Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ChapterChapter9 Plan and Track Your Finances 9.1 Financing Your Business 9.2 Pro Forma Financial Statements 9.3 Recordkeeping for Businesses

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 2 Assess Your Financial Needs Estimate startup costs. Create a personal financial statement. Prepare pro forma financial statements.

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Startup Costs Itemize startup costs. equipment and supplies furniture and fixtures vehicles remodeling legal and accounting fees licensing fees Chapter 1 Slide 3

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 4

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 5 Personal Financial Statement net worth = assets ─ liabilities personal financial statement = personal assets ─ personal liabilities

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 6

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 7 Equity Capital debt-to-equity ratio the relation between the dollars you have borrowed and the dollars you have invested in your business total liabilities ÷ total equity Lenders prefer low debt-to-equity ratios.

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 8 money invested in a business in return for a share in the profits of the business Sources of equity include: Personal Contributions Friends and Relatives Venture Capitalists individuals and companies that make a living investing in startup companies equity capital

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 9 Debt Capital debt capital money loaned to a business with the understanding that the money will be repaid usually with interest

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Friends and Relatives Determine how the loan will affect your relationship. Prepare a formal agreement regarding terms of the loan. Chapter 1 Slide 10

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 11 Commercial Bank Loans secured loans loans that are backed by collateral collateral property that the borrower forfeits if he or she defaults on the loan

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 12 line of credit long-term loan accounts receivable financing inventory financing Types of secured loans include the following:

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 13 loans that are not guaranteed with collateral only made to creditworthy customers unsecured loans

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 14 The business is a startup. A lack of: a solid business plan adequate experience confidence in the borrower adequate personal investment Reasons a bank may not lend money include:

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 15 Small Business Administration Small Business Investment Companies Minority Enterprise Small Business Investment Companies Department of Housing and Urban Development The Economic Development Administration State Governments Local and Municipal Governments Other sources of loans include:

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 16 Cash Flow Statement cash flow statement an accounting report that describes the way cash flows into and out of your business over a period of time

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 17 Forecast Receipts and Disbursements estimate monthly cash receipts monthly cash disbursements

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 18

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 19

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 20 Prepare the Cash Flow Statement net cash flow = cash receipts ─ cash disbursements Pro forma statements help you anticipate when negative cash flows will occur. You can plan how to handle or avoid them.

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 21

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 22 Economic Effects on Cash Flow Changes in the economy can dramatically effect the cash flow of businesses. Business owners should make conservative estimates.

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 23 Income Statement income statement shows revenues and expenses incurred over a period of time shows the profit or loss for the time period

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 24 Prepare a Pro Forma Income Statement The long-term growth of your business can be demonstrated by a pro forma income statement prepared for multiple years.

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 25 Revenue Cost of goods sold Gross profit Operating expenses Net income before taxes Taxes Net income/loss after taxes The pro forma income statement consists of:

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 26

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 27 Balance Sheet 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

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 28 Prepare a Pro Forma Balance Sheet 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

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 29 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 Types of Liabilities

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 30 allowance for uncollectible accounts the amount a company estimates it will not receive from customers depreciation the lowering of an asset’s value to reflect its current worth Reductions in Assets

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 31

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cash or Accrual Accounting Methods The major difference between the cash and accrual accounting methods is the timing of when transactions are recorded. Chapter 1 Slide 32

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cash Method 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. Chapter 1 Slide 33

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Accrual Method accrual method revenue is recorded when the sale occurs expenses are recorded when you receive the goods or services Chapter 1 Slide 34

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Choosing an Accounting Method Only very small businesses use the cash method. A business must use the accrual method if: annual sales exceed $5 million the company stocks inventory that will be sold to the public and has annual sales of over $1 million Chapter 1 Slide 35

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 36 Recording Transactions transaction any business activity that changes assets, liabilities or net worth

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Journals journals accounting records of the transactions you make for sales cash payments cash receipts purchases general Chapter 1 Slide 37

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Ledgers A general ledger is made up of accounts. account an accounting record that provides financial detail for a particular business item Chapter 1 Slide 38

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 39 used for accounts payable to show in detail the transactions with each vendor from whom merchandise is purchased on account subsidiary ledgers

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 1 Slide 40

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 41 a record keeping tool for tracking accounts receivable shows how long it takes customers to pay their bills aging table

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 42

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Business Records Good recordkeeping can help you make smart business decisions. Incomplete records can cause you to mismanage your business. Chapter 1 Slide 43

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 44 Banking Records A business checking account should be established. check register a booklet where you record information for each check written amount date name of person or business receiving your payment

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 45 You should balance your account each time a transaction occurs. Reconcile Your Account Each month you should reconcile your bank statement with your check register. Balance Your Account

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Payroll Records payroll a list of people who receive salary or wage payments from a business Chapter 1 Slide 46

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Tax Records Income tax Businesses that earn a profit must pay income tax. quarterly Payroll Taxes and Deductions deduct taxes from employees paychecks submit taxes to the government unemployment insurance taxes social security and Medicare taxes voluntary deductions Chapter 1 Slide 47

Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Slide 48 Sales taxes are based on a percentage of sales. Each month you deposit sales tax into a government owned account. Sales Tax