Chapter 9 Cash Flow: The Lifeblood of a Business Entrepreneurship Chapter 9 Cash Flow: The Lifeblood of a Business Mariotti: Entrepreneurship

The Income Statement does not Show How Much Cash You Have There is often a time lag between making a sale and getting paid. You can make a lot of sales and still be low on cash. The income statement includes non-cash expenses, such as depreciation. Use a cash flow statement to make sure you always know how much cash you have on hand. Marriotti: Entrepreneurship

Rules to Keep Cash Flowing Collect cash as soon as possible after a sale. Pay your bills by the due date, not earlier. Check your cash balance every day. Lease instead of buying equipment, where feasible. Avoid buying inventory (stock) that you may not be able to sell quickly. Marriotti: Entrepreneurship

Cash Flow can be Cyclical For many businesses, the amount of cash flowing into the business ebbs and flow throughout the year. If this is true for your business, include a seasonality scenario in your business plan. Examples: A flower store may have more cash around Mother’s Day and Valentine’s Day and less cash during the summer. A college bookstore will have more cash once school starts and less when it has to buy inventory before the school year begins. Marriotti: Entrepreneurship

Cash Flow Statement has 3 Sections 1. Cash inflows (or receipts) —operation (money used to run the business) —investment (money invested in the business) —financing (debt and equity used to finance the business) 2. Cash outflows (or disbursements) 3. Net change in cash flow (positive or negative) The Cash Flow Equation: Cash Flow = Receipts – Disbursements Marriotti: Entrepreneurship

Cash Flow Statement Marriotti: Entrepreneurship

Forecasting Cash Flow Prepare monthly cash flow projections (estimates) to make sure you have enough money coming in to pay bills. Step 1 Project your cash receipts from all possible sources: checks, credit card orders, cash. Step 2 Subtract expenses you expect to have to pay during the time period for which you are forecasting cash flow. Marriotti: Entrepreneurship

Risk of Tying Up Cash in Inventory If you buy inventory, no one may buy it at a price that earns you a profit. You will be spending money to store inventory. Pilferage: stealing of inventory by employees or customers. Make sure you can sell inventory at a price that covers COGS, storage, and pilferage . . . and still provides a profit. Marriotti: Entrepreneurship

Be Prepared for Negative Cash Flow When You Start Your Business It is normal to have a negative cash flow rate for the first few months of business. Burn rate: cash on hand/negative cash outflow per month = # of months before cash runs out. Solution: Write a business plan that will make investors willing to invest extra money to pay the bills for the first few months. Marriotti: Entrepreneurship

Current Assets – Current Liabilities Working Capital Working Capital = Current Assets – Current Liabilities Cash company can use to grow Tells you how much cash company will have left over if it uses its cash to pay all its short-term debts. A company with positive WC will outperform a company with negative WC, as it can use cash to develop products, advertise, etc. Marriotti: Entrepreneurship

Entrepreneurs Pay Self-Employment Tax Employees have Social Security tax taken out of their paychecks by employers. Self-employed people must pay their own self-employment tax into Social Security. If you earn over $400 per year from self employment, you must pay 15.3% to Social Security. Use tax form Schedule SE Marriotti: Entrepreneurship

Income and Sales Taxes Entrepreneurs also pay income tax to federal and state governments. 1040 US Individual Tax Return Schedule C—Profit or Loss from Business Obtain a federal tax identification number for your business. Income and self-employment tax returns must be mailed to the Internal Revenue Service by April 15 each year. If you sell products/services to the public, you must collect state sales tax and turn in the tax you have collected quarterly. Obtain a sales and use tax registration number from your state. Marriotti: Entrepreneurship

Each Legal Structure has Tax Pros and Cons Sole Proprietorship—all profits reported as personal income by owner. Partnership—profits and losses shared by partners and reported on their individual tax returns. Corporation—profits are taxed; also when owners receive share of profits, they must report them on their individual tax returns and pay tax on them. Marriotti: Entrepreneurship

Keep Good Records The IRS may audit (check) your financial records at any time. Keep records accurately and keep all records, receipts and invoices for at least 6 years after you file a return. Use a professional tax preparer or have one review all returns that you prepare. Marriotti: Entrepreneurship

Your Rights as a Taxpayer As a taxpayer you have the right to ask: Where are my tax dollars going? Are my tax dollars supporting services that benefit me and my community? Am I paying taxes for government services that could be more efficiently supplied by private companies? Are the tax rates fair? Marriotti: Entrepreneurship