The 4 Types of Money
When you’re first starting to learn about money management in your business, it’s useful to step back and understand that there’s really only four types of money that we look at:
‘Things and stuff’ that you own, which you could sell to someone else because it has some value to them.
Money that you owe to someone else, such as a bank loan.
We find our assets and liabilities on our balance sheet. A balance sheet is a snapshot of your business in a point in time.
Assets minus liabilities gives us our net worth or equity, which is the true value of what you are worth.
Money coming into your business as a result of you conducting your business, e.g. crop sales, sheep sales etc.
Costs are split up into a few different categories. They are direct costs, overhead costs, finance costs, tax and capital expenditure.
Income and costs are found on the profit & loss statement, which is like a video that shows you going from point A to point B, and all the money which came in and went out through that period of time, taking you through to your closing balance sheet.
So, if you’re getting confused and wondering where to go and find information, ask yourself first and foremost, ‘is it an asset, liability, income or cost?’. If it’s an asset or liability, you know you’ll need to go to your balance sheet to find out the value of those. If it’s an income or cost, go to your profit & loss statement, and there you’ll be able to find how much money came in or went out for each of those incomes or costs.
The faster you can get to this, the more in-control of your business you’ll be.
Watch more handy videos in the RCS Toolkit Series, such as this one!