This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
It is popularly supposed that many difficulties are encountered in solving the problems of business finance. One writer even has defined the science of business finance as "the modern black art," as if it were something mysterious and uncanny. Yet, whatever may be said of the difficulties pertaining to actual practice, the essential principles of business finance are simple and can be readily understood by anyone. This can be illustrated by the close analogy existing between the financial problems of the business enterprise and the financial problems encountered by the ordinary individual in his daily life.
The individual possesses both tangible and intangible assets. He has money, tools, land, and other material things. Also, he possesses health, skill, knowledge, and other assets that are intangible. Business divides its assets into things tangible and intangible in the same way; its plant, equipment, stock, and cash being tangible assets; while its good-will, trade name, patents, and copyrights are intangible assets.
The individual has his capital and his income and from these he must take his expenditures: first, to keep himself in condition to do business; second, to increase his productive and consequently his earning power; third, to reserve a portion of his income. He knows the laws of thrift and prudence, and knows that if he will obey them he will prosper.
It will be shown that precisely the same kind of wisdom and foresight is required to invest properly the capital and income of a great business so that it shall continue to grow and prosper and shall not be short of funds and credit should an evil day unfortunately come. The business, great or small, that does not keep its expenditures within its income is as certain to come to grief as the individual who spends more than he earns.
An individual should, from time to time, take an inventory of his resources and liabilities, physical, intellectual, and spiritual as well as material, and thus determine whether he is becoming richer or poorer. In like manner, every business should, at regular intervals, take an inventory, balance all accounts, subtract losses and add gains, and thus ascertain whether it is gaining ground or falling behind.