The three basic components that make up every company

Julie Brownlee, Fsp Invest, 14 May. 2014

Tags: company, business, financial statements, components, profit and loss, cash flow statement, balance sheet, profitability, cash flow, assets,

Think about all the companies in the world. There must be millions of them. These companies are all doing different things. Yet, in spite of this, you can break down each investor into three basic components. So how does this work? And what does this mean to you as an investor? Let’s take a closer look…

Each business contains three essential parts

Let’s kick off with an example to show you the main components of a business…

Your best friend Mary asks you to invest in her furniture shop. Before you make any decisions, what should you look at? You need to be able to value the business.

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Firstly, you want to check that Mary is selling her furniture at a profit, Tim Bennett in Money Week explains. She needs to sell them at a price that covers all her costs, including buying the furniture from the supplier and the running costs of the shop.

Secondly, you need to look at cash flow in the business. Does Mary sell any of her furniture on credit? This tactic may help her sell more furniture, but she could hit tough times because of this too. If Mary has to pay her suppliers before she gets the cash from her customers, she may run out of cash.

Thirdly, you need to look at the value of the assets themselves. If the company did go bust, how much could all the parts of the business sell for? What is the value of the premises? What is the value of the current stock of furniture?

These three parts are all crucial components of any business. Essentially they are:
  • Profitability;
  • Cash flow; and
  • Assets.
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The vital parts of a company’s financial statements

And this explains the arrangement of the financial statements of a company. You’ll find each of these components in the following part of the financial statements:
  • The profit and loss account;
  • The cash flow statement; and
  • The balance sheet.

If you want to look at any of the three main components of a business, you now know where to find them.

So there you have it, the three basic components that make up every company.

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