2 Unit 3 Vocabulary Accounting Period Accounts Payable Accounts ReceivableAccrual BasisAngelAssetsBalance SheetBootstrappingBudgetCalendar YearCapacityCapitalCapital ExpendituresCash BasisCash FlowCharacterChart of AccountsCollateralComparative Financial StatementConditionsContingency FundCredit BureausCredits
3 Unit 3 Vocabulary Current Assets Current Ratio Debt Capital Debits Due DiligenceEquityEquity CapitalFactorFinancial ReportsFiscal YearFixed AssetsFixed ExpensesGAAPGeneral JournalGeneral PartnerIncome StatementInitial Public Offering (IPO)JournalJournalizingLiabilitiesNet Profit on Sales RatioOperating CapitalOperating Ratio
4 Unit 3 Vocabulary Owner’s Equity Posting Private Placement Pro forma Quick RatioRatio AnalysisRisk CapitalStatement of Cash FlowsStockSubchapter S CorporationTrade CreditVariable ExpensesVenture CapitalVenture CapitalistsWorking Capital
5 Unit 3 Essential Question 1 (MKT-EN-4) What information is needed to compile a business plan worksheet?
6 Essential Question 1A (MKT-EN-4G) What are the sources of capital available to entrepreneurs?
7 Start up Financing Sources of Financing Equity Capital: Cash raised for a business in exchange for an ownership stake in the business or equity.Risk Capital: (Equity funding) money invested in companies where there is financial risk.Sources of Equity Financing:Personal SavingsFriends and FamilyPrivate InvestorsPartnersVenture CapitalistsGovernment-sponsored venture capital funds
8 Start up Financing Sources of Financing Debt Capital: Money raised by taking out loans.Sources of Debt Financing:Banks and Credit UnionsTrade CreditMinority Enterprise Development ProgramsCommercial Finance CompaniesSBA LoansSmall Business Investment Companies (SBICs)
9 Essential Question 1B (MKT-EN-4H) How do the sources of capital compare and contrast?
10 Start up Financing Sources of Financing Equity Capital Debt Capital: Advantage: Money does not have to be paid back even if business failsDisadvantage: You are giving up a percentage of ownership and/or control and profitDebt Capital:Advantage: You maintain ownership, control and profitsDisadvantage: Money has to be paid back even if business fails
11 Unit 3 Essential Question 2 (MKT-EN-7) What are the processes, strategies, and systems needed to guide the financial organization of an entrepreneurial entity?
12 Essential Question 2A (MKT-EN-7A) What are the fixed and variable costs for start up and maintenance of a business?
13 Start up Financing Start up Costs Fixed Expenses: Expenses that do not change with the number of units produced.RentLoansInsuranceManagement SalariesPromotion
14 Start up Financing Start up Costs Variable Expenses: Expenses that change with the number of units produced.SuppliesUtilitiesWorker wages / CommissionProduction materialsMaintenanceTransportationAll operating expenses
15 Essential Question 2B (MKT-EN-7B) What are the terms used in financial reports?
16 Financial Terms Definitions Assets: Items of value that belong to a business or individual.Liabilities: Monies owed to others.Equity: Ownership or investment.Liquidity: The ease of converting assets to cash. Items with high liquidity are savings, stocks, mutual funds, etc. Items with low liquidity are houses, equipment, etc.Solvency: Measure of indebtedness. If assets are greater than liabilities then you are solvent. If liabilities are greater than assets then you are insolvent.
17 Financial Terms Definitions Ratio Analysis: The comparison of two or more amounts on a financial statement and the evaluation of the relationship between them.Current Assets: Cash or any other item that can be converted to cash quickly and used within a year.Current Liabilities: Debts due within a year.
18 Financial Terms Ratio Analysis Current Ratio Obtained from the balance sheet.Indicates the ability of a business to pay its bills.Is measured by:A ratio of 2:1 or higher is good.
19 Financial Terms Ratio Analysis Working Capital Obtained from the balance sheet.Indicates the capital available to carry out daily operations.Is measured by: Current Assets – Current LiabilitiesAmount of working capital needed is determined by industry average.
20 Financial Terms Ratio Analysis Debt Ratio Obtained from the balance sheet.Indicates the solvency of a business.Is measured by:A ratio of 50% to 75% is good for business operation. This indicates the majority of the business is financed by creditors and provides a negative incentive for takeovers.A ratio of 40% or less is required for a business or personal loan.
