Presentation on theme: "EP Entrepreneurship Financials"— Presentation transcript:
1 EP2150 - Entrepreneurship Financials Sources of Financing for a small businessDistinguish between Debt and Equity FinancingDescribe the importance of financial statements for small businessExplain the differences between financial statements for big business and small businessExplain how the balance sheet, income statement and cash flow statement are constructedCreate a balance sheet, income statement, and statement of cash flow for a small businessConstruct a projected income statement for a small business
2 How will you finance your business? Sources of FinancingHow will you finance your business?Personal savingsCredit fromsuppliersLoans and mortgagesfrom banks, creditunions and othersGovernmentassistance programsLovemoneyEquity capitalfrom privatesourcesLeasingFriends andneighboursLocal professionalsand angelinvestorsPrepare loan or grantrequest packageEmployeesVenturecapitalists
3 Debt vs. Equity Financing Advantages of Debt FinancingUseful for meeting a short-term deficit in cash flowDo not have to give up or share control of your businessThe term of the debt is generally limitedMay be acquired from a variety of lendersInformation needed to obtain a loan is generally straightforward and part of your business planThe interest paid is tax-deductible
4 Debt vs. Equity Financing (Continued) Disadvantages of Debt FinancingCan be difficult to obtain for a risky projectTaking on too much debt can be a burden on your cash flowsIf the funds aren’t used properly, it may be difficult for the business to repay the loanIf it is a “demand” loan, it can be called by the lender at any timeThe lender may require you to provide a personal guarantee for the loanLenders will often insist on certain restrictions being put into place
5 Debt vs. Equity Financing (Continued) Advantages of Equity FinancingAn appropriate investor can contribute expertise, contacts, and new business as well as moneyEquity may be the only option to finance high-risk venturesEquity can be used to fund larger projects with longer time frames
6 Debt vs. Equity Finacing (Continued) Disadvantages of Equity FinancingYou may have to give up some ownership and control of the businessThere is always the danger of incompatibility and disagreement among the investorsIt is much more difficult to terminate the relationship in disagreements occur
7 Major Sources of Funds Personal Funds “Love Money” Banks and Similar InstitutionsOperating Loans (Line of Credit)Term LoansFederal GovernmentCanada Small Business Financing Program (CSBFA)Industrial Research Assistance Program (IRAP)Community Futures Development Corporations (CFDC)Women’s Enterprise Initiative Loan ProgramAboriginal Business Canada – Youth EntrepreneurshipBusiness Development Bank of Canada (BDC)Continued
8 Major Sources of Funds cont… Provincial Government ProgramsVenture Capital and “Angel” InvestorsOther Sources of Financing (Bootstrapping)Personal Credit CardsCanadian Youth Business FoundationSuppliers’ Trade Credit and Inventory Buying PlansLeasing vs. BuyingNegotiated Leasehold ImprovementsAdvance Payment from Customers
9 Dealing with banks Don’t “tell” your banker, “show” her Know what your banker is looking forDon’t “tell” your banker, “show” herInterview your bankerPassion makes perfectAsk for more money than you needGet your banker involved in your businessIncrease your credit when you don’t need it
11 Sample Pro Forma Income Statement TOUGH GUYS SPORTING GOODSPRO FORMA INCOME STATEMENTFor the year ending [date]Net sales $833,333 (A)Less: Cost of goods sold:Beginning inventory $220,000Plus: Net purchases 555,647Goods available for sale $775,647Less: Ending inventory ,481Cost of goods sold ,166 (B)Gross margin $289,167 (C)Operating expenses ,167 (D)Net Profit (Loss) Before Income Tax $ 15,000 (E)
12 Completed Pro Forma Income Statement TOUGH GUYS SPORTING GOODSPRO FORMA INCOME STATEMENTFor the Year (date)1. Gross Sales $833,3332. Less: Cash DiscountsA. NET SALES 833,333Cost of Goods Sold:3. Beginning Inventory $220,0004. Plus: Net Purchases 555,6475. Total Available for Sale $775,6476. Less: Ending Inventory 231,481B. COST OF GOODS SOLD $544,166C. GROSS MARGIN $289,167Less: Variable Expenses7. Owner’s Salary 40,0008. Employees’ Wages and Salaries 85,1339. Supplies and Postage 010. Advertising and Promotion 18,33011. Delivery Expense 1,67012. Bad Debt Expense 013. Travel 014. Legal and Accounting Fees 10,83015. Vehicle Expense 016. Miscellaneous Expenses ,833Continued
13 TOUGH GUYS SPORTING GOODS PRO FORMA INCOME STATEMENT For the Year (date) - ContinuedD. TOTAL VARIABLE EXPENSES $201,796Less: Fixed Expenses17. Rent 38,33318. Repairs and Maintenance 5,00019. Utilities (Heat, Light, Power) 8,17020. Telephone 1,00021. Taxes and Licences 022. Depreciation 10,00023. Interest 6,66724. Insurance 5,00025. Other Fixed ExpensesE. TOTAL FIXED EXPENSES $ 74,170F. TOTAL OPERATING EXPENSES $274,167 *G. NET OPERATING PROFIT (LOSS) $ 15,000* Numbers may not match operating expense percentages exactly due to rounding.
