1. New Venture Development
Chapters 1-3 Review
New Venture Development

2. ENTREPRENEURIAL FINANCE Fourth Edition
Chapter 1
Financial and Economic Concepts

3. Choices Available for Funds
Expected financial returns of investment opportunity
Investment opportunity
Expected annual rate of return (%)
Purchase stock 11
Purchase home 9
Purchase bonds 6
Place cash in saving account 2
Buy a new car
-15

4. Opportunity Costs
The highest value that is surrendered when a decision to invest funds is made.
Given the previous table with choices for funds:
If you decide to purchase a car (-15%), your opportunity cost is buying shares of stock (11%)
If you decide to buy shares of stock (11%), your opportunity cost is buying a home (9%)

5. Income, Expenditures, and Taxes
Gross income is all of the money received from all sources during the year.
Wages
Tips
Interest earned on savings and bonds
Income from rental property
Profits to entrepreneurs

6. Basic Income Calculations
Gross income - taxes = Disposable income
For most of us, disposable income is take-home pay.
Disposable income - Fixed expenses = Discretionary income
Fixed expenses are contractual obligations like rent, utilities, insurance, and car payments.
Discretionary income is cash that we can spend or save.

7. Taxes
Progressive taxes: larger percentage of tax paid as income increases.
Regressive taxes: smaller percentage of tax paid as income increases.
Proportional taxes: percentage of tax paid remains the same at all levels of income.

8. Example of Progressive Tax
Formula for tax percentage paid:
Income tax is progressive:

9. Example of Regressive Tax
Sales tax is regressive – it’s higher for those who consume more as a percentage of their incomes:
Income = $20,000; savings = 0; sales tax = 5%
Sales tax paid = $20,000 x 0.05 = 1,000
Income = $60,000; savings = $10,000; sales tax = 5%
Sales tax paid = $50,000 x 0.05 = $2,500

10. Example of Proportional Tax
The tax we pay into Medicare is a proportional tax (percentage of tax paid remains the same at all levels of income)
Formula for tax percentage paid:
Medicare tax is 1.45%
Annual income $30,000
Medicare tax = $30,000 x = $435
Annual income $500,000
Medicare tax=$500,000 x = $7,250

11. Factors Affecting Interest Rates
The supply of money saved is primarily the total money that is placed in demand deposit (checking) accounts, savings accounts, and money market mutual funds.
Appear in a bank’s liabilities on balance sheet
The demand for borrowed funds is all of the money that is demanded in our economy at a given price.
Appear in a bank’s assets on balance sheet
Assets
Liabilities
Equity
Pay rates of 0 % to 3%
Charge rates of 6% to 20%

12. Factors Affecting Interest Rates (continued)
Federal Reserve Policy
The Federal Reserve is the central bank of the United States.
The Fed tries to control interest rates – and therefore the rate of inflation or deflation – by purchases and sales of bonds
And by setting the overnight lending fee between banks (i.e., the “federal fund rate”)

13. Managing: You will know…
5 basic functions of a manager
Difference between strategic plans and functional plans
3 factors that must be addressed when establishing goals
Financial goals of a for-profit company
3-step process to take when using control
How to compare and contrast different forms of business ownership
The basic components of SWOT analysis
What goes into a business plan

14. 5 functions of managing Planning Organizing Staffing Directing
Controlling operations

15. Planning
A systematic process that takes from a current state to some future desired state
Strategic planning is development of long-term (> 1 year) plans for the business
Functional planning relates to the different functional areas that are driven by the strategic plan
Financial planning is determining monetary requirements
Goal setting forces you to identify measurable objectives that are achievable and have timelines

16. Organizing
Defining structures, responsibilities, and lines of communication
This comes from the functional plan:
Who will do what?
What skills they need?
When do we have to accomplish specific tasks?
How do we accomplish them?

17. Staffing
Obtaining the most capable personnel to implement the business plans
Each functional plan involves people assigned to specific jobs – you will have to write the job requirements (education, personal skills, training) and the job description

18. Directing
Providing proper guidance and direction to others who will accomplish the organizational mission
Good managers and employers have good long-term, loyal employees
Directing in the financial arena is done through the budgeting process

19. Controlling A three-step process that involves:
Establishing a standard of measurement
Measuring actual performance against the standard
Taking corrective action when actual performance deviates from established standard

20. Business organizations and ownership
You are responsible for understanding the differences between the forms small businesses can take – follow the link above.

