Entrepreneurship Chapter 12 Raising Capital: Tracking Debt and Equity on the Balance Sheet Mariotti: Entrepreneurship

The Balance Sheet Also called “point-in-time” statement Shows how a business is financed Prepared at end of fiscal year — the 12-month accounting period chosen by the business 3 items Assets—things a company owns that are worth money Liabilities—debts a company must pay, including unpaid bills Owner’s Equity (OE)—Assets-Liabilities, also called “net worth” Marriotti: Entrepreneurship

Balance Sheet Marriotti: Entrepreneurship

Short and Long-Term Assets Assets are all items worth money owned by the business: Current assets—cash or items that can be quickly turned into cash. Accounts receivables Inventory Supplies Long-term assets—items that would take the business more than one year to use. Equipment Furniture Machinery Real estate Marriotti: Entrepreneurship

Current and Long-term Liabilities Liabilities are all debts owed by the business. Current liabilities—debts that must be paid within one year. Bills Lines of credit Short-term loans Long-term liabilities—debts that will be paid over more than one year. Bank loans mortgages Marriotti: Entrepreneurship

The Balance Sheet Equation Assets – Liabilities = Owner’s Equity Or Assets = Owner’s Equity – Liabilities Owner’s Equity is also called: Net worth Capital Marriotti: Entrepreneurship

Where to Find Capital 1. Finance with earnings: If company is profitable, use portion of profits to hire employees, managers, expand, etc. 2. Finance with equity: If company is incorporated, sell stock to raise capital. 3. Finance with debt: If company is incorporated, sell bonds to borrow capital. Marriotti: Entrepreneurship

The Stock Market Comprised of a collection of exchanges around the world where stocks are traded, such as the New York Stock Exchange on Wall Street and the Nippon Stock Exchange in Tokyo. Each share of stock represents a percentage of ownership of a corporation. A stock’s price reflects investors’ opinions about how well the corporation is going to perform in the future. Marriotti: Entrepreneurship

Issuing Bonds Corporations use bonds to borrow money. Investors who buy bonds are lending the corporation a set amount of money (face value) for a set length of time (maturity). Investors get interest payments and when the bond matures, the corporation must pay back the face value to the investor. The investor may sell the bond on the financial markets. A bond can trade at par (face value), premium (above face value) or a discount (below face value). Stocks and bonds are called securities. Marriotti: Entrepreneurship

Reading Bond Tables Marriotti: Entrepreneurship

Assets Must Equal (“Balance”) Liabilities + O.E. If an item was financed with debt, the loan is a liability. If an item was purchased with the owner’s money, it was financed with equity. Liabilities and owner’s equity pay for all items owned by the business (assets). Marriotti: Entrepreneurship

Analyzing a Balance Sheet The balance sheet shows how a business is financed. Investors use ratios and “same-size” analysis to analyze a balance sheet. Marriotti: Entrepreneurship

“Same Size” Balance Sheet Analysis Marriotti: Entrepreneurship

Quick and Current Ratios Quick Ratio: Cash + marketable securities Current Liabilities Should always be greater than 1 Shows if you have enough cash to cover all your bills within 24 hours Current Ratio: Current Asset Shows that if you had to, you could sell some assets to pay off your debts Marriotti: Entrepreneurship

Debt Ratios Debt ratios show at a glance how much of the company is financed with debt and how much with equity. Debt-to-Equity Ratio: Debt/Equity Example: ratio of 1 means for every $1 of debt the company owns $1 of assets. Debt Ratio: Debt/Assets Example: ratio of .5 means company is in debt for 50% of its assets. Entrepreneurs like to have a fairly high debt ratio, because it means they are financing the business not with their own money but with credit from creditors and suppliers. Marriotti: Entrepreneurship

Operating Efficiency Ratios Collection Period Ratio: Average accounts receivable (Balance Sheet) Average daily sales (income Statement) Receivable Turnover Ratio: Total Sales (Income Statement) Average Accounts Receivables (Balance Sheet) Inventory Turnover Ratio: Cost of Goods Sold (Income Statement) Average Inventory (Balance Sheet) = # of days = # of times = # of times Marriotti: Entrepreneurship