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(a) From The Money Which We Initially Put In The Tank. This
(a) From the money which we initially put in the tank. This is usually in the form of shares, and in the jargon called 'the equity'. (b) We can borrow money on a short-term basis, overdrafts, etc: these are usually on call at the lender's discretion for a period which is less than one year and a day. (c) We can borrow money on a long-term basis - debentures, etc: these are usually against some form of tangible asset and cannot be called in within a period of less than a year and a day.
Balance sheet. So we have this tank of cash. There are two main plumbing circuits linked to the tank. The first is modelled in a company's balance sheet: it has three main outlets for cash from the tank which must be carefully controlled.
(a) An outlet which takes cash and invests in plant, equipment, buildings, etc: those items provide a base from which the organisation operates and are called capital items. They are not bought to be re-sold as part of the company's normal trading activities.
Again, in the jargon, these will remain, owned and used by the company for at least a year and a day. (b) Another outlet through which cash disappears and cannot directly again become available for trading use by the company is payment of interest on loans and shares. If a company fails to use effectively moneys which it has been loaned and so defaults on its promises of returns for the lenders, these soon lose confidence and will want their original loans or investment returned, to be put to use elsewhere, i.e.
with those who will manage their affairs better. (c) The third outlet through which cash will disappear can rouse strong emotions - the taxes which governments levy on companies' fictionally assessed 'profits'. (Personally, because tax has become such an emotive word, I prefer to speak of the licence fee which society charges an individual, or company, to be involved in and carry on the business of his choice. In my opinion, society has every right to levy such a licence fee; nevertheless I feel that perhaps the fee is too high. Don't we all) Those three outlets are shown in the balance sheet as historical information about money received and how much and on what fixed (capital) assets some of this has been spent.
(Strictly speaking, by law, this is all a vendor of a business is required to disclose to a buyer. We will come back to this shortly.) The Trading Cycle. Now let us look at the second plumbing circuit and how cash flows through this.