Starting a New Business Start out as small as you can to save money

FINANCE YOUR BUSINESS WITH EQUITY CAPITAL Equity capital is money invested in a business in return for a share in the business’s profits. –Sources of equity capital Personal savings Friends and family Partner(s) Venture capitalist

Private Investors (family, friends, business associates) What do they expect in return? –Get 10 times their investment at the end of 5 years or so –Want to see a strong management team –May want to be involved in the business

Venture Capitalists (individuals or companies willing to take a big risk) What do they expect in return? –Get 10 times their investment at the end of 5 years or so –Want to see a strong management team –Generally will want some percentage of ownership in the company

FINANCE YOUR BUSINESS WITH DEBT CAPITAL Debt capital is money borrowed from some kind of lender. –Sources of debt capital Bank loans MESBIC—minority enterprise small business investment companies; covers ethnicity, females & disabled Commercial finance companies—easier to get a loan than a bank, but more expensive SBA loan—small business administration Trade credit—buying something and not having to pay for, say, 30 days; now you have that money to use

Banks What do they expect in return? –Must make sure that you have the ability to repay the loan –Rely on the 3 C’s Character—WILL you repay the loan? Capacity/Capital-—CAN you repay the loan? Collateral—What if you don’t repay the loan? –Factor in the economic conditions at the time of the loan request

HOW TO GET FINANCING Figure out and show start-up costs –Costs that occur one time when starting business Furniture—Desks, Chairs, etc Equipment—computers, telephones, fax/copy machine Vehicles—delivery Attorney/Accounting Fees Licensing Fees

RESEARCH TO CREATE PRO-FORMA (ESTIMATED) FINANCIAL STATEMENTS –Income (sales) –Expenses Income Statement

Expenses –P–Producing/Purchasing inventory –R–Rent –P–Phone, electric, water –S–Salaries –I–Insurance –P–Payroll taxes –S–Sales taxes Operating Expenses— Costs that occur monthly Income – Expenses = Profit or Loss

RESEARCH TO CREATE PRO-FORMA (ESTIMATED) FINANCIAL STATEMENTS Shows what you own (assets), what you owe (liabilities), and what your company is worth (equity) Assets—Furniture, equipment, building, vehicles, accounts receivable, etc. Liabilities—Loans, accounts payable, etc. Balance Sheet Assets − Liabilities = New Worth

RESEARCH TO CREATE PRO-FORMA (ESTIMATED) FINANCIAL STATEMENTS –Actual cash coming in –Actual cash going out Cash in – Cash out = Cash Flow Cash Flow Statement

CASH FLOW STATEMENT What actual money comes in (revenues) and goes out (expenses) of business

Pro-forma Cash Flow Statement Project (educated guess) revenues Project (educated guess) expenses Subtracting expenses from revenues gives you cash flow Prepare a best- and worst-case scenario –Best—better than expected –Worst—worse than expected

Income Statement What you sold (revenues) What you spent (expenses) –Difference between income statement and cash flow statement: Often you sell and will be paid later so you didn’t have money actually coming in, however, you did sell something The same is true of expenses; you may purchase something with an agreement to be billed and pay later so no money actually went out, but you did purchase something Credit Card Sales?

Assets Fixed –Permanent things—Building, vehicle, equipment, furniture Current –Things that can be converted into cash immediately or used up—Cash, inventory, supplies, accounts receivable When you sell something and get paid in, say, 30 days Contra-asset is allowance for uncollectibe accounts—an amount to be subtracted from accounts receivable for those customers that don’t pay

Depreciation for Fixed Assets Amount an asset loses in value as it gets older so you can show its current worth

Liabilities Long term –Will take more than one year to pay off Mortgage on your building Loan for remodeling Short term –Will be paid off in one year or less Mortgage or any loan that is in its last year Accounts payable—when you buy something and pay in, say, 30 days

SHOPLIFTING  Shoplifting is the act of knowingly taking items from a business without paying.  Customers shoplift millions of dollars in merchandise every year.

EMPLOYEE THEFT Procedures for preventing and detecting employee theft include: –Prevent dishonest employees from joining your company. –Install surveillance systems. –Establish a tough company policy regarding employee theft. –Be on the lookout.

OTHER TYPES OF THEFT  Robbery  Credit card fraud  Bounced checks

TYPES OF INSURANCE  Property insurance—Covers Fire, Tornado/Storm Damage, Robbery  Property insurance Does Not Cover—Flood, Earthquake  Casualty insurance –Covers Accidents in store, Defective merchandise that causes damage to property or causes injury  Life insurance—Covers those that are living  Workers’ compensation—Covers employees injured on the job