To understand Corporate finance basics you need to know and understand:
Assets = Liabilities + Equity.
This is the fundamental equation that all Corporations are based on. The dictionary describes a Corporation as, “company or group of people authorized to act as a single entity (legally a person) and recognized as such in law.” With that being said the corporation, business, or organization is responsible to all corporate shareholders. It is necessary to prepare a report at a predetermined time, (monthly, quarterly or yearly) on the financial condition of the company to the shareholders using this formula. The CEO, Corporate Executive Officer, is responsible to facilitate the preparation of this reporting along with the Board of Directors.
What are liabilities? To keep it simple, liabilities are money you owe, or in accounting terms, accounts payable. What are your monthly bills? Do you have a loan that was needed for start-up or equipment? Do you have a credit line for your monthly purchases? Wages, salary, and state, federal and local taxes are also in the category of a liability.
What is Equity? Corporate Equity represents the value of the company stock. Equity is usually raised from the initial sale of stock and the shares are represented in value owned by the shareholders. As the company grows the value of the stock shares rise. That is why good financial reporting is necessary.
What are Assets? Everything you use to operate your business is an asset. It is important to utilize a monthly or quarterly inventory report to accurately assess what the assets are. Usually the initial start-up costs are financed by stock sales. As the business grows loans for additional purchases may be obtained as long as the business can support the cost. This loan would then be listed as an account payable.
Fiscal reporting and Corporate finance basics help to relate the value of the company to stockholders and give a realistic picture of the company’s overall health. If the value of the company starts to fall, decisions by the CEO and Board of Directors to help steer the company in a different direction is very important. Responsible reporting can mean the success or failure of your company.