Been one year in MBA program and now I feel that I don’t need it any more.
But it was not like that an year ago. The mere mention of ‘finance’ used to scare the shit out of me. I am sure there are quite a few like me out there and hence, this post trying to explain most basic of financial tool in simplistic way.
Reason? This July we got our junior batch (SOM 12) inducted in the program. A few of them read the blogs here and a fewer of those few asked why I don’t write often. So I thought to write something that would be helpful along with being interesting. (I hope I do justice) 😛
I remember how difficult it was for me, coming from computer science background, to understand balance sheet in my first term. I never could figure out what is asset and what is a liability. So here is an effort to make you understand balance sheet fundamentals through a more basic and common analogy, “Balance Sheet of Love Life”.
First, let’s go through the basics of a balance sheet.
The hardest thing about Balance sheet is deciphering its vocabulary. It is important to understand the three main sections on the balance sheet.
Assets: They are the things that you have that are of value to your business. These are the resources that you use to generate earnings. Examples are chairs, a barn, an instrument, land, a factory, and inventory.
Liabilities: can be thought of as obligations. Liabilities are not a bad thing, but if you have too many, you run the risk of going broke or having your resources tied up. Money that is owed to outsiders and lending institutions is categorized here.
Equity: a measurement of the resources that you borrow from outsiders, and resources you have generated and kept in the business. It also includes the value of your shares at the price on which they were issued and not what it is today.
Now keeping these definitions in mind, lets try and make things simpler to understand by taking analogy of our ‘Love Life’. Presented below is the Balance Sheet of Love Life.
|Long Term Liabilities|
On similar grounds, the Market Value of your Love Life would be the ‘current’ perceived hotness (of your gf) or smartness (of your bf) by your friends.
As always in balance sheet, the sum total of Assets should be equal to that of Liabilities. In case of Love Life, you have a great relationship if Assets = Liabilities and if not, well you can figure it out yourself 🙂
In case you like it or have any thoughts to improve it, please leave a comment.
PS: Now don’t come running to me in case you don’t understand Cash Flows 😀