Plan and Track Your Finances

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Chapter

Plan and Track Your Finances

9.1 Finance Your Business

9.2 Pro Forma Financial Statements 9.3 Record Keeping for Businesses

9

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Entrepreneurship: Ideas in Action

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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

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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

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Slide 4

Terms

 net worth

 debt-to-equity ratio

 equity capital

 venture capitalists

 debt capital

 collateral

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Assess Your Financial Needs

 Itemize startup costs.

 Determine the amount of capital required to start your business.

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Slide 6

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Personal Financial Statement

 net worth =

assets ─ liabilities

 personal financial statement =

personal assets ─ personal liabilities

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Slide 8

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Why is the net worth of an

entrepreneur important to potential investors in the business?

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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.

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 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

 equity capital

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Slide 12

What are some of the ways entrepreneurs can get equity capital?

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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

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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

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 line of credit

 long-term loan

 accounts receivable financing

 inventory financing

 Types of secured loans include the following:

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Slide 16

 loans that are not guaranteed with collateral

 only made to creditworthy customers

 unsecured loans

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 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:

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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:

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Where can entrepreneurs look for debt financing?

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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.

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Terms

 cash flow statement

 income statement

 balance sheet

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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

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Forecast Receipts and Disbursements

 estimate

 monthly cash receipts

 monthly cash disbursements

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Slide 24

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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

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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.

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What does a cash flow statement show?

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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

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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.

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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:

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Slide 34

What does an income statement show?

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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 =

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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

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 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

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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

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Slide 40

Name one example each of a

current liability, a long-term liability, a current asset, and a fixed asset.

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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.

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Slide 42

Terms

 transaction

 journals

 account

 check register

 payroll

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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

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Slide 44

 A general ledger is made up of accounts.

 account

 an accounting record that provides financial detail for a particular business item

 ledgers

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 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

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Slide 46

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What is the difference between a journal and a ledger?

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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

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 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

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Slide 50

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 payroll

 a list of people who receive salary or wage payments from a business

 Payroll Records

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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

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 Sales taxes are based on a percentage of sales.

 Each month you deposit sales tax into a government owned account.

 Sales Tax

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Slide 54

What kinds of bank, payroll, and tax records do you have to keep?

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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.

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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.

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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?

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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?