Business Understanding the Big Picture

A Step Back What does it mean to have a job – An organization is willing to pay you to help them – They have to make money – By hiring you, they are betting that you will generate more revenue than your salary

A Step Back What does it mean to be an entrepreneur – Start your own organization and generate your own revenue – You [and investors] are betting on yourself to generate profit – If you’re in it for the money You have to generate more profit/year than the salary you turned down – If you’re in it for the fun Go for it! Do it now

Every Organization Has to Make Money Even non-profits and charities have to keep the lights on As much as we’d rather just write code – Someone has to make sure all the bills and salaries are paid on time

How Organizations Make Money Hire a combination of employees with specific skills and organize them towards a profitable goal How expensive are employees?

The Employee

Employer Expenses Salary Social security 6.2% Medicare 1.45% Federal Unemployment $56 State Unemployment: Varies 2-10% Workers Comp: Varies Benefits: Varies – Health Insurance – Retirement – Vacation

Employee Taxes Social security 6.2% Medicare 1.45% Federal Income Tax State Income Tax – Varies by state

Federal Income Tax Tax brackets are widely misunderstood! No such thing as making a little more money and paying a lot more in taxes

2014 Federal Income Tax - Single {Income : $89,300, Federal Income Tax : $16,631} {Income : $89,400, Federal Income Tax : $16,656}

Deductions The previous example was misleading After deductions, the taxable income of both salaries were in the same bracket Itemized deductions – Claim everything that is a tax deductible – Complicates filing for taxes – For most people, it will not save money Standard deduction – The default deduction if you don’t itemize – Filing single: $6200 Taxable income is income minus deductions

Example Revised – Filing Single Income : $95,500 – Taxable Income after standard deduction: $89300 – Federal Tax: $18181 – Effective tax rate: 19% Income : $95,600 – Taxable Income after standard deduction: $89400 – Federal Tax: $18208 – Effective tax rate: 19%

Benefits Your salary is only the beginning Insurance (Health, Dental, Vision) – Very expensive to purchase independently Vacation Profit-sharing and bonuses – Take them if you can get them Stock Options

Benefits – 401K Most common employer sponsored retirement plan Set income aside and invest to earn interest – Varying level of flexibility for investments Common for employer to match a % of contributions Pre-tax contributions – Effectively an additional deduction on your taxable income – Contributions + interest are taxed when withdrawn – Similar to Tradition IRA Sometimes an option to use post-tax income – No tax during retirement – Similar to Roth IRA Penalties for withdrawing before retirement

Accounting

Accounting – The Big Three Income Statement – Did the company make money? Balance Sheet – What does the company own? Statement of Cash Flow – How liquid is the company? The business world works in quarters – Public corporations report to shareholders every 3 months

Accounting – Income Statement Revenue – How much capital was generated – Mostly through sales Expenses – How capital much was used Income – Income = Revenue – Expenses; – The bottom line on the income statement – What all investors are watching – Usually translated into Earnings Per Share (EPS)

Microsoft Income Statement (Abridged)

Accounting – Balance Sheet Assets – Everything a company owns – Includes cash, accounts receivable, properties, equipment, investments, goodwill Liabilities – Everything a company owes – Includes debt, accounts payable, deferred tax, and other financial obligations Equity – Equity = Assets – Liabilities; – The sheet must balance this equation

Apple Balance Sheet (Abridged)

Cash Flow A measure of liquidity (Flexibility) – Cash is the most liquid asset Everyone wants it – Non-cash assets make a company rigid Slower to adapt Susceptible to market changes Bottom line is the change in cash on hand

Facebook Cash Flow

Cash Flow Scenario A small startup has $100,000 cash Sells $1M in product that will cost $100,000 to produce – $900,000 profit! Revenue increases by $1M on the income statement Accounts receivable increases by $1M on the balance sheet Equity and Income look great: $900,000 Common to wait 90 days after delivery for a payment – Cash flow looks bad in the short term: ($100,000) Startup must go an entire quarter with no cash – Can’t fill any orders while waiting – Taking orders during this time can cause a successful business to fail – Desperately look for new loans and investments