A business is a loop
Morrow Bikes is a small repair workshop. It buys parts, rents a shop, pays two mechanics and fixes bicycles for people who would rather not. That is the whole business. It is also the whole of finance, once you learn to watch it properly.
Every business is a loop that turns money into more money, or less. Owners and a lender put money in. The shop spends it on parts, rent and wages. Customers get their bikes back and promise to pay. The promises turn into cash. Whatever is left goes around again, or goes back out to the lender, the tax office and the owners.
- Raiseowners and lenders put money in
- Buymoney becomes people, stock and machines
- Sellcustomers promise to pay
- Collectpromises become cash
- Returnreinvest, repay, pay tax, distribute
Accounting writes down what happened to the money at each turn of the loop. Finance decides what to do with it next: how to fund the shop, how much risk to carry, whether the next bike lift is worth buying. The two overlap constantly, but they answer different questions. A perfectly recorded ledger cannot tell you whether the lift was a good idea.
Follow one repair
A customer pays $120 for a completed repair. The mechanic used $35 of parts and $45 of paid time. That leaves $40 to cover rent, the front desk and, eventually, profit.
Four words carry this lesson, and the whole course. Revenue is what the business earned by selling. Expense is what it used up to earn it. Profit is revenue minus expense over a period. Cash is what sits in the bank at an instant. Profit is a story about a period; cash is a balance on a date. Keep the four apart and most of finance stops being confusing.
Four questions before any number
Different businesses run the loop differently, so the same number can mean different things in different businesses. Before reading any figure, ask: Who is the customer? What is being sold? When is the sale earned? When is the cash collected?
- Sells a repair
- Earned when the bike is fixed
- Cash on pickup or weeks later
- Sells a year of service
- Earned month by month
- Cash collected up front
- Sells goods at the till
- Earned at the checkout
- Cash immediately, suppliers paid later
A subscription app collects cash a year before it finishes earning it. A supermarket collects cash from shoppers weeks before it pays its suppliers. Both can look rich or poor depending on which clock you read. That is the second of the five questions this course keeps asking: which clock?
Morrow finishes a $300 repair in March and the customer pays in April. Which statement is precise?