C. Financing a Small Business 5.00 Explain the financial statements maintained in a small business Develop the financial records used in a small business.

Balance Sheet: A financial statement that shows what a business owns, what it owes, and how much it is worth at a particular point in time. Components include: Assets Liabilities Net worth

XYZ Balance Sheet March 31, ____ Assets Cash$10,745 Accounts receivable 868 Inventory 5,799 Supplies 433 Total Assets$17,845 ¯¯¯¯¯¯¯ Liabilities Accounts Payable$3,444 Notes Payable 5,705 Total Liabilities $ 9,149 Net Worth Robin Smith 8,696 Total Liabilities & Net Worth$17,845 ¯¯¯¯¯¯¯

Assets: Items of value owned by a business. Types of Assets: Current Assets: Easily converted into cash Fixed Assets: Not easily converted into cash Intangible Assets: Can not be seen or touched Other Assets: Value of life insurance policy or retirement savings

CURRENT ASSETS Cash or items of monetary value that can easily be converted to cash and that are used up by a business within one year. Cash Inventory: The quantities of goods and materials on hand.

CURRENT ASSETS Supplies: Assets that are used up in business operations. Accounts receivable: Sales that have been made but not collected.

FIXED ASSETS Items of monetary value that are not easily converted into cash. Land Buildings Furniture Equipment

INTANGIBLE ASSETS Items of value that the business owns that cannot be seen or touched.

INTANGIBLE ASSETS Copyright: Legal right to exclusive publication, production, sale, or distribution of a literary or artistic work. Copyrights remain in effect for 70 years after the death of the author.

INTANGIBLE ASSETS Patent: A legal document that gives an inventor the sole right to produce, use, and sell an invention. A patent lasts for 20 years.

INTANGIBLE ASSETS Trademark: A name, symbol, or special mark that, when registered, can be used only by a certain business.

INTANGIBLE ASSETS Goodwill: Customers’ approval and support of a business.

OTHER ASSETS Cash value of life insurance policy Cash value on retirement savings (401K, IRA)

Liabilities: The amount owed to others. Types of Liabilities: Current: Financial obligations that will be repaid within one year. Accounts Payable: Expenses that have been incurred but not yet paid. Notes Payable: Amounts owed for small loans. (Example: money owed on loans for office furniture, landscaping)

Liabilities: The amount owed to others. Salaries Payable: Wages owed to employees. Income Taxes Payable: Monies due to the government.

Liabilities: The amount owed to others. Long-Term Liabilities: Financial obligations that will take the business more than one year to repay. Mortgage: A loan for purchasing a building and or land Notes Payable: Amounts owed for large loans. (Equipment, vehicles)

Net Worth: The monetary amount a business owns. Net worth is calculated by subtracting a business’ liabilities from assets. Assets – Liabilities = Net Worth

Income Statement: A financial statement that shows how much a business has earned or lost during a year. Components include: Gross sales Net sales Cost of goods sold Gross profit on sales Expenses Net income Taxes

XYZ Income Statement Year Ended December 31, ____ Revenue Net Sales $450,000 Cost of goods sold 250,000 Gross Profit on Sales$200,000 Operating Expenses: Salaries$70,000 Advertising 12,000 Rent 14,000 Utilities 3,600 Maintenance 1,200 Insurance 1,500 Miscellaneous 1,000 Total Expenses 103,300 Net Income (before taxes) $96,700 ¯¯¯¯¯¯

Gross sales: The dollar amount of all sales, usually within a one-year period.

Net sales: Gross sales minus returned goods.

Cost of goods sold: The dollar amount a company pays to purchase a product for resale.

Gross profit on sales: Net sales minus the cost of goods sold.

Expenses: All costs associated with running a business except for the cost of goods sold. Includes: Variable expenses: Business expenses that change month-to-month. Fixed expenses: Business expenses that do not change month-to-month.

VARIABLE EXPENSES Salaries/Wages Advertising/ Promotion Travel Office Supplies Utilities Professional Fees

FIXED EXPENSES FIXED EXPENSE: Business expenses that do not change month-to-month, but rather remain the same for a period of time. Rent Loan Payment Insurance Alarm System

Net Income: The amount of money left after all costs and expenses have been deducted. Net income is calculated by subtracting total expenses from gross profit. This can result in a net profit or loss. Gross Profit – Total Expenses = Net Income

Taxes: Federal, state, and local taxes that are owed to the government. The tax due is calculated on the net income which represents the true profit of the business. Taxes are not considered an operating expense and are subtracted below net income on the income statement.

Cash Flow Statement: A cash flow statement is a monthly financial report for internal use that describes the flow of money into and out of the business. Components include: Cash receipts Cash disbursements Net cash flow

CASH FLOW STATEMENT Cash Receipts: Helps identify seasonal changes in money received Helps identify problems such as credit customers slow in paying bills

CASH FLOW STATEMENT Cash Disbursements: Helps identify operating expenses that are too high Helps identify unnecessary expenses Net Cash Flow: Shows whether a positive or negative cash flow situation exists Even a profitable and growing business can run out of cash