Business Fundamentals Explained - How Businesses Make & Record Money
Understanding How Every Business Operates, Earns, and Keeps the Financial System Alive - Divyesh Dave
Everyone says they know how businesses run. When I first began my accounting career, I used to think business was all about “buying and selling.”
But once I started working closely with entrepreneurs, I realized that business is not just about money, it’s about value creation.
Money is the result.
But the process that creates it, the systems, the people, the ideas, the decisions, that’s what keeps a business alive.
In this blog, let’s explore how businesses truly make and record money, the fundamentals every accountant, finance professional, and aspiring entrepreneur must understand.
What is a Business?
A business is a system that solves problems for others in exchange for money.
It could be as small as a home-based bakery or as large as a multinational bank, but the logic is the same:
Create value, Deliver it effectively, and Manage it wisely.
Every business runs with one simple goal:
👉 To earn more money than it spends, while continuously improving the way it operates. and the ultimate goal is “EARN PROFIT” on money invested.
Understanding this helps accountants go beyond data entry, it gives you the bigger picture behind every transaction you record.
🧩 The Three Types of Businesses
Now we also need to understand what types of businesses there are because not all businesses make money the same way.
Let’s break them down into three simple types. Each one creates value differently and records money differently, too.
1. Product-Based Businesses
A product business sells physical or tangible goods, things you can touch, hold, or store.
Examples include manufacturers, retailers, wholesalers, and e-commerce sellers.
When a product business makes money, the process usually starts with buying or producing goods, storing them as inventory, and then selling them to customers at a higher price.
Here, accounting tracks cost of goods sold (COGS), inventory valuation, and sales revenue.
When goods are sold, accountants record:
Debit Cash/Receivable,
Credit Sales Revenue
and at the same time, record
Debit COGS
Credit Inventory.
That’s how the profit from every product sale is measured and monitored.
A product business must also manage logistics, warehousing, supplier payments, and customer collections, all of which flow through accounting records daily.
2. Service-Based Businesses
A service business earns money by providing expertise, skills, or time, not tangible goods.
Examples include accounting firms, car cleaning services, salons, law firms, or consultants.
Here, value is delivered through work done rather than physical items. Basically, providing services.
Revenue is recognized when the service is performed, even if payment is received later.
Accountants ensure accuracy by recording:
Debit Accounts Receivable
Credit Service Revenue.
Unlike product businesses, there’s no inventory. Instead, tracking time, project costs, and employee hours becomes crucial.
A service business makes money through quality, trust, and speed of delivery, the more value it adds per hour, the higher the income.
3. Information-Based Businesses
Information-based businesses make money from knowledge, data, or intellectual property.
Think of online courses, subscription models, content creators, or software developers. Freelancing can be considered in service or information-based, depending on the product.
Here, the main product is information, which can be delivered repeatedly at almost no extra cost.
Revenue can come from subscriptions, licensing, or advertising.
Accountants record:
Debit Cash/Receivable
Credit Subscription Revenue
(and if payment covers future months, defer part as unearned revenue).
This model relies heavily on digital infrastructure and clear revenue recognition policies under IFRS 15 or ASC 606.
These businesses scale faster but require careful accounting for intangible assets like software, trademarks, and goodwill.
Six Core Areas of Every Business
Do you know what are the major areas of business? Let’s find out.
Every business, no matter the type, runs on six core functions.
Think of them as six departments working together like organs in the same body.
1. Operations and Administration
Operations are where products are made or services delivered.
Administration supports operations, managing logistics, paperwork, scheduling, and vendor coordination.
Together, they produce most of the business transactions: purchases, salaries, utilities, and overheads.
Efficient operations reduce cost per unit and improve profitability, something accountants measure through margin analysis.
2. Legal and Compliance
This area ensures the business follows laws, pays taxes, and operates ethically. It covers contracts, licenses, and statutory filings. We can say all types of compliance.
For accountants, it means ensuring records align with regulations, maintaining VAT returns, corporate tax returns, statutory books, and timely audits.
Compliance protects the business from fines and builds trust with investors and authorities.
3. Accounting and Finance
This is the brain of the business, where every transaction is recorded, measured, and analyzed. Here we as Accountants help businesses to present the right pictures with financial statements.
What accounting and finances do is not easy to explain in a simple small blog. But count it as Accounting records history; finance plans the future.
Together, they provide answers:
How much did we earn?
What’s our profit margin?
Do we have enough cash to expand?
Without this function, business is like driving blindfolded, you’re moving, but you don’t know where you’re headed.
