Entrepreneurship: Ideas in Action © Cengage Learning/South-Western ChapterChapter Plan and Track Your Finances 9.1 Finance Your Business 9.2 Pro Forma Financial Statements 9.3 Record Keeping for Businesses 9

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 2 Ideas in Action Katelin Shea addressed the unmet need in the marketplace for attractive, personalized covers for electronic equipment. Her advice to other entrepreneurs starting a business is to: solve a problem fill a gap expand on a hobby Electronic Safekeeping

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 3 Lesson 9.1 Finance 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.

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 4 Terms net worth debt-to-equity ratio equity capital venture capitalists debt capital collateral

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 5 Assess Your Financial Needs Itemize startup costs. Determine the amount of capital required to start your business.

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 6

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 7 Personal Financial Statement net worth = assets ─ liabilities personal financial statement = personal assets ─ personal liabilities

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 8

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 9 Why is the net worth of an entrepreneur important to potential investors in the business?

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 10 Equity Capital debt-to-equity ratio the relation between the dollars you have borrowed and the dollars you have invested in your business The higher percentage of your own money that you have invested, the easier it will be for you to get others to invest.

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 11 the 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 or companies that make a living investing in startup companies equity capital

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 12 What are some of the ways entrepreneurs can get equity capital?

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 13 Debt Capital debt capital money loaned to a business with the understanding that the money will be repaid usually with interest Friends and Relatives determine how the loan will affect your relationship prepare a formal agreement regarding repayment terms

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 14 Commercial Bank Loans secured loans loans that are backed by collateral collateral property that the borrower forfeits if he or she defaults on the loan

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 15 line of credit long-term loan accounts receivable financing inventory financing Types of secured loans include the following:

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 16 loans that are not guaranteed with collateral only made to creditworthy customers unsecured loans

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 17 The business is a startup. A lack of: a solid business plan adequate experience confidence in the borrower personal investment Reasons a bank may not lend money include:

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 18 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 Other sources of loans include:

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 19 Where can entrepreneurs look for debt financing?

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 20 Lesson 9.2 Pro Forma Financial Statements Goals Prepare a pro forma cash flow statement. Prepare a pro forma income statement. Prepare a pro forma balance sheet.

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 21 Terms cash flow statement income statement balance sheet

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 22 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

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 23 Forecast Receipts and Disbursements estimate monthly cash receipts monthly cash disbursements

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 24

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 25

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 26 Prepare the Cash Flow Statement net cash flow = cash receipts ─ cash disbursements Tracking monthly cash flow statements enables you to anticipate periods of positive and negative cash flow

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 27

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 28 Economic Effects on Cash Flow Changes in the economy can dramatically effect the cash flow of businesses. Business owners should make conservative estimates.

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 29 What does a cash flow statement show?

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 30 Income Statement income statement shows revenues and expenses incurred over a period of time shows the profit or loss for the time period

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 31 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.

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 32 Revenue Cost of goods sold Gross profit Operating expenses Net income before taxes Taxes Net income/loss after taxes The pro forma income statement consists of:

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 33

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 34 What does an income statement show?

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 35 Balance Sheet balance sheet 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

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 36 Prepare a Pro Forma Balance Sheet fixed assets used for many years current assets items that are used up in normal business operations accounts receivable the amounts owed to a business by its credit customers

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 37 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 long-term liabilities

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 38 the amount a company estimates it will not receive from customers depreciation the lowering of an asset’s value to reflect its current worth allowance for uncollectible accounts

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 39

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 40 Name one example each of a current liability, a long-term liability, a current asset, and a fixed asset.

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 41 Lesson 9.3 Record Keeping for Businesses Goals 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.

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 42 Terms transaction journals account check register payroll

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 43 Recording Transactions transaction any business activity that changes assets, liabilities or net worth journals accounting records of the transactions you make for sales cash payments cash receipts purchases general

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 44 A general ledger is made up of accounts. account an accounting record that provides financial detail for a particular business item ledgers

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 45 used for accounts payable to show in detail the transactions with each vendor from whom merchandise is purchased on account aging table a record keeping tool for tracking accounts receivable shows how long it takes customers to pay their bills subsidiary ledger

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 46

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 47 What is the difference between a journal and a ledger?

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 48 Business Records A business checking account should be established. check register booklet (or electronic register) where you record information for each check written amount date name of person or business receiving your payment

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 49 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. Balance Your Account

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 50

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 51 payroll a list of people who receive salary or wage payments from a business Payroll Records

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 52 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 taxes voluntary deductions Income Tax

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 53 Sales taxes are based on a percentage of sales. Each month you deposit sales tax into a government owned account. Sales Tax

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 54 What kinds of bank, payroll, and tax records do you have to keep?

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 55 PERFORMANCE INDICATORS EVALUATED Explain the opportunity for business expansion. Present convincing rationale for expanding a business into two surrounding communities. Develop a complete financial plan for a business venture.

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 56 Present financial information to obtain a loan from a financial institution. Organize a financial proposal for a growing business. Manage time and information for an effective presentation. Request a business loan from a financial institution.

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 57 THINK CRITICALLY 1.Why does a financial institution want to know the future sales potential of the business’s target market? 2.What does a business’s workforce have to do with a business loan?

Entrepreneurship: Ideas in Action © Cengage Learning/South-Western Chapter 9 Slide 58 4.Why must the team describe the target market demographics for the two new proposed locations for the business? 3.Why should the business project how quickly a loan will be repaid?