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

Lesson 9.1 Financing Your Business Goals Estimate your startup costs and personal net worth. Identify sources of equity capital for your business. Identify sources of debt capital for your business. Chapter 9

Vocabulary net worth debt-to-equity ratio equity capital venture capitalists debt capital collateral Chapter 9

Assess Your Financial Needs Estimate startup costs. Create a personal financial statement. Prepare pro forma financial statements. Chapter 9

Startup Costs Itemize startup costs. equipment and supplies furniture and fixtures vehicles remodeling legal and accounting fees licensing fees Chapter 1

Chapter 9

Personal Financial Statement net worth = assets ─ liabilities personal financial statement = personal assets ─ personal liabilities Chapter 9

Chapter 9

Why is the net worth of an entrepreneur important to potential investors in the business? Chapter 1

Equity Capital debt-to-equity ratio the relation between the dollars you have borrowed and the dollars you have invested in your business total liabilities ÷ total equity Lenders prefer low debt-to-equity ratios. Chapter 9

Sources of equity include: equity capital money invested in a business in return for a share in the profits of the business Sources of equity include: Personal Contributions Friends and Relatives Venture Capitalists individuals and companies that make a living investing in startup companies Chapter 9

What are some of the ways entrepreneurs can get equity capital? Chapter 1

Debt Capital debt capital money loaned to a business with the understanding that the money will be repaid usually with interest Chapter 9

Friends and Relatives Determine how the loan will affect your relationship. Prepare a formal agreement regarding terms of the loan. Chapter 1

Commercial Bank Loans secured loans collateral loans that are backed by collateral collateral property that the borrower forfeits if he or she defaults on the loan Chapter 9

Types of secured loans include the following: line of credit long-term loan accounts receivable financing inventory financing Chapter 9

unsecured loans loans that are not guaranteed with collateral only made to creditworthy customers Chapter 9

Reasons a bank may not lend money include: The business is a startup. A lack of: a solid business plan adequate experience confidence in the borrower adequate personal investment Chapter 9

Other sources of loans include: Small Business Administration Small Business Investment Companies Minority Enterprise Small Business Investment Companies Department of Housing and Urban Development The Economic Development Administration State Governments Local and Municipal Governments Chapter 9

Where can entrepreneurs look for debt financing? Chapter 1

Lesson 9.2 Pro Forma Financial Statements Goals Prepare a pro forma cash flow statement. Prepare a pro forma income statement. Prepare pro forma balance sheet. Chapter 9

Vocabulary cash flow statement income statement 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 Chapter 9

Forecast Receipts and Disbursements estimate monthly cash receipts monthly cash disbursements Chapter 9

Chapter 9

Chapter 9

Prepare the Cash Flow Statement net cash flow = cash receipts ─ cash disbursements Pro forma statements help you anticipate when negative cash flows will occur. You can plan how to handle or avoid them. Chapter 9

Chapter 9

Economic Effects on Cash Flow Changes in the economy can dramatically effect the cash flow of businesses. Business owners should make conservative estimates. Chapter 9

What does a cash flow statement show? Chapter 1

Income Statement income statement shows revenues and expenses incurred over a period of time shows the profit or loss for the time period Chapter 9

Prepare a Pro Forma Income Statement The long-term growth of your business can be demonstrated by a pro forma income statement prepared for multiple years. Chapter 9

The pro forma income statement consists of: Revenue Cost of goods sold Gross profit Operating expenses Net income before taxes Taxes Net income/loss after taxes Chapter 9

Chapter 9

What does an income statement show? Chapter 1

Balance Sheet balance sheet assets = liabilities + owner’s equity a financial statement that lists what a business owns what a business owes how much a business is worth at a point in time assets = liabilities + owner’s equity Chapter 9

Prepare a Pro Forma Balance Sheet Types of Assets current assets can be converted to cash easily accounts receivable the amounts owed to a business by its credit customers fixed assets cannot be converted into cash easily Chapter 9

Types of Liabilities long-term liabilities current liabilities debts that are payable over a year or longer current liabilities debts that must be paid in full in less than a year accounts payable amounts owed to vendors for merchandise purchased on credit Chapter 9

Reductions in Assets allowance for uncollectible accounts depreciation the amount a company estimates it will not receive from customers depreciation the lowering of an asset’s value to reflect its current worth Chapter 9

Chapter 9

Name one example each of a current (liquid) asset, a fixed (illiquid) asset, a current liability, and a long-term liability. Chapter 1

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

Vocabulary cash method accrual method transaction journals account check register payroll Chapter 9

Cash or Accrual Accounting Methods The major difference between the cash and accrual accounting methods is the timing of when transactions are recorded. Chapter 1

Cash Method cash method revenue is not recorded until cash (or a check) is actually received expenses are not recorded until they are actually paid The cash flow statement is prepared using the cash method. Chapter 1

Accrual Method accrual method revenue is recorded when the sale occurs expenses are recorded when you receive the goods or services Chapter 1

Choosing an Accounting Method Only very small businesses use the cash method. A business must use the accrual method if: annual sales exceed $5 million the company stocks inventory that will be sold to the public and has annual sales of over $1 million Chapter 1

What is the main difference between the cash and accrual methods of accounting? Chapter 1

Recording Transactions any business activity that changes assets, liabilities or net worth Chapter 9

Journals journals accounting records of the transactions you make for sales cash payments cash receipts purchases general Chapter 1

Ledgers A general ledger is made up of accounts. account an accounting record that provides financial detail for a particular business item Chapter 1

subsidiary ledgers used for accounts payable to show in detail the transactions with each vendor from whom merchandise is purchased on account Chapter 9

Chapter 1

aging table a record keeping tool for tracking accounts receivable shows how long it takes customers to pay their bills Chapter 9

Chapter 9

What is the difference between a journal and a ledger? Chapter 1

Business Records Good recordkeeping can help you make smart business decisions. Incomplete records can cause you to mismanage your business. Chapter 1

Banking Records A business checking account should be established. check register a booklet where you record information for each check written amount date name of person or business receiving your payment Chapter 9

Reconcile Your Account Balance Your Account You should balance your account each time a transaction occurs. Reconcile Your Account Each month you should reconcile your bank statement with your check register. Chapter 9

Payroll Records payroll a list of people who receive salary or wage payments from a business Chapter 1

Tax Records Income tax Payroll Taxes and Deductions Businesses that earn a profit must pay income tax. quarterly Payroll Taxes and Deductions deduct taxes from employees paychecks submit taxes to the government unemployment insurance taxes social security and Medicare taxes voluntary deductions Chapter 1

Sales Tax Sales taxes are based on a percentage of sales. Each month you deposit sales tax into a government owned account. Chapter 9

What kinds of bank, payroll, and tax records do you have to keep? Chapter 1

PERFORMANCE COMPETENCIES Articulate the need for the loan Explain the process of applying for a loan Chapter 9

Explain the type of loan Demonstrate good communication skills Demonstrate the ability to make a professional presentation Answer questions effectively Chapter 9

GIVE IT A TRY Identify the appropriate type of loan Complete an application for a loan Provide justification for the loan selected Write a report in appropriate business style Demonstrate correct spelling and grammar Chapter 9

Learn and apply financial business decision-making skills Develop business contacts Implement written and oral skills Develop familiarity with procedures of financial institutions Chapter 9