Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9
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
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 3
Assess Your Financial Needs
Estimate startup costs.
Create a personal financial statement.
Prepare pro forma financial statements.
Startup Costs
Itemize startup costs.
equipment and supplies
furniture and fixtures
vehicles
remodeling
legal and accounting fees
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 5
Personal Financial Statement
net worth =
assets ─ liabilities
personal financial statement =
personal assets ─ personal liabilities
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 7
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.
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 9
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
equity capital
Using page 249 as an example, create a start up cost statement to include in your business plan.
• Equipment & supplies
• Furniture & fixtures
• Inventory
• Remodel/Rent/Building
• Vehicles (if needed)
• Legal & accounting fees (if needed)
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 11
Debt Capital
debt capital
money loaned to a business with the
understanding that the money will be repaid
usually with interest
Borrowing from Friends and Relatives
Determine how the loan will affect your relationship.
Prepare a formal agreement regarding
terms of the loan.
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 13
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
line of credit
long-term loan
accounts receivable financing
inventory financing
Types of secured loans include the
following:
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 15
loans that are not guaranteed with collateral
only made to creditworthy customers
unsecured loans
The business is a startup.
A lack of:
a solid business plan
adequate experience
confidence in the borrower
adequate personal investment
Reasons a bank may not lend money
include:
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 17
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:
SBA loans:
Net Bookmark page 254
Chapter 9
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 19
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.
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 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 21
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.
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 23
Economic Effects on Cash Flow
Changes in the economy can
dramatically effect the cash flow of businesses.
Business owners should make
conservative estimates.
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 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 25
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.
Revenue
Cost of goods sold
Gross profit
Operating expenses
Net income before taxes
Taxes
The pro forma income statement
consists of:
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 27
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 =
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 29
Prepare a Pro Forma Balance Sheet
Types of Assets
current assets
can be converted to cash easily (inventory, cash)
accounts receivable
the amounts owed to a business by its credit customers
fixed assets
cannot be converted into cash easily
(equipment, vehicles)
long-term liabilities
debts that are payable over a year or longer (loans)
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
Types of Liabilities
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 31
allowance for uncollectible accounts
the amount a company estimates it will not receive from customers
depreciation
the lowering of an asset’s value to reflect its current worth
Reductions in Assets
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 1 Slide 33
Using pages 258-261 as guides, create a pro forma cash flow
statement, a pro forma income
statement, and a pro forma balance sheet.
Remember: these are made-up
numbers, but should be reasonable.
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.
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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 Slide 35
Cash Accounting 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
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Accrual Accounting Method
accrual method
revenue is recorded when the sale occurs
expenses are recorded when you receive the goods or services
Chapter 1 Slide 37
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
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 39
Recording Transactions
transaction
any business activity that changes assets,
liabilities or net worth
Journals
journals
accounting records of the transactions you make for
sales
cash payments
cash receipts
purchases
general
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ledgers
A general ledger is made up of accounts.
account
an accounting record that provides
financial detail for a particular business item
Chapter 1 Slide 41
used for accounts payable to show in detail the transactions with each vendor from whom merchandise is purchased on account
subsidiary ledgers
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 1 Slide 43
a record keeping tool for tracking accounts receivable
shows how long it takes customers to pay their bills
aging table
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 45
Business Records
Good recordkeeping can help you make smart business decisions.
Incomplete records can cause you to
mismanage your business.
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 47
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
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 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2. Payroll Records
payroll
a list of people who receive salary or wage payments from a business
Chapter 1 Slide 49
3. Tax Records
Income tax
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
Entrepreneurship: Ideas in Action 5e
© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 9 Slide 51
