You paid off of the loan's principal this year (cash leaving your pocket).
However, the bank gave you a new mini-loan of to help buy the pastry case (cash entering your pocket). FCFE.zip
Included in your expenses was for the wear and tear on your espresso machines (depreciation). You didn't actually write a check for $10,000 this year; it is just an accounting entry. Because that cash is still in your bank account, you add it back [1, 4]. Running Total: $110,000 3. Reinvesting in the Business: Capex You paid off of the loan's principal this
At the end of the year, your accountant tells you the shop made in net profit after paying for coffee beans, employee wages, rent, and taxes. 2. The Paper Expense: Depreciation You didn't actually write a check for $10,000
You also realized you needed to keep more milk, cups, and pastries in stock to meet demand, which tied up an extra of your cash in inventory (Working Capital). Because that cash is trapped in the business, you subtract it [1, 4]. Running Total: $85,000 5. The Debt Factor: Net Borrowing Finally, you have a bank loan for the business.