I hope you now understand the importance of us as accountants in an organisation.
4. Human Resources and Payroll
Every business depends on people. HR ensures the right talent is hired, trained, and rewarded.
Payroll converts employee time into structured financial costs.
For accountants, HR means handling salary accounting, benefits, and statutory contributions.
It reminds us that numbers are powered by people.
5. Information Technology and Databases
Data is the new oil, you might have heard this, and IT keeps it flowing safely.
Every accounting entry today passes through software, from QuickBooks to ERP systems to Networking of computers in premises.
IT ensures these systems run securely and accurately.
As an accountant, understanding database flow helps detect errors, prevent fraud, and ensure data integrity.
6. Sales and Marketing
No business survives without customers. That is why sales is a lifeline of a business. Without sales, no business can survive, and that is why salespeople are paid so highly across the globe, because this is the area brings real money into the business.
Sales and marketing bring in revenue through strategy, communication, and relationships.
For accountants, these functions generate the most exciting entries:
Sales Revenue, Accounts Receivable, Advertising Expense, and Commissions.
A good relationship between finance and sales ensures accurate forecasts, healthy cash flow, and timely collections.
🧭 The Business Process - From Idea to Impact
So you might be thinking, now you know the areas, how exactly does business start and run? So let’s dig into that.
Every business, big or small, begins with an idea and evolves through a series of practical steps. which starts with an idea and continues with innovation and improvement. It never stops.
Here are few steps, which I must share with you: -
1. The Idea
An idea is the birth of any business. Every successful business starts with a spark, a thought about doing something better.
It could come from personal frustration, observation, or opportunity.
For example, Tim noticed car owners wasting hours in queues for cleaning, that frustration became his idea for Speedo Car Cleaning.
2. Identifying a Problem
Businesses succeed when they solve real problems.
The sharper the problem, the clearer the solution.
Tim solved “lack of time and convenience”, a problem millions relate to.
3. Creating the Product or Service
Once the problem is identified, the next step is building a solution, a product, a service, or a platform.
Here, costs begin, including development, materials, setup, staff, rent, and marketing.
Accountants record these as assets, inventory, or expenses depending on nature and duration.
4. Pricing the Offer
Now we price the products for which we can sell our products as solution to the problem that we identified.
Price decides sustainability. It should cover cost, reflect value, and compete smartly.
Accountants help calculate the break-even point and expected profit margins.
Pricing too low risks loss; pricing too high risks losing customers.
5. Selling and Delivering
Now comes the real action, selling the product or delivering the service. Here, comes the Rocket Singh, salesman of the year. Ha Ha Ha. Anyways. let;s come to the point.
Each sale generates two things:
Revenue for the business,
Responsibility to deliver value to the customer.
Accountants record both with accuracy, ensuring financial reports show true performance.
6. Reviewing and Improving
Once sales are done, businesses analyze results.
They compare targets with actuals, measure costs, and refine strategies.
Continuous improvement turns survival into success.
Accountants contribute by preparing management reports, variance analysis, and KPIs, helping leaders make informed decisions.
How Businesses Make and Record Money
Now that we’ve seen how a business runs, so it’s time to connect it to the heart of accounting, money flow and recording.
Every business makes money by creating value and exchanging it for payment. But the moment money is earned, accounting ensures that it is measured, matched, and reported correctly.
Let’s understand this in both stages, how money is made and how it is recorded.
How Businesses Make Money
Creating Value – Every rupee starts with a problem solved. Whether it’s selling a product, providing a service, or sharing information, the business earns when the customer feels they’ve received more value than they paid for.
Delivering Value Efficiently – Businesses make more money when they deliver faster, better, or cheaper than competitors. This efficiency converts effort into profit.
Retaining Value – Smart businesses don’t just earn; they retain profits by reducing waste, improving systems, and reinvesting in growth.
The difference between income and value creation is timing, accounting captures value when it’s realized, not when imagined.
📘 How Businesses Record Money
We as Accountants, help businesses to record money, and we take Financial transactions as a basis.
Recording money is where accountants turn business reality into financial clarity. for example: -
When a sale happens, we record two sides:
The inflow (cash or receivable)
The outflow or expense that made it possible
For example, when Tim cleans a car for ₹500, the accounting entries are:
Debit Cash ₹500 (Asset increases)
Credit Service Revenue ₹500 (Income increases)
If he used cleaning supplies worth ₹100:
Debit Cleaning Expense ₹100 (Expense increases)
Credit Inventory ₹100 (Asset decreases)
These simple entries capture the entire life of a transaction, from value creation to financial reflection.
