Balancing your cheque book

If you have a healthy business that is entirely cash based and you do not spend any money on fixed or long-term assets, your net profit is your cash surplus for the period. Your balance sheet will show cash in the bank balanced by owner's equity. Ah, but you probably owe taxes that should show as a liability (reducing owner's equity by the same amount).

Unfortunately, life is never this simple. You spend money on things that do not relate to the current period (fixed assets, prepaid rents) and extend credit to your customers. These build up the asset side of the balance sheet. At the same time, you finance this by credit from your suppliers and loans from various sources. Your profits no longer equal cash flow. However, ...

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