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EP2150 - Entrepreneurship Financials Sources of Financing for a small business Distinguish between Debt and Equity Financing Describe the importance of.

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Presentation on theme: "EP2150 - Entrepreneurship Financials Sources of Financing for a small business Distinguish between Debt and Equity Financing Describe the importance of."— Presentation transcript:

1 EP2150 - Entrepreneurship Financials Sources of Financing for a small business Distinguish between Debt and Equity Financing Describe the importance of financial statements for small business Explain the differences between financial statements for big business and small business Explain how the balance sheet, income statement and cash flow statement are constructed Create a balance sheet, income statement, and statement of cash flow for a small business Construct a projected income statement for a small business

2 Sources of Financing How will you finance your business? Personal savings Credit from suppliers Loans and mortgages from banks, credit unions and others Government assistance programs Love money Equity capital from private sources Leasing Friends and neighbours Local professionals and angel investors Prepare loan or grant request package Employees Venture capitalists

3 Debt vs. Equity Financing Advantages of Debt Financing Useful for meeting a short-term deficit in cash flow Do not have to give up or share control of your business The term of the debt is generally limited May be acquired from a variety of lenders Information needed to obtain a loan is generally straightforward and part of your business plan The interest paid is tax-deductible

4 Debt vs. Equity Financing (Continued) Disadvantages of Debt Financing Can be difficult to obtain for a risky project Taking on too much debt can be a burden on your cash flows If the funds aren’t used properly, it may be difficult for the business to repay the loan If it is a “demand” loan, it can be called by the lender at any time The lender may require you to provide a personal guarantee for the loan Lenders will often insist on certain restrictions being put into place

5 Debt vs. Equity Financing (Continued) Advantages of Equity Financing An appropriate investor can contribute expertise, contacts, and new business as well as money Equity may be the only option to finance high-risk ventures Equity can be used to fund larger projects with longer time frames

6 Debt vs. Equity Finacing (Continued) Disadvantages of Equity Financing You may have to give up some ownership and control of the business There is always the danger of incompatibility and disagreement among the investors It is much more difficult to terminate the relationship in disagreements occur

7 Major Sources of Funds Personal Funds “Love Money” Banks and Similar Institutions – Operating Loans (Line of Credit) – Term Loans Federal Government – Canada Small Business Financing Program (CSBFA) – Industrial Research Assistance Program (IRAP) – Community Futures Development Corporations (CFDC) – Women’s Enterprise Initiative Loan Program – Aboriginal Business Canada – Youth Entrepreneurship – Business Development Bank of Canada (BDC) Continued

8 Provincial Government Programs Venture Capital and “Angel” Investors Other Sources of Financing (Bootstrapping) –Personal Credit Cards –Canadian Youth Business Foundation –Suppliers’ Trade Credit and Inventory Buying Plans –Leasing vs. Buying –Negotiated Leasehold Improvements –Advance Payment from Customers Major Sources of Funds cont…

9 Dealing with banks Know what your banker is looking for Don’t “tell” your banker, “show” her Interview your banker Passion makes perfect Ask for more money than you need Get your banker involved in your business Increase your credit when you don’t need it

10 Estimating Operating Results Conduct Research Estimate one-time start-up expenditures Estimate expected monthly operating expenses Develop short-term financial projections Determine your breakeven point Forecast your cash flow Pro forma income statement Pro forma balance sheet

11 Sample Pro Forma Income Statement TOUGH GUYS SPORTING GOODS PRO FORMA INCOME STATEMENT For the year ending [date] Net sales$833,333(A) Less: Cost of goods sold: Beginning inventory$220,000 Plus: Net purchases 555,647 Goods available for sale$775,647 Less: Ending inventory 231,481 Cost of goods sold 544,166(B) Gross margin$289,167(C) Operating expenses 274,167(D) Net Profit (Loss) Before Income Tax$ 15,000(E)