14 Determining Your Cash Flow Cash Flow from Operating Activities(+) Cash received from customers(+) Any other operating cash receipts(=) Total Cash Receipts from Operations (A)(-) Cash paid to suppliers(-) Cash paid to employees(-) Interest paid(-) Taxes paid(-) Other cash payments for expenses(=) Total Cash Payments from Operations (B)Total Net Cash Provided from Operations = (A) – (B)Continued
15 2. Cash Flow from Investment Activities (+) Cash proceeds from the sale of assets(-) Cash disbursements for the purchase of property or equipment(=) Total Net Cash Provided from Investment ActivitiesContinued
16 3. Cash Flow from Financing Activities (+) Cash received from bank and other loans(+) Capital contributions by owners(+) Proceeds from issuing stock(=) Total Cash Received from Financing (A)(-) Repayment of principal on loans(-) Dividends paid to shareholders(-) Cash withdrawals by owners(-) Other funds removed from the business(=) Total Cash Payments for Financing (B)Total Net Cash Provided by Financing = (A) – (B)Continued
17 TOTAL NET CASH FORECAST Total Net Cash Provided by OperationsPlus Total Net Cash Provided by InvestmentPlus Total Net Cash Provided by Financing
18 Sample Cash Flow Forecast Pro Forma Cash Flow Forecast for Tough Guys Sporting Goods12-Month Cash Flow ProjectionsMinimum CashBalance Required =Year 1Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. TotalCash Flow from Operations(during month)1. Cash Sales 17,136 25,500 33,500 43,500 48,500 56,000 62,500 55,500 43,500 39,500 36,500 43, ,1362. Payments for Credit Sales 0 17,000 22,333 29,000 32,333 37,333 41,667 37,000 29,000 26,333 24,333 29, ,3333. Investment Income4. Other Cash IncomeA. TOTAL CASH ON HAND $17,136 $42,500 $55,833 $72,500 $80,833 $93,333 $104,167 $92,500 $72,500 $65,833 $60,833 $72,500 $833,333Less Expenses Paid(during month)15. Inventory or New Material -31, , , , , , , , , , , , ,7396. Owner’s Salary -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -3, ,9007. Employees’ Wagesand Salaries -5,155 -7,223 -9, , , , , , ,545 -9,639 -9,890 -6, ,5018. Supplies and Postage9. Advertising and Promotion ,375 -1,668 -1,888 -2,149 -2, ,536 -1,404 -1, ,27010. Delivery Expense ,66111. Travel12. Legal and Accounting Fees -3, ,70013. Vehicle Expense14. Maintenance Expense 0 -1, , , ,00015. Rent -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -3, ,40016. Utilities ,96017. Telephone ,20018. Taxes and Licences19. Interest Payments ,51220. Insurance -1, , , ,00021. Other Cash Expenses -1,877 -2,631 -3,437 -4,171 -4,721 -5,372 -5,472 -4,647 -3,841 -3,511 -3,602 -2, ,696B. TOTAL EXPENDITURES (50,626) (60,209) (71,630) (80,155) (92,006) (93,967) (87,210) (72,040) (66,005) (64,328) (62,434) (45,658) (840,419)5,000Continued1. Expenses and other payments should be entered as negative (-) numbers.
20 Sample Pro Forma Balance Sheet ASSETSCurrent Assets:1. Cash 6,7002. Accounts Receivable 29,0003. Inventory 231,0004. Other Current Assets 30,000 ________A. Total Current Assets $296,700Fixed Assets:5. Land and Buildings 0less depreciation 06. Furniture and Fixtures 46,000less depreciation 2,300 43,7007. Equipment 08. Trucks and Automobiles 09. Other Fixed Assets 34,000less depreciation 3,000 31,000 _______B. Total Fixed Assets $ 74,700C. Total Assets (C = A + B) $371,400TOUGH GUYS SPORTING GOODS BALANCE SHEETEnd of Year 1Continued
21 TOUGH GUYS SPORTING GOODS BALANCE SHEET End of Year 1 (Continued) LIABILITIESCurrent Liabilities (due within 12 months)10. Accounts Payable 150,00011. Bank Loans/Other Loans 30,00012. Taxes Owed _______D. Total Current Liabilities $180,000Long-Term Liabilities13. Notes Payable (due after one year) 140,00014. Other Long-Term Liabilities 35,400 _______E. Total Long-Term Liabilities $175,400F. Total Liabilities (F = D + E) $355,400NET WORTH (CAPITAL)SHARE CAPITALCommon Shares 1,000Preferred Shares 0RETAINED EARNINGS ,000G. Total Net Worth (G = C - F) $ 16,000H. Total Liabilities and Net Worth (H = F + G) $371,400
22 Determining Your Break-Even Point Profit Area900SalesTotal Costs800700Breakeven Point600500Expenses (thousands of dollars)400Loss Area300Fixed Expenses200100100200300400500600700800900Sales Revenue (thousands of dollars)
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