It turns out that I've read enough and written enough financial software that I actually can grasp the big picture here from all the details. And I figured that, given some questions I've heard from friends and the current fiscal crisis, I should put fingers to keyboard and write a little about how it all fits together. I'm not going to write about how you should make money... I'm just going to explain where things come from and how the big pieces of the system work.

The goal is that I'll go from the basics of business that everybody ought to know so that I can then give a brief explanation of the really exotic stuff out there and you'll grasp the basics. You should also be able to understand why just about every book in the personal finance section of your local bookstore or library (All those Rich Dad, Broke Cousin and How To Make A Million Bucks In A Week) are pure and unadulterated bullshit.

The problem, of course, is that I can't bring you to exciting stories and sophisticated investment strategies without giving some room for the basics, so we're starting slow and simple.

The first thing you need to understand is that finance is a fuzzy sort of thing and very rarely a hard science. You can't put a cash value on work ethic or good feelings or the possibility that a person might think up something brilliant. There are a lot of numbers that people just make educated guesses on instead of finding a precise value.

I think the best place to start my explanation is a company. See, a company has a pile of money and some income and some expenses. It's got employees, but it really doesn't matter how many of them there are.

Now, if you want to make money, you need to have money or something that might as well be money. Even if it's something abstract like a song or poem or piece of software. If I write a song on a dirt floor with a stick, I'm not spending money, but I also must eat. So a song may be worth a bowl of fried rice and a nice smoothie, plus some shelter over my head instead of cash... but today it would cost most folks real money to get that bowl of fried rice, the smoothie, and the shelter. Now, I can only write songs so quickly. And it probably doesn't matter too much if I have fried rice and a smoothie or prime rib because the prime rib is just going to give me writer's block and my music will start to suck because I'm not a tortured artist anymore. So let's talk about soap. A basic industrial product. If I'm making soap, I can spend more money to make soap faster by purchasing machines. I can stockpile soap for the famous mud wrestling season. Things like that.

Now, I could be making soap or guitars or even fancy leather jackets, but everything reduces down to the cash cycle. It's just an engine. Same as the engine in your car, except it doesn't burn gas. With the cash cycle, I put in ten bucks and when the cycle is done, I've got twenty.

The cash cycle has two properties. The easiest point to see is how much money I get out of it for each buck I put in. But you also need to consider how long it takes to cycle. If I put in ten bucks every day, I'll get twenty bucks out every day once it starts going. But how long does it take for me to get back my initial ten bucks plus the ten bucks the cash cycle "made"?

So, say I want to make more money. Your first inclination will probably be to put in more money at the beginning... So if I put in a hundred instead of ten, I'll end up with two hundred instead of twenty. But that's not the only way. I can also figure out how to make the cycle net thirty at the end.

But even better is to figure out how to shorten the cash cycle. So if I make the cycle run in one day instead of ten, I can make ten times as much money. The thing is, the time value of money is important. If I don't have the money to make another batch of soap, I'm not making any money. In fact, I can even have a business model based on sitting on money for a period of time but offering some service.

So, in theory, you could build a business solely starting from some fat and lye. But it turns out that it's faster to use other people's money and, on a large scale, better for the whole economy. So we'll talk about that next.