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

2. 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

3. Balance Sheet
Marriotti: Entrepreneurship

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. Reading Bond Tables
Marriotti: Entrepreneurship

11. 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

12. 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

13. “Same Size” Balance Sheet Analysis
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14. 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

15. 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

16. 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