SCORE ® Counselors to America’s Small Business Service Corps of Retired Executives Managing Your Money Cash Flow Forecasting Begin with Four Budgets Sources of Equity Sources of Debt Forecasting Cash Flow Break-even Point Other Financial Statements Starting Your Business with Other People’s Money Most Common Problems With Loan Requests

201/05/09 Managing Your Money Numbers- The Language of Business Numbers- The Language of Business Records- The Tools of Money Management Records- The Tools of Money Management Financial Analysis- The Key to Understanding Performance Financial Analysis- The Key to Understanding Performance Cash- The Life Blood of Business Cash- The Life Blood of Business Forecasting Cash Flows is a key to success Forecasting Cash Flows is a key to success WHEN YOU’RE OUT OF CASH YOU’RE OUT OF BUSINESS

301/05/09 Basic Financial Statements Profit & Loss Statement (also called income statement) Profit & Loss Statement (also called income statement) Balance Sheet Balance Sheet Cash Flow Statement Cash Flow Statement –This is the most important financial statement

401/05/09 Profit & Loss Statement Reflects performance over a period of time Gross Sales (Revenue) - Cost of Goods Sold Gross Profit - Operating expenses Operating Income - Interest expense Net Income before taxes - Income taxes Net Income (Profit) Variable expenses ( costs which vary with sales ) Fixed (or period) expenses Depreciation Selling expenses General & Administrative expenses Cost to buy or make the product sold

501/05/09 Balance Sheet Displays net worth of business at a given point in time +Cash +Accounts Receivable +Inventory Current Assets (convertible to cash within one year) +Equipment +Furniture & Fixtures +Property - Depreciation Fixed Assets (longer than one year to convert to cash) TOTAL ASSETS +Accounts Payable +Accrued Taxes +Short-term Notes Payable +Current due on Long-term Debt Current Liabilities (Collectible within one year) +Long-term Notes Payable (Payable in longer than one year) Total Liabilities +Owners Investment +Retained Earnings (income reinvested in the company) Net Worth (Equity of the company) TOTAL LIABILITIES+NET WORTH Assets (what you own)Liabilities (what you owe) =

601/05/09 Equity Investments +DEBT = Total Cash available before business start up - Cash expenditures for Start-up = Cash available at the beginning of month 1 +Cash received during each month from any source -Cash paid out during each month = Cash available at the end of one month and the beginning of the next month Cash Flow Statement

701/05/09 Cash Flow Forecast Begin with 4 Basic Budgets 1. Personal Budget –Make sure minimal personal needs are met 2. Start-up Budget –Cash required to begin your business –Sources of Funds: equity + debt 3. Expense Budget –Forecast of all expenses: Variable & Fixed 4. Sales Revenue / Gross Margin Budget –Forecast of sales revenues and gross margin –Comes from the marketing plan Typical Budget Period 1 st year: Month 2 nd year: Quarter 3 rd year: Annual Add a fifth budget for those of you in Service Business – TIME BUDGET

801/05/09 Personal Budget Your income and expenses now and after the business starts Your income and expenses now and after the business starts Your bank balances over past few months Your bank balances over past few months Show how much money you must take out of the business to live on … this is your minimum owner’s draw Show how much money you must take out of the business to live on … this is your minimum owner’s draw

901/05/09 The Start-up Budget Non-repetitive - one time expenditures prior to opening your business Capital Items Capital Items –Real estate including improvements; equipment, vehicle Initial inventory Initial inventory Other one-time Expenses Other one-time Expenses –Licenses and permits –Professional fees –Rent and Utility deposits –Pre-start up advertising and promotion –Contingency funds Working capital Working capital –Funds required to offset anticipated cash pull down until break-even

1001/05/09 Initial Inventory is a function of Sales Potential Sales= $1 million Sales= $1 million Cost mark up= 100% Cost mark up= 100% Cost of Goods= $500k Cost of Goods= $500k Inventory turns= 5 Inventory turns= 5 (from industry benchmark) Inventory required= $100k Inventory required= $100k

1101/05/09 Financing Start up Costs Sources of Equity Your own savings Your own savings Borrowing against collateral Borrowing against collateral –Home equity loan / refinance –Borrow from pension funds Informal borrowing from family and friends Informal borrowing from family and friends Credit cards Credit cards Equity from Partners or Investors Equity from Partners or Investors

1201/05/09 Financing Start up Costs Sources of Debt Your bank Your bank –Personal loan –Business loan* –Community Express loan* –Line of credit Other financial institutions Other financial institutions –504 Certified Development Company* –SBA-licensed Small Business Investment Companies (SBIC) –Houston Business Development, Inc. –Accion Texas * SBA guarantees these loans up to 85%

