The Financial plan and Source of capital Lets make some money!

Financing for your business Debt financing - Obtaining borrowed funds for the company. Asset-based financing; requires some asset to be used as a collateral. Borrowed funds plus interest need to be paid back. Equity Financing - Obtaining funds for the company in exchange for ownership. Does not require collateral. Offers investor some form of ownership position. Financing for your business

Factors affecting type of financing: Availability of funds. Assets of the venture. Prevailing interest rates. All financing requires some level of equity; amount will vary by nature and size of venture.

External funds: Personal funds Least expensive funds in terms of cost and control. Essential in attracting outside funding. Typical sources of personal funds: Savings. Life insurance. Mortgage on a house or car. The entrepreneur’s level of commitment is reflected in the percentage of total assets that the entrepreneur has committed. External funds: Personal funds

External funds: Family and friends Likely to invest due to relationship with entrepreneur. Advantages - Easy to obtain money; more patient than other investors. Disadvantage - Direct input into operations of venture. A formal agreement must include: Amount of money involved. Terms of the money. Rights and responsibilities of the investor. Steps to be taken incase business fails. External funds: Family and friends

External funds: Commercial bank Types of Bank Loans (Asset based) Accounts receivable loans. Inventory loans. Equipment loans. Real-estate loans. Cash flow financing (Conventional bank loans) Installment loans. Straight commercial loans. Long-term loans. Character loans. External funds: Commercial bank

External funds: Commercial bank Bank Lending Decisions Based on quantifiable information and subjective judgments. Decisions are made according to the five Cs of lending- Character, Capacity, Capital, Collateral, and Conditions. Review of past financial statements and future projections. Questions are asked regarding ability to repay the loan. External funds: Commercial bank

External funds: Commercial bank “Bank Shopping” procedure: Complete an application, which is a “mini” business plan. Evaluate alternative banks. Select one with a positive loan experience in the business area. Set an appointment. Carefully present the case for the loan. Borrow the maximum amount possible. External funds: Commercial bank

External funds: Venture capitalist They will always ask for equity They will involve themselves in the business but it might be a bad thing if the VC has knowledge about your industry. External funds: Venture capitalist

External funds Criteria for evaluating external sources of funds: Length of time the funds are available. Costs involved. Amount of company control lost. External funds

Internal funds: Your own business Internally generated funds are most frequently employed; sources include: Profits (retained earnings) Sale of assets and little-used assets. Working capital reduction. Accounts receivable. Short-term internal source of funds: Reducing short-term assets - inventory, cash, and other working-capital items. Extended payment terms from suppliers. Internal funds: Your own business

Startup cost Itemize startup costs. Remodeling equipment and supplies furniture and fixtures vehicles Remodeling Legal and accounting fees Licensing fees Startup cost

Some financial terms Net Worth/Equity = Assets – liabilities Debt to Equity ratio = Total liabilities / total equity Equity capital: Money invested in a business in return for a share of the profit in the business. Some financial terms

Why you might get rejected for financing The business is a startup. A lack of:  a solid business plan  adequate experience  confidence in the borrower  adequate personal investment Why you might get rejected for financing

A statement of how your business is performing measured in term of money. Cash flow statement Income statement / P/L statement Balance Sheet Financial Statements

Income statement Your income statement includes: Revenue Cost of goods sold Gross profit Operating expenses Net income before taxes Taxes Net income/loss after taxes Income statement

A 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 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 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 Balance Sheet

The major difference between the cash and accrual accounting methods is the timing of when transactions are recorded. 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. ACCRUAL METHOD Revenue is recorded when the sale occurs Expenses are recorded when you receive the goods or services Only very small businesses use the CASH method. If annual sales exceeds 5 mil, you use ACCRUAL method. Cash or Accrual method