1. The Financial plan and Source of capital
Lets make some money!

2. Financing for your business
Debt financing - Obtaining borrowed funds for the company.
Asset-based financing; requires some asset to be used as a collateral.
Borrowed funds plus interest need to be paid back.
Equity Financing - Obtaining funds for the company in exchange for ownership.
Does not require collateral.
Offers investor some form of ownership position.
Financing for your business

3. Factors affecting type of financing:
Availability of funds.
Assets of the venture.
Prevailing interest rates.
All financing requires some level of equity; amount will vary by nature and size of venture.

4. External funds: Personal funds
Least expensive funds in terms of cost and control.
Essential in attracting outside funding.
Typical sources of personal funds:
Savings.
Life insurance.
Mortgage on a house or car.
The entrepreneur’s level of commitment is reflected in the percentage of total assets that the entrepreneur has committed.
External funds: Personal funds

5. External funds: Family and friends
Likely to invest due to relationship with entrepreneur.
Advantages - Easy to obtain money; more patient than other investors.
Disadvantage - Direct input into operations of venture.
A formal agreement must include:
Amount of money involved.
Terms of the money.
Rights and responsibilities of the investor.
Steps to be taken incase business fails.
External funds: Family and friends

6. External funds: Commercial bank
Types of Bank Loans (Asset based)
Accounts receivable loans.
Inventory loans.
Equipment loans.
Real-estate loans.
Cash flow financing (Conventional bank loans)
Installment loans.
Straight commercial loans.
Long-term loans.
Character loans.
External funds: Commercial bank

7. External funds: Commercial bank
Bank Lending Decisions
Based on quantifiable information and subjective judgments.
Decisions are made according to the five Cs of lending- Character, Capacity, Capital, Collateral, and Conditions.
Review of past financial statements and future projections.
Questions are asked regarding ability to repay the loan.
External funds: Commercial bank

8. External funds: Commercial bank
“Bank Shopping” procedure:
Complete an application, which is a “mini” business plan.
Evaluate alternative banks.
Select one with a positive loan experience in the business area.
Set an appointment.
Carefully present the case for the loan.
Borrow the maximum amount possible.
External funds: Commercial bank

9. External funds: Venture capitalist
They will always ask for equity
They will involve themselves in the business but it might be a bad thing if the VC has knowledge about your industry.
External funds: Venture capitalist

10. External funds Criteria for evaluating external sources of funds:
Length of time the funds are available.
Costs involved.
Amount of company control lost.
External funds

11. Internal funds: Your own business
Internally generated funds are most frequently employed; sources include:
Profits (retained earnings)
Sale of assets and little-used assets.
Working capital reduction.
Accounts receivable.
Short-term internal source of funds:
Reducing short-term assets - inventory, cash, and other working-capital items.
Extended payment terms from suppliers.
Internal funds: Your own business

12. Startup cost Itemize startup costs. Remodeling
equipment and supplies
furniture and fixtures
vehicles
Remodeling
Legal and accounting fees
Licensing fees
Startup cost

13. Some financial terms Net Worth/Equity = Assets – liabilities
Debt to Equity ratio = Total liabilities / total equity
Equity capital: Money invested in a business in return for a share of the profit in the business.
Some financial terms

14. Why you might get rejected for financing
The business is a startup.
A lack of:  a solid business plan  adequate experience  confidence in the borrower  adequate personal investment
Why you might get rejected for financing

15. A statement of how your business is performing measured in term of money.
Cash flow statement
Income statement / P/L statement
Balance Sheet
Financial Statements

16. Income statement Your income statement includes: Revenue
Cost of goods sold
Gross profit
Operating expenses
Net income before taxes
Taxes
Net income/loss after taxes
Income statement

17. A 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
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
Types of liabilities
 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
Balance Sheet

18. The major difference between the cash and accrual accounting methods is the timing of when transactions are recorded.
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.
ACCRUAL METHOD
Revenue is recorded when the sale occurs
Expenses are recorded when you receive the goods or services
Only very small businesses use the CASH method. If annual sales exceeds 5 mil, you use ACCRUAL method.
Cash or Accrual method