12 Completed Pro Forma Income Statement TOUGH GUYS SPORTING GOODS PRO FORMA INCOME STATEMENT For the Year (date) 1. Gross Sales$833,333 2. Less: Cash Discounts 0 A. NET SALES833,333 Cost of Goods Sold: 3.Beginning Inventory$220,000 4. Plus: Net Purchases 555,647 5.Total Available for Sale$775,647 6.Less: Ending Inventory 231,481 B. COST OF GOODS SOLD$544,166 C. GROSS MARGIN$289,167 Less: Variable Expenses 7.Owner’s Salary40,000 8.Employees’ Wages and Salaries85,133 9.Supplies and Postage0 10.Advertising and Promotion18,330 11.Delivery Expense1,670 12.Bad Debt Expense0 13.Travel0 14.Legal and Accounting Fees10,830 15.Vehicle Expense0 16.Miscellaneous Expenses 45,833 Continued

13 TOUGH GUYS SPORTING GOODS PRO FORMA INCOME STATEMENT For the Year (date)  Continued D.TOTAL VARIABLE EXPENSES$201,796 Less: Fixed Expenses 17.Rent38,333 18.Repairs and Maintenance5,000 19.Utilities (Heat, Light, Power)8,170 20.Telephone1,000 21.Taxes and Licences0 22.Depreciation10,000 23.Interest6,667 24.Insurance5,000 25.Other Fixed Expenses 0 E.TOTAL FIXED EXPENSES$ 74,170 F.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 1.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 Activities Continued

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 Operations PlusTotal Net Cash Provided by Investment Plus Total Net Cash Provided by Financing

18 Sample Cash Flow Forecast Year 1 Jan.Feb.Mar.Apr.MayJuneJulyAug.Sept.Oct.Nov.Dec. Total Cash Flow from Operations (during month) 1. Cash Sales17,13625,50033,50043,50048,50056,00062,50055,50043,50039,50036,50043,500505,136 2. Payments for Credit Sales017,00022,33329,00032,33337,33341,66737,00029,00026,33324,33329,000325,333 3. Investment Income0000000000000 4. Other Cash Income0000000000000 A. 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$833,333 Less Expenses Paid (during month) 1 5. Inventory or New Material-31,570-39,562-48,002-54,332-61,823-62,983-53,488-44,204-40,406-41,461-38,296-21,608-537,739 6. Owner’s Salary-3,325-3,325-3,325-3,325-3,325-3,325-3,325-3,325-3,325-3,325-3,325-3,325-39,900 7. Employees’ Wages and Salaries-5,155-7,223-9,437-11,451-12,961-14,748-15,024-12,759-10,545-9,639-9,890-6,568-85,501 8. Supplies and Postage0000000000000 9. Advertising and Promotion-751-1.052-1,375-1,668-1,888-2,149-2,189-1.859-1,536-1,404-1,441-957-18,270 10. Delivery Expense-68-96-125-152-172-195-199-169-140-128-131-87-1,661 11. Travel0000000000000 12. Legal and Accounting Fees-3,000-700-700-700-700-700-700-700-700-700-700-70010,700 13. Vehicle Expense0000000000000 14. Maintenance Expense0-1,50000-1,0000-1,3000-3000-9000-5,000 15. Rent-3,200-3,200-3,200-3,200-3,200-3,200-3,200-3,200-3,200-3,200-3,200-3,200-38,400 16. Utilities-580-580-580-580-580-580-580-580-580-580-580-580-6,960 17. Telephone-100-100-100-100-100-100-100-100-100-100-100-100-1,200 18. Taxes and Licences000000000000 19. Interest Payments0-240-348-476-536-624-632-496-332-280-268-280-4,512 20. Insurance-1,0000-1,0000-1,0000-10000-1000000-5,000 21. Other Cash Expenses-1,877-2,631-3,437-4,171-4,721-5,372-5,472-4,647-3,841-3,511-3,602-2,392-45,696 B. 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) Pro Forma Cash Flow Forecast for Tough Guys Sporting Goods 12-Month Cash Flow Projections Minimum Cash Balance Required = 5,000 1. Expenses and other payments should be entered as negative (-) numbers. Continued