1301/05/09 Financing Start up Costs Other Sources of Debt Credit from suppliers (trade credit) Credit from suppliers (trade credit) Loan against inventory (Floor planning) Loan against inventory (Floor planning) Equipment vendor financing (Lease instead of Buy) Equipment vendor financing (Lease instead of Buy) Factors (cash advance against accounts receivable) Factors (cash advance against accounts receivable)

1401/05/09 The Expense Budget Variable expenses (costs which vary with sales) Variable expenses (costs which vary with sales) –Delivery, credit cards, material, utilities, sometimes labor Fixed expenses Fixed expenses –Payroll, rent, supplies, owner’s draw, Debt repayment

1501/05/09 Sales Revenue Budget Forecast sales volume Forecast sales volume –Industry data including competitive analysis –Historical experience or industry benchmarks –Seasonality if appropriate Forecast margin Forecast margin –Difference between sales price of an item and gross cost of making or purchasing that item –Includes materials (or merchandize), delivery and other variable costs Disaggregate by products and services Disaggregate by products and services List key assumptions List key assumptions

1601/05/09 Revenue/Margin Budget (from Marketing Section) Month  YEAR Number of units you expect to sell Average sales price Average cost of sale Gross margin = price - cost Gross Profit =Sales units x gross margin Build one table per product line

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1901/05/09 Break-Even Analysis $ Cash Fixed Costs Cash Income Break-even Point Operating losses added to start-up costs Time (months)

2001/05/09 Break-Even Analysis $ Cash Fixed Costs Cash Income Operating losses added to start-up costs Break-even Point Time (months) Sales are below forecast Over-estimating Income

2101/05/09 Break-Even Analysis $ Cash Fixed Costs Cash Income Operating losses added to start-up costs Break-even Point Time (months) Sales are below forecast Expenses are higher than forecast Under-estimating Expenses

2201/05/09 Break-Even Analysis

2301/05/09 Break-Even Analysis

2401/05/09 Manage Cash on Regular Basis Owner Keeps Control of All Cash Open separate bank account for your business ASAP Open separate bank account for your business ASAP Deposit all receipts “in tact” Deposit all receipts “in tact” Use a “petty cash fund” Use a “petty cash fund” Separate sales tax receipts on your books Separate sales tax receipts on your books Hang on to cash as long as possible Hang on to cash as long as possible Reconcile your bank account at least monthly Reconcile your bank account at least monthly

2501/05/09 Keep Good Records So you can Analyze Your business Measure performance Measure performance –against industry (ratio analysis) –today vs. yesterday vs. same day last year (trend analysis) –How did I do vs. how did I say I would do (actual vs forecast) Recognize red flags; use as diagnostic tool Recognize red flags; use as diagnostic tool Determine cash needs Determine cash needs Control inventory Control inventory Take advantage of cash discounts Take advantage of cash discounts

2601/05/09 Measure Performance Financial Ratios Measure of Comparative performance Measure of Comparative performance Helps identify potential problems Helps identify potential problems Types of Financial Ratios Types of Financial Ratios –Profitability Ratios Measure the efficiency of the business and the owner’s return on investment Measure the efficiency of the business and the owner’s return on investment –Liquidity Ratios Measure the ability of the business to meet its financial obligations Measure the ability of the business to meet its financial obligations –Leverage Ratios Measure the business risk arising from the debt structure of the business Measure the business risk arising from the debt structure of the business

2701/05/09 Three fundamentals of sound cash management 1. Have adequate cash and a reserve fund at the start of the business 2. Manage cash on a daily basis (or on certain days of each week) 3. Prepare and maintain a cash forecast for at least six months into the future CASH is Your Most Important Asset

2801/05/09 Take Home Messages When you’re out of cash you’re out of business When you’re out of cash you’re out of business Budget, budget, budget! Budget, budget, budget! Keep good records Keep good records Analyze your cash flow and business performance regularly Analyze your cash flow and business performance regularly More inventory turns means more cash! More inventory turns means more cash! Bug SCORE for free counseling Bug SCORE for free counseling

SCORE ® Counselors to America’s Small Business Service Corps of Retired Executives Starting & Growing Your Business with Other People’s Money

3001/05/09 The First Tough Truth 

3101/05/09 You … 5 C’s of credit: You … 5 C’s of credit: –Character.…...Credit score, etc. –Collateral……. Assets –Capacity..…… Ability to pay the debt –Conditions..… Economic conditions of area and industry –Capital…..….. The amount you will invest Purpose of the loan Purpose of the loan Your Experience Your Experience Your Business Plan Your Business Plan What Do The Lenders Look For?

