What is business?
A business is an entity that provides goods or services in exchange for payment to generate a profit.
Every business has one or multiple owners. The primary objective of a business is to generate profits by selling goods or services to its customers.
Each Business has 3 main components:
- Core Business- means its Product or service
- Its Owners
- Its Customers
A daily life example of a business could be a local coffee shop. The owner of the coffee shop has started a business by investing in a physical location, purchasing equipment and supplies, and hiring employees to prepare and serve coffee to customers. The owner of the coffee shop has to manage the finances of the business, including revenue from sales, expenses such as rent and salaries, and taxes.
Why understand business for investing?
Buying stocks is equal to investing in a business.
Investing in stocks is a way to invest in a business. As the individual becomes a shareholder in the company, they have a claim on its assets and earnings.
If a business does well, the stock eventually follows
–Warren Buffett
Business Accounting
George decided to open a Burger Joint. He rented a commercial property and made some rudimentary arrangements. He employed 1 staff to prepare hamburgers and 1 manager to oversee finance and operations. Initial investment made by George was $100,000 to start his small business.
Let us see the numbers of George’s Burger Joint.
Cost of Raw Materials/annum = $12000
Operating Expenses
Rent & Electricity/annum = $ 12000
Salary of Staffs/annum = $12000
Salary of Manager/annum = $24000
Equipment Cost: 20000
_________________________
Total Cost = $80000
_________________________
Revenue
Total Revenue from selling burger = $190,000
Therefore, Earnings = Revenue – Cost
= $190000- $80000
= $110,000
Suppose total Tax is $10,000
Net Earnings = Total earnings – Tax
= $110000 – $10000
= $100,000
George earns $100,000 per annum as the owner of Joint Burger.
Lets say, the current value of his company is $1,000,000, and we divide it into 10000 equal parts.
Thus, the value of each share of company is = 1,000,000/10000
= $100
In the current year, Burger Joint made a profit of $100,000.
Therefore the earnings made per share is:
EPS = Net income of the company/ Total No. of shares
= $100,000/10,000
= $10
George decided to retain a part of its profit for future growth and expansion. Thus, 60% of the profit was taken out while the other 40% was retained (invested back in company).
Profit distributed to owners is called a dividend.
Divident = 60% of $100000 = $60000.
Retained earnings are the profit re-invested in the company for growth and expansion.
Retained earnings = 40% of $100000
=$40000
George invested $100,000 initially in the company. Profit made in the current year was $100,000.
ROI is a financial ratio that uses net profit and the initial investment to determine the profitability of your company.
ROI = (Net Profit / Cost of Investment) x 100
= (100000/100000) X 100
= 100%
A business is an entity that provides goods or services in exchange for payment to generate a profit.
Every business has one or multiple owners. The primary objective of a business is to generate profits by selling goods or services to its customers.
Each Business has 3 main components:
- Core Business- means its Product or service
- Its Owners
- Its Customers
A daily life example of a business could be a local coffee shop. The owner of the coffee shop has started a business by investing in a physical location, purchasing equipment and supplies, and hiring employees to prepare and serve coffee to customers. The owner of the coffee shop has to manage the finances of the business, including revenue from sales, expenses such as rent and salaries, and taxes.
Why understand business for investing?
Buying stocks is equal to investing in a business.
Investing in stocks is a way to invest in a business. As the individual becomes a shareholder in the company, they have a claim on its assets and earnings.
If a business does well, the stock eventually follows
–Warren Buffett
Business Accounting
George decided to open a Burger Joint. He rented a commercial property and made some rudimentary arrangements. He employed 1 staff to prepare hamburgers and 1 manager to oversee finance and operations. Initial investment made by George was $100,000 to start his small business.
Let us see the numbers of George’s Burger Joint.
Cost of Raw Materials/annum = $12000
Operating Expenses
Rent & Electricity/annum = $ 12000
Salary of Staffs/annum = $12000
Salary of Manager/annum = $24000
Equipment Cost: 20000
_________________________
Total Cost = $80000
_________________________
Revenue
Total Revenue from selling burger = $190,000
Therefore, Earnings = Revenue – Cost
= $190000- $80000
= $110,000
Suppose total Tax is $10,000
Net Earnings = Total earnings – Tax
= $110000 – $10000
= $100,000
George earns $100,000 per annum as the owner of Joint Burger.
Lets say, the current value of his company is $1,000,000, and we divide it into 10000 equal parts.
Thus, the value of each share of company is = 1,000,000/10000
= $100
In the current year, Burger Joint made a profit of $100,000.
Therefore the earnings made per share is:
EPS = Net income of the company/ Total No. of shares
= $100,000/10,000
= $10
George decided to retain a part of its profit for future growth and expansion. Thus, 60% of the profit was taken out while the other 40% was retained (invested back in company).
Profit distributed to owners is called a dividend.
Divident = 60% of $100000 = $60000.
Retained earnings are the profit re-invested in the company for growth and expansion.
Retained earnings = 40% of $100000
=$40000
George invested $100,000 initially in the company. Profit made in the current year was $100,000.
ROI is a financial ratio that uses net profit and the initial investment to determine the profitability of your company.
ROI = (Net Profit / Cost of Investment) x 100
= (100000/100000) X 100
= 100%