Understanding How Cash Flows in a Business
This chapter is designed to enable those with less direct experience of the operation of businesses to grasp the fundamental financial and economic logic that governs how successful businesses operate. It represents the starting point for our journey through the landscape of cash flow analysis. In order to gain benefit from this chapter no prior knowledge of either cash flow or business is required.
We start our journey by developing a model of how the cash flows in a simple business work. We then develop our knowledge of cash flows by incrementally adding complexity to this model.
Whilst developing this model based on the cash flows of a business we also introduce some fundamental logic about what different types of business must do in order to be successful.
THERE IS NOTHING NEW ABOUT BUSINESS
Humans have been engaging in trade for thousands of years, initially through some sort of barter process. Archaeologists have discovered ancient manufactured goods such as pottery and metal objects that have travelled vast distances from their point of manufacture. There are numerous examples of early Greek and Roman shipwrecks being discovered in many different parts of the Mediterranean dating back 2000 years or more. In the 1960s evidence was finally discovered that proved that the Vikings were the first Europeans to discover America some 500 years before Columbus. The remains of a Norse settlement at L’Anse aux Meadows on the ...