19 Sample Cash Flow Forecast (Continued) Year 1 Jan.Feb.Mar.Apr.MayJuneJulyAug.Sept.Oct.Nov.Dec. Total Capital Purchase of Fixed Assets0000000000000 Sale of Fixed Assets0000000000000 C. CHANGE IN CASH FROM PURCHASE OR SALE OF ASSETS$0$0$0$0$0$0$0$0$0$0$0$0$0 Financing Payment of Principal of Loan000000-17,000-20,500-6,500-1,5000-31,200-76,700 Inflow of Cash from Bank Loan30,00013,50016,0007,50011,0001,00000001,500080,500 Issuance of Equity Positions0000000000000 Repurchase of Outstanding Equity0000000000000 D. CHANGE IN CASH FROM FINANCING$30,000$13,500$16,000$7,500$11,000$1,000($17,000)($20,500)($6,500) ($1,500)$1,500(-$31,200)$3,800 E. INCREASE (DECREASE) IN CASH($626)($4,209)$203($155)($172)$357($44)($41)($5) $5 ($101) $1,502 ($3,286) F. CASH AT BEGINNING OF$10,000$9,374$5,165$5,367$5,212$5,040$5,397$5,354$5,313$5,308$5,313$5,212$10,000 2 PERIOD G. CASH AT END OF PERIOD$9,374$5,165$5,367$5,212$5,040$5,397$5,354$5,313$5,308$5,313$5,212$6,714$6,714 MEET MINIMUM CASH BALANCE Accept.Accept.Accept. Accept.Accept.Accept.Accept.Accept.Accept.Accept.Accept.Accept.Accept. Pro Forma Cash Flow Forecast for Tough Guys Sporting Goods 12-Month Cash Flow Projections (Continued) Minimum Cash Balance Required = 5,000 2. This entry should be the same amount as for the beginning of the year. All other rows will be the total for the entire year. Copyright © 2000, McGraw-Hill Ryerson Limited Slide 7.4B Building a Dream

20 Sample Pro Forma Balance Sheet ASSETS Current Assets: 1.Cash6,700 2.Accounts Receivable29,000 3.Inventory231,000 4.Other Current Assets30,000________ A. Total Current Assets$296,700 Fixed Assets: 5.Land and Buildings0 less depreciation0 6.Furniture and Fixtures46,000 less depreciation2,30043,700 7.Equipment0 less depreciation0 8. Trucks and Automobiles0 less depreciation0 9.Other Fixed Assets34,000 less depreciation3,00031,000_______ B. Total Fixed Assets$ 74,700 C. Total Assets (C = A + B)$371,400 TOUGH GUYS SPORTING GOODS BALANCE SHEET End of Year 1 Continued

21 LIABILITIES Current Liabilities (due within 12 months) 10.Accounts Payable150,000 11.Bank Loans/Other Loans30,000 12.Taxes Owed_______ D. Total Current Liabilities$180,000 Long-Term Liabilities 13.Notes Payable (due after one year)140,000 14.Other Long-Term Liabilities35,400_______ E. Total Long-Term Liabilities$175,400 F. Total Liabilities (F = D + E)$355,400 NET WORTH (CAPITAL) SHARE CAPITAL Common Shares1,000 Preferred Shares0 RETAINED EARNINGS 15,000 G. Total Net Worth (G = C  F)$ 16,000 H. Total Liabilities and Net Worth (H = F + G)$371,400 TOUGH GUYS SPORTING GOODS BALANCE SHEET End of Year 1 (Continued)

22 Determining Your Break-Even Point 100 200 300 500400 600 700 Sales Revenue (thousands of dollars) 100 200 300 400 500 600 700 Expenses (thousands of dollars) Fixed Expenses Loss Area Breakeven Point Total Costs Sales Profit Area 800 900

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