role-of-the-state/what-do-governments-actually-do/ Accessed on September 12, 2019.
• Pengelly, M. 2019, Trump calls off tariffs after US-Mexico deal but Mnuchin says threat remains. The Guardian June 8, 2019. https://www.theguardian.com/us-news/2019/jun/07/us-mexico-deal-tariffs-trump-says Accessed on September 12, 2019.
• Vitullo Martin, J. 2019, Sane environmental laws boost the economy, too New York Post, July 10, 2019. https://nypost.com/2019/07/10/sane-environmental-laws-boost-the-economy-too/ Accessed on September 12, 2019.
• Committee for Economic Development of The Conference Board, 2017. Regulation and the Economy-How to improve it. Sep 7, 2017. https://www.ced.org/reports/regulation-and-the-economy Accessed on September 12, 2019.
• BBC, 2019. Brexit, your simple guide to the UK leaving the EU, July 30, 2019. BBC News. https://www.bbc.com/news/uk-46318565 Accessed on September 12, 2019.
• Criss, D. 2019. The non-Brits’ guide to Brexit (because it affects you too), CNN, September 3, 2019. https://edition.cnn.com/2018/11/17/uk/non-brits-guide-to-brexit-update-gbr-trnd-intl/index.html Accessed on September 12, 2019.

Be yourself; Everyone else is already taken.

— Oscar Wilde.

This is the first post on my new blog. I’m just getting this new blog going, so stay tuned for more. Subscribe below to get notified when I post new updates.

This is an example post, originally published as part of Blogging University. Enroll in one of our ten programs, and start your blog right.

You’re going to publish a post today. Don’t worry about how your blog looks. Don’t worry if you haven’t given it a name yet, or you’re feeling overwhelmed. Just click the “New Post” button, and tell us why you’re here.

Why do this?

• Because it gives new readers context. What are you about? Why should they read your blog?
• Because it will help you focus you own ideas about your blog and what you’d like to do with it.

The post can be short or long, a personal intro to your life or a bloggy mission statement, a manifesto for the future or a simple outline of your the types of things you hope to publish.

To help you get started, here are a few questions:

• Why are you blogging publicly, rather than keeping a personal journal?
• What topics do you think you’ll write about?
• Who would you love to connect with via your blog?
• If you blog successfully throughout the next year, what would you hope to have accomplished?

You’re not locked into any of this; one of the wonderful things about blogs is how they constantly evolve as we learn, grow, and interact with one another — but it’s good to know where and why you started, and articulating your goals may just give you a few other post ideas.

Can’t think how to get started? Just write the first thing that pops into your head. Anne Lamott, author of a book on writing we love, says that you need to give yourself permission to write a “crappy first draft”. Anne makes a great point — just start writing, and worry about editing it later.

When you’re ready to publish, give your post three to five tags that describe your blog’s focus — writing, photography, fiction, parenting, food, cars, movies, sports, whatever. These tags will help others who care about your topics find you in the Reader. Make sure one of the tags is “zerotohero,” so other new bloggers can find you, too.