Plan and Track Your Finances

1. Plan and Track Your Finances 9.1 Financing Your Business 9.2 Pro Forma Financial Statements 9.3 Recordkeeping for Businesses

2. Lesson 9.1Financing 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 business. Chapter 9

3. Vocabulary • net worth • debt-to-equity ratio • equity capital • venture capitalists • debt capital • collateral Chapter 9

4. Assess Your Financial Needs • Estimate startup costs. • Create a personal financial statement. • Prepare pro forma financial statements. Chapter 9

5. Startup Costs • Itemize startup costs. • equipment and supplies • furniture and fixtures • vehicles • remodeling • legal and accounting fees • licensing fees Chapter 1

6. Chapter 9

7. Personal Financial Statement • net worth= assets ─ liabilities • personal financial statement = personal assets ─ personal liabilities Chapter 9

8. Chapter 9

9. Why is the net worth of an entrepreneur important to potential investors in the business? Chapter 1

10. 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. Chapter 9

11. equity capital • 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 Chapter 9

12. What are some of the ways entrepreneurs can get equity capital? Chapter 1

13. Debt Capital • debt capital • money loaned to a business with the understanding that the money will be repaid • usually with interest Chapter 9

14. Friends and Relatives • Determine how the loan will affect your relationship. • Prepare a formal agreement regarding terms of the loan. Chapter 1

15. 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 Chapter 9

16. Types of secured loans include the following: • line of credit • long-term loan • accounts receivable financing • inventory financing Chapter 9

17. unsecured loans • loans that are not guaranteed with collateral • only made to creditworthy customers Chapter 9

18. Reasons a bank may not lend money include: • The business is a startup. • A lack of: • a solid business plan • adequate experience • confidence in the borrower • adequate personal investment Chapter 9

19. Other sources of loans include: • 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 Chapter 9

20. Where can entrepreneurs look for debt financing? Chapter 1

21. Lesson 9.2Pro Forma Financial Statements Goals • Prepare a pro forma cash flow statement. • Prepare a pro forma income statement. • Prepare pro forma balance sheet. Chapter 9

22. Vocabulary • cash flow statement • income statement • balance sheet Chapter 9

23. 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 Chapter 9

24. Forecast Receipts and Disbursements • estimate • monthly cash receipts • monthly cash disbursements Chapter 9

25. Chapter 9

26. Chapter 9

27. 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. Chapter 9

28. Chapter 9

29. Economic Effects on Cash Flow • Changes in the economy can dramatically effect the cash flow of businesses. • Business owners should make conservative estimates. Chapter 9

30. What does a cash flow statement show? Chapter 1

31. Income Statement • income statement • shows revenues and expenses incurred over a period of time • shows the profit or loss for the time period Chapter 9

32. 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. Chapter 9

33. The pro forma income statement consists of: • Revenue • Cost of goods sold • Gross profit • Operating expenses • Net income before taxes • Taxes • Net income/loss after taxes Chapter 9

34. Chapter 9

35. What does an income statement show? Chapter 1

36. 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 = liabilities + owner’s equity Chapter 9

37. Prepare a Pro Forma Balance Sheet • Types of Assets • current assets • can be converted to cash easily • accounts receivable • the amounts owed to a business by its credit customers • fixed assets • cannot be converted into cash easily Chapter 9

38. Types of Liabilities • long-term liabilities • 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 Chapter 9

39. Reductions in Assets • 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 Chapter 9

40. Chapter 9

41. Name one example each of a current (liquid) asset, a fixed (illiquid) asset, a current liability, and a long-term liability. Chapter 1

42. Lesson 9.3Recordkeeping 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. Chapter 9

43. Vocabulary • cash method • accrual method • transaction • journals • account • check register • payroll Chapter 9

44. 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

45. Cash 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 using the cash method. Chapter 1

46. Accrual Method • accrual method • revenue is recorded when the sale occurs • expenses are recorded when you receive the goods or services Chapter 1

47. 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 sold to the public and has annual sales of over $1 million Chapter 1

48. What is the main difference between the cash and accrual methods of accounting? Chapter 1

49. Recording Transactions • transaction • any business activity that changes assets, liabilities or net worth Chapter 9

50. Journals • journals • accounting records of the transactions you make for • sales • cash payments • cash receipts • purchases • general Chapter 1