3201/05/09 Build Your Reputation Find an unmet need and get started Find an unmet need and get started Learn your business, if you haven’t already Learn your business, if you haven’t already Learn how to manage money Learn how to manage money Establish your credit rating Establish your credit rating Gather some seed money from people who know and believe in you (like yourself) Gather some seed money from people who know and believe in you (like yourself) Prepare a business plan Prepare a business plan

3301/05/09 Learn to Manage Your Money Have a realistic, economical personal budget and stick to it Have a realistic, economical personal budget and stick to it Keep good current records … whether you like to or not! Keep good current records … whether you like to or not! Keep business and personal funds separate. Keep business and personal funds separate. Prepare a financial plan for your business. Prepare a financial plan for your business.

3401/05/09 Build Your Credit Rating Buy things on credit and pay the bill on time. (35%) Buy things on credit and pay the bill on time. (35%) Don’t use most of the credit lenders are willing to give you. (30%) Don’t use most of the credit lenders are willing to give you. (30%) The longer you do this the better. (15%) The longer you do this the better. (15%) Use different types of credit. (10%) Use different types of credit. (10%) Once started, don’t make many new credit applications in a short time. (10%) Once started, don’t make many new credit applications in a short time. (10%)

3501/05/09 One free report from each agency each year at One free report from each agency each year atannualcreditreport.com Get a credit score estimate for $6.95. Get a credit score estimate for $6.95. You Can Easily Check Your Credit Status

3601/05/09 With Business Reputation Financing Becomes Available Community Express; HBD Fast Track Loans; Accion of Texas Community Express; HBD Fast Track Loans; Accion of Texas Trade credit – supplier, equipment vendor Trade credit – supplier, equipment vendor SBA 7(a) loan guarantee program (up to $1.5 million) through commercial banks SBA 7(a) loan guarantee program (up to $1.5 million) through commercial banks HBD Direct and Tandem Loans HBD Direct and Tandem Loans Community development lenders Community development lenders Small business investment companies Small business investment companies

3701/05/09 Working With Your Lender It is never too early to start It is never too early to start A small bank might be best … relationship trumps interest rate A small bank might be best … relationship trumps interest rate A good credit rating is a big plus A good credit rating is a big plus Describe your personal financial status Describe your personal financial status –Share your Personal Budget –Provide all tax returns for past 3 years –List any lawsuits, bankruptcies Describe your financial needs Describe your financial needs –Specify Amount and length of loan –Display sources and uses of funds – be complete and specific Share your business plan Share your business plan –Include financial statements –Show how you will pay back the loan –Show why you will succeed Be open - Tell it like it is

3801/05/09 Most Common Problems With Loan Requests Inadequate equity for the type of business Inadequate equity for the type of business Inadequate collateral Inadequate collateral Inadequate debt coverage in repayment plan (which includes personal spending) Inadequate debt coverage in repayment plan (which includes personal spending) Management ability Management ability Poor owner credit score Poor owner credit score Careless assumptions used in plan Careless assumptions used in plan

SCORE ® Counselors to America’s Small Business Service Corps of Retired Executives Congratulations & Thank You! Keep in touch.

BACK UP

4101/05/09 Accounting Methods Single Entry - Cash Basis Single Entry - Cash Basis –Very simple - (like household accounting) –Recognize income when received –Recognize expenses when paid Double Entry - Accrual Basis Double Entry - Accrual Basis –More complex - - need an accountant –More financial reports generated –Software is more difficult to use –Recognize income when earned –Recognize expenses when incurred

4201/05/09 An Example Start up costs Start up costs –Fixtures 65 –Pick up truck 15 –Inventory 5 –Cash on hand 15 Total100 Total100 Start up financing –Equity 35 –Debt 65 Total100 Fixed Asset Life = 5 years Annual Depreciation = 16 Debt Term = 5 years Interest = 11% Annual Interest = 7 Principal payment = 13

4301/05/09 Example (continued) 1 st year operations: 1 st year operations: –Revenue100 … but collect 97 –Cost of sale 67 … but pay 65 and then build 3 of inv. Materials; Direct Labor; Delivery, etc. –Fixed costs 12 Craft Supplies & Artists; Shop & Truck Rental; Advertising, Utilities, Insurance, Legal, Accounting –Owner’s draw 12 Minimum amount needed to live on

4401/05/09 Cash Flows - Year 0

4501/05/09 Cash Flows - Year 1

4601/05/09 Beginning Balance Sheet Beginning Balance Sheet

4701/05/09 Income Statement

4801/05/09 Ending Balance Sheet Ending Balance Sheet

4901/05/09 Cash Flow Statement

5001/05/09 Income vs. Check Book 24 20