Go with the flow and don't lose your balance

Money records are either balances’ or flows’. Get to understand the difference between these two concepts and you'll be well on your way to becoming financially literate, says Peter Hughes.

- Peter Hughes

Investors and banks don't judge agribusinesses on their sales, -yields, product prices, production costs or productivity figures.

They judge them on profitability. Both profitability now, and what it's likely to be in the future.

And the three key financial records these people will want to see are the 'balance sheet', 'income statement' and 'cash flow'.

CONFUSION REIGNS

When I set off on my journey many years ago to develop some financial literacy, nothing confused me more than these documents.

Then I learned that a business was a 'legal person', in other words an entity separate from its owners, and I started getting a glimmer of understanding.

But what was this thing called the balance sheet'? What balanced with what? How was it possible for there to be a balance in the business, when there was always an imbalance between sales and expenses? The amounts were never the same! More confusion was to come.

I discovered that the 'income statement' contained not only income, but costs as well. And, adding to my confusion, some costs were identified as 'cost of sales', others as 'overheads' and 'variable'.