21. Starting a business
One of the first decisions is legal formation (no “business” until owners establish it)
Owner must determine how much money is needed to start the business (owner’s equity, outside financing)
SWOT analysis

22. SWOT analysis Strengths, weaknesses, opportunities, and threats
Strengths: the core competencies of your business – succeed because you do these better than competitors
Weaknesses: areas where your business needs improvement (old equipment, untrained workers, no $)

23. SWOT analysis Strengths, weaknesses, opportunities, and threats
Opportunities: factors that exist in the business environment that will help the business grow
Threats: factors…that will impede the business

24. SWOT analysis
Note: opportunities and threats are also shaped by your own strengths and weaknesses
“Given my superior ability to write apps for iPhones, I can take advantage of the growing base of iPhone owners who use apps”

25. The business plan
Tend to cover a common format to make it easier for investors to read
The executive summary is everything. It is the first thing readers will see, but you should write it last
You must convince your audience in two pages or less that they need to read the rest of your plan
Autoshop example on wiki space

26. Stages of business growth
Seed/start-up: the initial stage; the company has a concept and is normally < 18 months old
Early: less than 3 years old, product or service is commercially available
Expansion: older than 3 years old and has high revenue growth, but may not show a profit
Later: product or service is widely available; generates revenue and has positive cash flow

27. Chapter 3
Financial Statements

28. Financial Statement (Personal Form)
Single bank loan application form which incorporates two individual financial forms:
Statement of financial position
Cash
Cash equivalents
Invested assets
Use assets
Liabilities
Net worth
Personal cash flow statement
Income
Fixed expenses
Variable expenses

29. Personal Income Statement (Cash Flow Statement)
Income—Include all sources
Wages, tips, overtime
Interest on savings, stock dividends, etc.
Fixed expenses
Contractual, must be paid
Rent, insurance, utilities, car payments, etc.
Variable expenses
You control level of expenses (food, clothing)

30. Sources of financing
Personal assets: savings, investments, credit cards, home-equity loans
Equity financing: company-retained earnings and fixed assets of company as collateral
Bank loans
Angel investors: provide seed money for start-up and early-stage companies
Venture capitalists: provide financing at expansion and later stages of business development

31. Differentiating types of costs
Variable costs are directly related to the volume of product flow – the cost you incur for each sale of a unit of product
Variable costs X # units sold = total revenues
Fixed costs are the operating costs associated with running the business but not directly related to revenues

32. Income Statement Business
Basic Format
Sales, revenues, income from doing business
Less cost of goods sold
Gross profit
Less operating expenses
Operating income
Less interest
Net income (explain)

34. Statement of Cash Flows
Statement of cash flows shows how the company’s working capital flows into and out of the business during the year.
Statement of cash flows includes:
Cash flows from operating activities is the difference between all of the cash received by the business and all of the cash paid out by the business in conducting its day-to-day operations.
Cash Flows from Investing Activities:
Acquisition or sale of Plant Assets
Cash Flows from Financing Activities:
Proceeds from issuance or sale of stock (preferred & common), bonds. Purchase of stock or the payment of long-term debt.

35. Statement of Cash Flows (continued)
Examples of operating cash flow
Receipts: All cash received from sales, changes in accounts receivable, changes in inventory.
NOTE: An increase in accounts receivable or inventory represents a negative cash flow. A reduction in receivables or inventory is a positive cash flow.
Payments: All payments made by the company to all accounts (suppliers, employees, rent, utilities, etc.).
Net increase (decrease) in cash plus the cash balance, previous year equals cash balance, current year.

36. Types of activities
Operating
Investing
Financing
Corporation

37. Balance Sheet (Statement of Financial Position)
Total assets
Current assets
Cash, accounts receivable, inventory, treasuries
Anything in your possession that can be reasonably be expected to turn into cash in 90 days
Fixed assets
Land
Building & equipment (less accumulated depreciation)
Net building & equipment

38. Balance Sheet (Statement of Financial Position)
Total liabilities
Current liabilities
Accounts payable, notes payable, taxes payable
Long-term liabilities (debt)
Total equity
Preferred stock
Common stock par value
Paid-in capital in excess of par (common)
Retained earnings

39. Balance Sheet Basic Accounting Equation Individual Sole Proprietorship
Partnership
Corporation

40. Family

41. Balance sheet – “Partners’ equity”

42. Corporation Assets Current assets Fixed assets
Liabilities and SE Equity
Current liabilities
Long-term liabilities
Shareholders’ equity
Preferred stock
Common stock
Retained earnings
Corporation

43. What’s accumulated depreciation?
Corporation

44. Depreciation
The wearing out of a business asset during its useful life
The IRS establishes schedules that businesses use to determine the appropriate method of depreciation
Land never depreciates, but equipment does, usually over 10-year period
Break down depreciation schedules for each piece of equipment
When a fixed asset is sold or disposed of, both its cost and accumulated depreciation go off the balance sheet

45. Accumulated depreciation on the balance sheet