Lecture 10 Financial Issues Dr. Hatem Elaydi ECOM 5368 Engineering Management (Entrepreneurship & ework) Islamic University of Gaza Oct 3, 2016

5.1 Start-up Costs Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Start-up costs: six steps Calculate the amount of capital that you will need to start the business. Determine whether or not the business has potential for profitability. Prepare a projected cash flow as a viable tool for planning the most efficient uses of your cash. Prepare a balance sheet to give you a snapshot of the financial position of the business on a specified date. Develop a sales forecast based on industry and customer trends in order to provide everyone working in the business with a goal. Determine how well is your business is doing compared with previous periods or other competitors by comparing certain data about your business. (sales ratio, return on investment, liquidity, debt management, activities, turnovers) Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Definitions Start-up costs: all expenditure a business will have prior to opening doors minus what owner will contribute. Start-up costs don’t include existing assets of owner and owner’s spare labor. Costs after opening doors: cost of goods sold and operating cost. Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Summary of costs Research & development: market research, product development, business plan development Management: office supplies, legal & accounting, licenses and taxes, owner wages Production assets: plant & equipment, land, transportation – company vehicle Overhead: utilities(electricity, water, garbage pickup, gas), insurance(fire, liability, theft, life), leases, rents Production costs: improvement & maintenance, inventory, materials, freight, customs duties Sales costs: advertising, promotion, travel Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Formulas Start-up capital = start-up cost + operating requirements - available funds of owner Start-up capital: the amount of money or funds required to bring the business to the point of sales Start-up cost: all costs involved in starting up a business Operating requirements: the cost that you have to continue production, such as wages, inventory, and materials Available funds of owner: funds that owner have available to invest in the business Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

5.2 Income statement Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Income statement It provides the entrepreneur with a financial measure of profitability of the business over a specified period of time Profit: the monetary increase or decrease of an owner’s business in a given accounting period. Profitability: difference between revenues and expenses Revenues: sales and receivables of goods and services Expenses: costs incurred to bring those services and business to the point of sales Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Income statement 2: five elements Revenues: sales Cost of goods sold: CofGS Gross profit (markup): difference between revenues and CofGS. Gross margin: gross profit as percentage of sales Expenses: operating cost (warranties, services, etc) Net operating income: monetary profit or loss of a business over a specified period of time. Calculated by subtracting expenses from the gross profit margin Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Income statement 3: formulas Revenues: sales Cost of goods sold: CofGS Gross profit = revenues – CofGS Net operating income = gross profit - expenses Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

5.3 Cash flow Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Cash flow: two elements Inflows: all sources of cash received (sales, loans, capital sales, owners contributions Outflows: all cash disbursements (inventory purchases, cash operating expenses, loan payment, capital expenditures, owner withdrawals) Ending balance = beginning balance + inflows - outflows Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

5.4 Balance sheet Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship