1. Chapter Eighteen Financial and Legal Management

2. Chapter Focus Determine the financing needs of your business. Define basic financing terminology. Explain where to look for sources of funding.

3. SMALL BUSINESS FINANCE The five C’s of credit 1.Capacity 2.Capital 3.Collateral 4.Character 5.Conditions

4. SMALL BUSINESS FINANCE Forms of Capital 1.Debt a. Types 1) Long-term 2) Short-term 3) Fixed rate 4) Variable rate

5. SMALL BUSINESS FINANCE Forms of Capital –Equity financing From family or friends From silent partners From venture capital firms Equity holders are shareholders –Should receive dividends –Should share in growth of assets

6. SMALL BUSINESS FINANCE Start-up Budget –Personnel (costs prior to opening) –Legal/professional fees –Occupancy (buying and/or leasing) –Licenses/permits –Equipment –Insurance –Supplies –Advertising/promotions –Inventory

7. SMALL BUSINESS FINANCE Operating budget –Insurance –Rent –Loan payments –Advertising/promotion –Legal/accounting –Supplies –Salaries/wages –Utilities –Taxes –Repairs/maintenance

8. Stereo City Income Statement INCOME: Net Sales Cost of Goods Sold GROSS PROFIT ON SALES EXPENSES: Selling Expense Advertising Delivery and Freight Sales Salaries Miscellaneous Selling Expenses Administrative Expense Licenses Insurance Nonsales Salaries Payroll Taxes Rent/Mortgage Utilities Legal Fees Depreciation Miscellaneous Administrative Expenses TOTAL EXPENSES $450,000 270,000 180,000 12,000 10,000 25,000 1,000 150 2,400 38,000 6,300 12,400 6,000 1,500 42,000 500 $157,250 % OF SALES 100.00% 60.00% 40.00% 2.67% 2.22% 5.56% 0.22% 0.03% 0.53% 8.44% 1.40% 2.76% 1.33% 0.33% 9.33% 0.11% 34.94% Fig. 17-2a

9. Stereo City Income Statement (cont.) INCOME FROM OPERATIONS OTHER INCOME Interest Income OTHER EXPENSES Interest Expense NET PROFIT (LOSS) BEFORE TAXES INCOME TAXES NET PROFIT (LOSS) AFTER TAXES NOTE: Cash Flow From Operations Equals Net Profit or Loss After Taxes Plus Depreciation $22,750 300 15,000 8,050 3,220 4,830 46,830 % OF SALES 5.06% 0.07% 3.33% 1.79% 0.72% 1.07% Fig. 17-2b

10. Stereo City Balance Sheet ASSETS Current Assets: Cash Accounts Receivable Inventory Prepaid Expenses Short-term Investments Total Current Assets Fixed Assets: Building Equipment Leasehold Improvements Other Fixed Assets Gross Fixed Assets Less: Accumulated Depreciation Net Fixed Assets Total Assets $3,500 12,000 125,000 5,000 10,000 155,500 150,000 25,000 20,000 15,000 210,000 42,000 168,000 323,500 Percent of Total Assets 1.08% 3.71% 38.64% 1.55% 3.09% 48.07% 46.37% 7.73% 6.18% 4.64% 64.91% 12.98% 51.93% 100.00% Fig. 17-3a

11. Where Capital Comes From Short-term Bank Debt Pub. Issue of Equity Fig. 18-1 % of Respondents

12. Who Gets SBA Loans? Industry Segment % of 1992 SBA Loan Dollars Fig. 18-2