Plan and Track Your Finances 9.1 Financing Your Business 9.2 Pro Forma Financial Statements 9.3 Recordkeeping for Businesses

Essential Question How can you asses your financial needs and get funding? Chapter 9

Lesson 9.1 Financing Your Business Learning Objectives 9.1-1 Estimate your startup costs and personal net worth. 9.1-2 Identify sources of equity capital for your business. 9.1-3 Identify sources of debt capital for your business. Chapter 9

Assess Your Financial Needs Startup Costs (include: equipment and supplies, furniture, vehicles, remodeling, legal and accounting fees, licensing fees. Financial Statement Net worth (owner’s equity): The difference between assets (items of value that you own) and liabilities (amounts you owe to others) Chapter 9

Sample Startup Costs Chapter 9

Sample Personal Financial Statement Chapter 9

Equity Capital *Debt-to-equity ratio: The relation between the dollars you have borrowed (debt) and the dollars you have invested in your business (equity) Debt-to-equity ratio = Total Liabilities ÷ Total Equity Equity capital: Money invested in a business in return for a share in the profits of the business Chapter 9

Equity Capital (continued) Personal Contributions Friends and Relatives Venture Capitalists VC are individuals or companies that makes a living by investing is startups They usually only go after what they see as making above average profits or with a chance to go public Crowdfunding (using internet to get investments for share in company, some investors give without anything in return to support a business or cause. Chapter 9

Debt Capital Debt capital: Money loaned to a business with the understanding that the money will be repaid within a certain time period, usually with interest Friends and Relatives Can loan for equity or a loan. Chapter 9

Debt Capital (continued) Commercial Bank Loans Secured Loans (loans backed by collateral) Collateral: Property that the borrower forfeits if he or she defaults on the loan Chapter 9

Types of Secured Loans Line of Credit: lend up to a certain amount of money whenever the borrow needs it. This is a program with a fee and interest, even If the money wasn’t borrowed. Long term loan: loan payable over a period greater than a year. Accounts receivable financing: businesses that allow customers to charge merchandise and services to pay later. Banks will loan companies up to 85% of those outstanding accounts. Inventory financing: when banks use inventory as collateral Chapter 9

Debt capital Unsecured Loans (not backed by collateral Reasons a Bank May Not Lend Money Business is a startup Lack of solid business plan Lack experience No confidence in borrower Inadequate investment in the business Chapter 9

Other sources of loans SBA: offer loan programs. This organizations is going to try to help Small business investment companies Department of housing and urban development HUD: provides grants to cities to help develop needing areas. Chapter 9

Assessment 9.1 What are the challenges of getting equity financing from friends and family? Why is secured loans easier to obtain vs unsecured loans? What is the main advantage of going to a bank with a SBA guarantee? Chapter 9

Lesson 9.2 Pro Forma Financial Statements Learning Objectives 9.2-1 Prepare a pro forma cash flow statement. 9.2-2 Prepare a pro forma income statement. 9.2-3 Prepare a pro forma balance sheet. Chapter 9

Cash Flow Statement Cash flow statement An accounting report that describes the way cash flows into and out of your business over a period of time Forecast Receipts and Disbursements Prepare the Cash Flow Statement Cash receipts – Cash disbursements = Net cash flow Economic Effects on Cash Flow Chapter 9

Forecasted Receipts Chapter 9

Forecasted Disbursements Chapter 9

Pro Forma Cash Flow Statement Chapter 9

Income Statement Income statement Prepare a Pro Forma Income Statement Shows the business’s revenues and expenses incurred over a period of time and the resulting profit or loss Prepare a Pro Forma Income Statement Chapter 9

Pro Forma Income Statement Chapter 9

Balance Sheet Balance sheet A financial statement that lists what a business owns, what it owes, and how much it is worth at a particular point in time Assets = Liabilities + Owner’s Equity Chapter 9

Balance Sheet (continued) Prepare a Pro Forma Balance Sheet Types of Assets Accounts receivable: The amounts owed to a business by its credit customers Types of Liabilities Accounts payable: Amounts owed to vendors for merchandise purchased on credit Reductions in Assets Chapter 9

Pro Forma Balance Sheet Chapter 9

Lesson 9.3 Recordkeeping for Businesses Learning Objectives 9.3-1 Differentiate between alternative methods of accounting. 9.3-2 Describe the use of journals and ledgers in a recordkeeping system. 9.3-3 Explain the importance of keeping accurate and up-to-date bank, payroll, and tax records. Chapter 9

Essential Question 9.3 Why should entrepreneurs establish, maintain, and analyze appropriate accounting and business records? Chapter 9

Cash or Accrual Accounting Methods Cash Method vs Accrual Method Two methods of reporting a business’s revenue and expenses The major difference between the two methods is the timing of when transactions, including sales and purchases, are recorded. Chapter 9

Cash or Accrual Accounting Methods cont. Cash Method Revenue is not recorded until money is actually received, and expenses are not recorded until they are actually paid. Cash Flow statement is prepared using this method. Accrual Method Transactions are recorded when the order is placed, item delivered, serviced rendered. Chapter 9

Best method? Small businesses usually use the cash method. Larger companies use the accrual method. If you make less than 5 million a year you can choose either method Accrual gives a better picture of a business long term profitability Chapter 9

Recording Transactions Any business activity that changes assets, liabilities, or net worth Journals Accounting records of the transactions you make Chapter 9

5 different journals business use Sales Journal: record only sales of merchandise on account. Customers get now pay later. Cash Payment journals: records only cash payments transactions(cash, check electronic payment) Cash receipts journal: Credit cards Purchase journal: record only purchases of merchandise on account. Receive supplies today but pay later General Journal: Used to record any kind of transaction. Some businesses use this to record all transactions, other use this on transactions that do not fit any of the 4 above. Chapter 9

Recording Transactions (continued) Ledgers Account: Accounting record that provides financial detail for a particular business item, such as for cash, sales, rent, and utilities Subsidiary Ledgers (more detailed record of general ledger accounts) Aging Tables (use to track accounts receivable and provide detailed summaries of transactions for each supplier and customer) Chapter 9

General Journal/Ledger Chapter 9

Aging Tables Chapter 9

Journals vs ledgers Journals separate transaction types Ledgers separate transactions by account Chapter 9

Business Records Banking Records Check register: A booklet used to record the dates and amounts of checks as well as the names of people or businesses to whom you have written checks Balance Your Account Reconcile Your Account (when you receive your bank statement you should reconcile it with your cash register) Chapter 9

Business Records (continued) Payroll Records Payroll: A list of people who receive salary or wage payments from a business Tax Records Income Tax (if you earn profits you must pay income tax or pay a penalty) Payroll and Tax Deductions (you must deduct taxes from your employees and submit to govt. Also must pay for unemployment insurance. Sales Tax: tax on goods or services Chapter 9

Assessment 9.3 Why would you want to use the accrual method vs the cash method to record revenue and expenses? Why is it important to keep accurate payroll records? If a small business owner uses their personal checking account with business, how would you convince them to separate their accounts? Chapter 9