- All right, let's imagine that we want to buy this building
and convert it into a large ice cream production facility.
Now how much do you think it would cost
to get our ice cream business up and running?
- Well, if we want to do this right,
buying the land, building, equipment,
and initial stock of raw materials?
That's going to cost us about $100 million.
- See, I can see it in my mind's eye,
the gleaming stainless steel mixing vats,
the happy employees wearing white clothes, white shoes,
white caps to emphasize the cleanliness of the facility.
The huge freezer storage rooms
stacked with delicious ice cream.
- Yeah, yeah, that's a great vision, but back to reality.
Where would we get $100 million in financing
to make this happen?
- [Man With Glasses] If we want to buy $100 million
in ice cream production assets, then we need $100 million
in money from somewhere to buy them.
- The reality is that if we want to go
from small-size business people to medium-size
business people with assets of $100 million,
we're almost certainly going to have to raise
a lot of financing from strangers.
- Wait, wait, strangers?
- Yup, strangers, a bank, or a group of banks,
venture capitalists who are free-lance investors
willing to take a risk on a growing business
in exchange for part ownership.
- Well, we might even consider going public.
To go public in the United States,
you must file a business plan, called a prospectus,
with the Securities and Exchange Commission, the SEC.
- That's correct.
Once approved by the SEC, you can issue ownership shares
to anyone in the world.
In essence, anyone in the world can now become
your business partner by buying shares in your corporation.
- [Man With Glasses] Now corporation is merely a collection
of hundreds, thousands, or millions of individuals
who each own a portion of the company.
- Well, that brings us back to financial records.
We must provide potential investors,
most of them complete strangers to us,
with summary financial statements to give them
a concrete idea of what they would be investing in
if they invested in our ice cream company.
- [Man With Glasses] Right, a key point here
is that new businesses cannot get financing
in a reasonable way without financial statements.
In short, financial statements are essential
to the functioning of our modern economy
in which we don't raise capital from friends and family,
but instead, we are typically raising it from strangers.
- Reliable financial reports are what make it possible
to turn the dreams of entrepreneurs into the reality
of actual businesses.
- See, I like that.
Financial reports turn dreams into reality.
- So bookkeeping is not just an amusing exercise
in encoding business transactions
into debit and credit language.
- No, no, no.
Bookkeeping leads to financial statements,
which make it possible for entrepreneurs
to giving strangers to provide the financing
to turn their entrepreneurial dreams into reality.