Legend Business

The total amount of long-term finance is known as Net Capital Employed.

The total amount invested in Fixed Assets and Working Capital is known as Net Assets Employed.

Fixed Assets (also known as Non-current Assets)

Therefore it makes sense that rather than putting the total cost of these items into the calculation of profit in the year of purchase, the cost is ‘spread’ over the useful life to the business to produce an annual charge against profit. This charge is known as depreciation or amortisation.

The fixed assets and working capital are then put to use to make products or services that can be sold. The total value of sales, or invoices raised in a period, may be referred to as turnover or revenue.

The profit figure at this stage is often referred to as Operating Profit as the financing costs have yet to come.

Deducted from the Operating Profit are firstly the costs of interest payments on the loans and then the tax that has to be paid on any profits. The profit measure at this stage is referred to as Earnings and belongs to the shareholders. Some of this they will want to take as dividends, with the rest available to reinvest back into the business as Retained Profit.

[A word of warning: The focus so far has been on making a profit – i.e. selling products for more than they cost. However, businesses do not go into receivership because they make a loss but because they run out of cash. As profit and cash flow are not the same thing (and can even move in opposite directions), mastering the profit numbers is not enoug

All balance sheets (or Statements of Financial Position) are snapshots at a point in time showing where the money came from and where it is currently invested.

Receivables

This is the amount of money you are waiting to receive for goods or services that have been invoiced to your customers but for which you have not yet been paid.