21 Financial Terms Ratio Analysis Net Profit on Sales Obtained from the income statement.Indicates the amount of money left from each dollar derived from sales.Is measured by:Amount of net profit on sales is determined by industry average.If net profit on sales is lower than industry average, it may indicate that prices are too low or costs are too high.
22 Financial Terms Ratio Analysis Operating Ratio Obtained from the income statement.Indicates the relationship between an expense and sales.Each expense is measured separately.Is measured by:Amount of operating ratio is determined by industry average.If your percentage is higher than the industry average, it could be an indicator that you are spending too much in that expense area.
23 Financial Terms Ratio Analysis Quick Ratio Obtained from the balance sheet.Indicates the liquidity of a business without relying on inventory.Is measured by:Amount of quick ratio is determined by industry average.
24 Financial Terms Ratio Analysis Return on Equity (ROE) Obtained from the balance sheet and income statement.Indicates the amount of money earned for each dollar invested.Is measured by:Amount of ROE is determined by industry average.
25 Essential Question 2C (MKT-EN-7C) What are the various elements needed for a tentative budget for a business including an income statement, balance sheet, and cash flow statement?
26 Financial StatementsBudget: A formal, written statement of expected revenue and expenses for a future period of time. It will include a projected (pro forma) income statement, cash flow statement, and balance sheet.
27 The Income StatementIncome Statement: A summary of the business’s revenue and expenses and is used to calculate Net Income or Loss.
28 The Income Statement Total Sales Returns and Allowances = Net Sales Cost of goods Sold= Gross ProfitOperating Expenses= Net Income from Operations+ Other IncomeOther Expenses= Net Profit Before TaxesIncome Taxes= Net Profit (Loss)
29 The Income Statement Cost of Goods Sold is calculated by: Beginning Inventory+ Purchases= Goods Available for SaleEnding Inventory= Cost of Goods Sold
31 The Balance SheetBalance sheet: A summary of a business’s assets, liabilities, and owner’s equity.Assets = Liabilities + Owner’s EquityA balance sheet consists of:Current assets: Cash or any other item that can be converted to cash quickly and used within a year.Fixed assets: Items that will be held for more than a year. (Automobiles, equipment, buildings, etc)Current liabilities: Debts due within a year.Long-term liabilities: Debts that will not be paid off within the year.Owner’s Equity: The value or worth of the business.
33 Cash Flow StatementCash Flow: The amount of cash available at any time.Cash Flow Statement: A report of how much cash a business took in and where the cash went.Cash Flow also helps you see if you will have enough money when you need to pay your bills.
35 Essential Question 2D (MKT-EN-7D) What are the various tax liabilities?
36 Laws that Affect TaxesSales Taxes: Percentage of the price of an item that goes to a state or local government.Federal Unemployment Tax: The Federal Unemployment Tax Act (FUTA) requires employers to pay 6.2% of their employee’s gross pay as insurance for workers who are temporarily out of work.
37 Laws that Affect TaxesState Unemployment Tax: The State Unemployment Tax Act (SUTA) requires employers to pay a percentage (varies with the state – 2.7% on the first $8500 with step decreases depending on hiring/firing history in Georgia) of their employee’s gross pay for workers who are temporarily out of work.Business Income Taxes: Your business’s legal status regulates the amount of local, state, and federal income taxes paid.
38 Laws that Affect TaxesOther Business Taxes: Depending on the business, there may be other local, state, and/or federal taxes.Environmental taxesCommunication and air transportation taxesFuel taxesFirst retail sale on heavy trucks, trailors and tractorsManufactures taxes on the sale and use of a variety of different articlesThere is a federal excise tax on certain trucks, truck tractors, and buses used on public highwaysBusinesses that accept wagers or conduct a wagering pool or lottery
39 Laws that Affect Taxes Payroll Taxes: Federal Insurance Contributions Act of 1935 (FICA): Established the Social Security Tax.Is 13% of the employee’s gross pay.Employee pays 6.5%.Employer pays 6.5%.If you are self-employed you are considered both the employer and employee and are required to pay the full 13%.
40 Laws that Affect Taxes Medicare Tax Is 2.9% of the employee’s gross pay.Employee pays 1.45%.Employer pays 1.45%.If you are self-employed you are considered both the employer and employee and are required to pay the full 2.9%.