1. Plan and Track Your Finances
9.1 Financing Your Business
9.2 Pro Forma Financial Statements
9.3 Recordkeeping for Businesses

2. Lesson 9.1 Financing Your Business
Goals
Estimate your startup costs and personal net worth.
Identify sources of equity capital for your business.
Identify sources of debt capital for your business.
Chapter 9

3. Vocabulary net worth debt-to-equity ratio equity capital
venture capitalists
debt capital
collateral
Chapter 9

4. Assess Your Financial Needs
Estimate startup costs.
Create a personal financial statement.
Prepare pro forma financial statements.
Chapter 9

5. Startup Costs Itemize startup costs. equipment and supplies
furniture and fixtures
vehicles
remodeling
legal and accounting fees
licensing fees
Chapter 1

6. Chapter 9

7. Personal Financial Statement
net worth =
assets ─ liabilities
personal financial statement =
personal assets ─ personal liabilities
Chapter 9

8. Chapter 9

9. Why is the net worth of an entrepreneur important to potential investors in the business?
Chapter 1

10. 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.
Chapter 9

11. Sources of equity include:
equity capital
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
Chapter 9

12. What are some of the ways entrepreneurs can get equity capital?
Chapter 1

13. Debt Capital debt capital
money loaned to a business with the understanding that the money will be repaid
usually with interest
Chapter 9

14. Friends and Relatives
Determine how the loan will affect your relationship.
Prepare a formal agreement regarding terms of the loan.
Chapter 1

15. Commercial Bank Loans secured loans collateral
loans that are backed by collateral
collateral
property that the borrower forfeits if he or she defaults on the loan
Chapter 9

16. Types of secured loans include the following:
line of credit
long-term loan
accounts receivable financing
inventory financing
Chapter 9

17. unsecured loans loans that are not guaranteed with collateral
only made to creditworthy customers
Chapter 9

18. Reasons a bank may not lend money include:
The business is a startup.
A lack of:
a solid business plan
adequate experience
confidence in the borrower
adequate personal investment
Chapter 9

19. Other sources of loans include:
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
Chapter 9

20. Where can entrepreneurs look for debt financing?
Chapter 1

21. Lesson 9.2 Pro Forma Financial Statements
Goals
Prepare a pro forma cash flow statement.
Prepare a pro forma income statement.
Prepare pro forma balance sheet.
Chapter 9

22. Vocabulary cash flow statement income statement balance sheet
Chapter 9

23. 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
Chapter 9

24. Forecast Receipts and Disbursements
estimate
monthly cash receipts
monthly cash disbursements
Chapter 9

25. Chapter 9

26. Chapter 9

27. 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.
Chapter 9

28. Chapter 9

29. Economic Effects on Cash Flow
Changes in the economy can dramatically effect the cash flow of businesses.
Business owners should make conservative estimates.
Chapter 9

30. What does a cash flow statement show?
Chapter 1

31. Income Statement income statement
shows revenues and expenses incurred over a period of time
shows the profit or loss for the time period
Chapter 9

32. 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.
Chapter 9

33. The pro forma income statement consists of:
Revenue
Cost of goods sold
Gross profit
Operating expenses
Net income before taxes
Taxes
Net income/loss after taxes
Chapter 9

34. Chapter 9

35. What does an income statement show?
Chapter 1

36. Balance Sheet balance sheet assets = liabilities + owner’s equity
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
Chapter 9

37. 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
Chapter 9

38. Types of Liabilities long-term liabilities current 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
Chapter 9

39. Reductions in Assets allowance for uncollectible accounts depreciation
the amount a company estimates it will not receive from customers
depreciation
the lowering of an asset’s value to reflect its current worth
Chapter 9

40. Chapter 9

41. Name one example each of a current (liquid) asset, a fixed (illiquid) asset, a current liability, and a long-term liability.
Chapter 1

42. Lesson 9.3 Recordkeeping for Businesses
Goals
Differentiate between alternative methods of accounting.
Describe the use of journals and ledgers in a recordkeeping system.
Explain the importance of keeping accurate and up-to-date bank, payroll, and tax records.
Chapter 9

43. Vocabulary cash method accrual method transaction journals account
check register
payroll
Chapter 9

44. 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

45. 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

46. Accrual Method accrual method revenue is recorded when the sale occurs
expenses are recorded when you receive the goods or services
Chapter 1

47. 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

48. What is the main difference between the cash and accrual methods of accounting?
Chapter 1

49. Recording Transactions
any business activity that changes assets, liabilities or net worth
Chapter 9

50. Journals journals accounting records of the transactions you make for
sales
cash payments
cash receipts
purchases
general
Chapter 1

51. Ledgers A general ledger is made up of accounts. account
an accounting record that provides financial detail for a particular business item
Chapter 1

52. subsidiary ledgers
used for accounts payable to show in detail the transactions with each vendor from whom merchandise is purchased on account
Chapter 9

53. Chapter 1

54. aging table a record keeping tool for tracking accounts receivable
shows how long it takes customers to pay their bills
Chapter 9

55. Chapter 9

56. What is the difference between a journal and a ledger?
Chapter 1

57. Business Records
Good recordkeeping can help you make smart business decisions.
Incomplete records can cause you to mismanage your business.
Chapter 1

58. 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
Chapter 9

59. Reconcile Your Account
Balance Your Account
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.
Chapter 9

60. Payroll Records payroll
a list of people who receive salary or wage payments from a business
Chapter 1

61. Tax Records Income tax Payroll Taxes and Deductions
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

62. Sales Tax Sales taxes are based on a percentage of sales.
Each month you deposit sales tax into a government owned account.
Chapter 9

63. What kinds of bank, payroll, and tax records do you have to keep?
Chapter 1

64. PERFORMANCE COMPETENCIES
Articulate the need for the loan
Explain the process of applying for a loan
Chapter 9

65. Explain the type of loan Demonstrate good communication skills
Demonstrate the ability to make a professional presentation
Answer questions effectively
Chapter 9

66. GIVE IT A TRY Identify the appropriate type of loan
Complete an application for a loan
Provide justification for the loan selected
Write a report in appropriate business style
Demonstrate correct spelling and grammar
Chapter 9

67. Learn and apply financial business decision-making skills
Develop business contacts
Implement written and oral skills
Develop familiarity with procedures of financial institutions
Chapter 9