In the same way, every purchase, salary, loan, or tax payment follows this dual recording principle, ensuring the books always balance and the business always knows where it stands.
That’s how businesses make and record money, one real-world action at a time, one double entry at a time.
Few Business Practices That Strengthen Financial Health
A financially healthy business is like a well-trained athlete, consistent, disciplined, and resilient.
It’s not about short bursts of profit, but long-term strength and balance.
Here are five powerful business practices that can help every entrepreneur, manager, and accountant build a stronger foundation.
1. Keep Cash Flow Under Control
Profit is a theory. Cash is reality.
A company can show a healthy profit on its income statement but still struggle to pay salaries, rent, or suppliers. That’s because profit is recorded when income is earned, not when cash is received.
Cash flow management means monitoring the actual movement of money, when it comes in, when it goes out, and how much stays in hand at the end of the day.
Smart businesses forecast their cash needs in advance. They know which clients pay late, which expenses are fixed, and where they can tighten spending temporarily.
For accountants, maintaining cash flow reports and reconciling bank balances regularly helps management make confident decisions.
A steady cash flow is the heartbeat of a business, if it stops, everything else fails.
2. Review Your Cost Structure Often
Costs are like silent termites, small, invisible, but dangerous if ignored.
Many businesses lose money not because of low sales but because of unnoticed expenses.
Regular cost review means analyzing every rupee spent, rent, materials, salaries, marketing, and checking whether each cost is truly adding value.
Sometimes, a small tweak in supplier pricing or renegotiating payment terms can improve margins instantly.
In other cases, identifying redundant subscriptions or unnecessary administrative costs can save significant amounts.
For accountants, cost analysis isn’t just about bookkeeping, it’s about storytelling.
When you explain why costs are rising and how to reduce them, you become a business partner, not just a record keeper.
3. Comply Before You Expand
In the rush to grow, many businesses skip compliance until a penalty or audit notice arrives.
But compliance is not a burden; it’s a safety net.
Before expanding into new markets or taking on new investors, ensure that all licenses, taxes, and statutory reports are up to date.
Strong compliance builds trust with banks, auditors, and partners, making it easier to access funding or close big deals.
Accountants play a critical role here: maintaining accurate records, ensuring VAT/GST filings, verifying contracts, and following IFRS or GAAP standards.
Compliance doesn’t slow down growth, it protects it. A business built on clean records can scale confidently without fear of future surprises.
4. Invest in People and Systems
Behind every successful company, there’s a combination of skilled people and efficient systems.
People bring ideas, relationships, and energy. Systems ensure consistency, discipline, and accuracy.
Both are essential, one without the other creates an imbalance.
Businesses that train employees regularly and invest in better tools, accounting software, CRM, ERP systems, or automation end up saving time, reducing errors, and boosting morale.
From an accountant’s view, investing in systems means faster reporting, better data accuracy, and easier audits.
Investing in people means fewer mistakes, improved productivity, and a culture that values learning.
Remember: software without training is wasted, and training without structure is forgotten. Combine both, and you’ll see lasting growth.
5. Measure Performance Monthly
You can’t improve what you don’t measure.
Waiting till year-end to know profits is like driving blindfolded and checking the map after the journey.
Successful businesses measure performance every month, sales trends, expense ratios, profit margins, and cash flow movement.
Accountants should prepare monthly management reports, not just financial statements. These reports highlight whether the company is moving toward or away from its goals.
When business owners see real numbers regularly, they make better decisions, whether to expand, hire, or cut costs.
Consistency in reporting builds clarity, and clarity leads to control.
A monthly financial review isn’t an accounting ritual, it’s a strategic habit that turns chaos into confidence.
Quick Question for You
Now I would like to ask, If you had to start a business tomorrow, which one would you choose, Product, Service, or Information-based, and why?
Please share your reply in the comments section below.
Here’s my Final Thoughts
See, Business is not just about making money, it’s about understanding how money moves. Just like we as individuals invest money in shares (Stock) of other companies, an investor puts his money into a business to earn returns. It is as simple as this.
When you see both sides, how value is created and how it’s recorded, you stop being just an accountant and start becoming a business thinker.
That’s what the best finance professionals do, they don’t just close books; they open possibilities.
So I hope this blog helped you to enhance your business acumen a little bit. If yes, please share this with your friends and colleagues. And,
👉 If you want to keep learning real-world accounting and business fundamentals step by step, join The Accountant Hub VIP Group today.
Keep Learning, Keep Growing 1% better every day.
Divyesh Dave