HOW FUNDS FLOW THROUGH BUSINESS
We can say that money or funds are used for purchasing assets, paying operating costs and producing the income. The operating costs are the day-to-day expenses of running your business including the cost of materials and supplies. The producer should also pay the employees' salary, rent, insurance, basic advertising, property taxes, and license fees. These are the fixed costs. There also exist variable costs which fluctuate according to the volume of business and include salesperson commissions, shipping and delivery expenses and so on. The cost of goods sold is going to increase when you are busy and decrease when your business is slow.
Many small enterprises prefer to operate on the cash basis obtaining no credit and borrowing no money. Larger enterprises prefer to use credits. The enterprises may use this money for buying assets such as land, buildings, equipment, tools and machines. They are sometimes bought with mortgage loans which are secured by the building or equipment itself. So we can say that the lender (a bank, a finance company, or insurance company) really owns the property until the entrepreneur has paid mortgage in full. If the debt or credit is used, it increases both assets and the income purchaser. The use of the borrowed money to make more money is called leverage.
One more point to keep in mind is the cash reserve. If the entrepreneur is sure in the availability of cash at any time he wishes he will need no cash reserve. But unfortunately it happens very seldom. The entrepreneur almost always needs a reserve supply of cash, that’s why management problems usually arise. Idle cash earns no profit and declines in value. It is called inflation. Cash should be used for producing the income and profit. If the manager has got some idle cash it should be invested into some financial institutions to draw the interest. Sometimes the enterprises with excess funds will buy securities from one of the exchanges and let them earn the income and profit until the enterprise needs funds itself. Securities are documents that represent the right to receive funds in the future. The person or the organization that holds the security is called a bearer. The security certifies that the bearer has a claim to future funds. Securities have the value because the bearer has the right to be paid the amount specified. So the entrepreneur if he needs the money right away can sell the securities to someone else for cash to get the funds. The name of these securities is near money.
Exercise 3. Read the text once again and find key words in every passage.
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