1. Copyright © 2014 Pearson Education 11 - 1 Ch, 11: Creating a Successful Financial Plan

2. Copyright © 2014 Pearson Education The Importance of a Financial Plan 11 - 2 Ch, 11: Creating a Successful Financial Plan Common mistake among business owners: Failing to collect and analyze basic financial data. Many entrepreneurs run their companies without any kind of financial plan. Financial planning is essential to running a successful business and is not that difficult!

3. Copyright © 2014 Pearson Education Basic Financial Statements 11 - 3 Ch, 11: Creating a Successful Financial Plan Balance Sheet – “Snapshot.” Estimates the firm’s worth on a given date; built on the accounting equation: Assets = Liabilities + Owner’s Equity Income Statement – “Moving picture.” Compares the firm’s expenses against its revenue over a period of time to show its net income (or loss): Net Income = Sales Revenue - Expenses Statement of Cash Flows – Shows the change in the firm's working capital over a period of time by listing the sources and uses of funds.

4. Copyright © 2014 Pearson Education The Accounting Equation The relationship between assets, liabilities, and owners’ equity Assets Things of value that a firm owns (Cash, inventory, equipment etc.) Liabilities A firm’s debts and obligations Owners’ Equity The difference between a firm’s assets and its liabilities (Funds from investors and profit) =+

5. Copyright © 2014 Pearson Education Creating Projected Financial Statements 11 - 5 Ch, 11: Creating a Successful Financial Plan Helps the entrepreneur transform business goals into reality Challenging for a business start-up Start-ups should focus on creating projections for two years Projected financial statements: ► Income statements ► Balance sheet

6. Copyright © 2014 Pearson Education Projected Financial Statements Answer 11 - 6 Ch, 11: Creating a Successful Financial Plan What profit can the business expect to earn? What sales levels must be achieved? What are the fixed and variable expenses?

7. Copyright © 2014 Pearson Education Breakeven Analysis Breakeven point - the level of operation at which a business neither earns a profit nor incurs a loss. A useful planning tool because it shows entrepreneurs minimum level of activity required to stay in business. With one change in the breakeven calculation, an entrepreneur can also determine the sales volume required to reach a particular profit target. 11 - 7 Ch, 11: Creating a Successful Financial Plan

8. Copyright © 2014 Pearson Education Calculating the Breakeven Point Step 1. Determine the expenses the business can expect to incur. Step 2. Categorize the expenses in step 1 into fixed expenses and variable expenses. Step 3. Calculate the ratio of variable expenses to net sales. Then compute the contribution margin: 11 - 8 Ch, 11: Creating a Successful Financial Plan Contribution Margin = 1 - Variable Expenses Net Sales Estimate Step 4. Compute the breakeven point: Breakeven Point ($) = Total Fixed Costs Contribution Margin Contribution Margin

9. Copyright © 2014 Pearson Education Calculating the Breakeven Point: The Magic Shop Net Sales estimate is $950,000 with Cost of Goods Sold of $646,000 and total expenses of $236,500. Step 1. Net Sales estimate is $950,000 with Cost of Goods Sold of $646,000 and total expenses of $236,500. Variable Expenses: $705,125 Fixed Expenses: $177,375 Step 2. Variable Expenses: $705,125 Fixed Expenses: $177,375 Contribution margin: Step 3. Contribution margin: 11 - 9 Ch, 11: Creating a Successful Financial Plan Contribution Margin =1 - $705,125 $ $950,000 Breakeven Point: Step 4. Breakeven Point: Breakeven Point $ = $177,375.26 =.26 =.26 = $682,212 = $682,212

10. Copyright © 2014 Pearson Education Breakeven Chart for t he Magic Shop 11 - 10 Ch, 11: Creating a Successful Financial Plan.

11. Copyright © 2014 Pearson Education 1 - 11 Ch, 11: Creating a Successful Financial Plan Conclusion Preparing a financial plan is a critical step Entrepreneurs can gain valuable insight through: ► Pro forma statements ► Breakeven analysis

12. Copyright © 2014 Pearson Education The Importance of Cash “Everything is about cash – raising it, conserving it, collecting it.” Guy Kawasaki 12 - 12 Ch. 12: Managing Cash Flow Common cause of business failure: Cash crisis!

13. Copyright © 2014 Pearson Education Cash Management Cash management – forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly. Young and growing companies are “cash sponges.” Know your company’s cash flow cycle. 12 - 13 Ch. 12: Managing Cash Flow

14. Copyright © 2014 Pearson Education Cash and Profits Cash ≠ profits. Cash ≠ profits. Profit is the difference between a company’s total revenue and total expenses. Profit is the difference between a company’s total revenue and total expenses. Cash is the money that is free and readily available to use. Cash is the money that is free and readily available to use. Cash flow measure a company’s liquidity and its ability to pay it bills. Cash flow measure a company’s liquidity and its ability to pay it bills. 12 - 14 Ch. 12: Managing Cash Flow

15. Copyright © 2014 Pearson Education Preparing a Cash Budget 1. Determine a Minimum Cash Balance 2. Forecast Sales 3. Forecast Cash Receipts 4. Forecast Cash Disbursements 5. Estimate End-of-Month Cash Balance 12 - 15 Ch. 12: Managing Cash Flow (continued)

16. Copyright © 2014 Pearson Education Benefits of Cash Management Increase amount and speed of cash flowing into the company Reduce the amount and speed of cash flowing out Make the most efficient use of available cash Take advantage of money-saving opportunities such as cash discounts Finance seasonal business needs 12 - 16 Ch. 12: Managing Cash Flow

17. Copyright © 2014 Pearson Education Benefits of Cash Management Develop a sound borrowing and repayment program Develop a sound borrowing program Impress lenders and investors Provide funds for expansion Plan for investing surplus cash 12 - 17 Ch. 12: Managing Cash Flow (continued)

18. Copyright © 2014 Pearson Education The “Big Three” of Cash Management 1. Accounts Receivable 2. Accounts Payable 3. Inventory 12 - 18 Ch. 12: Managing Cash Flow

19. Copyright © 2014 Pearson Education Cash Flow 12 - 19 Ch. 12: Managing Cash Flow Cash Accounts Payable Decrease in Cash Production/Cash Purchases Inventory Accounts Receivable Cash Sales Increase in Cash Leakage

20. Copyright © 2014 Pearson Education Conclusion “Cash is King” Cash and profits are not the same. Entrepreneurial success means operating a company “lean and mean.” ► Fit wasteful expenditures. ► Invest surplus funds. ► Plan and manage cash flow. 12 - 20 Ch. 12: Managing Cash Flow

21. Copyright © 2014 Pearson Education Raising Capital Raising capital to launch or expand a business is a challenge. Many entrepreneurs are caught in a “credit crunch.” 13 - 21 Ch. 13: Sources of Financing: Debt & Equity

22. Copyright © 2014 Pearson Education The “Secrets” to Successful Financing 1.Choosing the right sources of capital can be as important as choosing the right form of ownership or the right location. 2.The money is out there; the key is knowing where to look. 3.Raising money takes time and effort. 4.Creativity counts. Entrepreneurs have to be as creative in their searches for capital as they are in developing their business ideas. 13 - 22 Ch. 13: Sources of Financing: Debt & Equity

23. Copyright © 2014 Pearson Education The “Secrets” to Successful Financing 5.The Internet puts at entrepreneur’s fingertips vast resources of information that can lead to financing. 6.Put social media to work to locate potential investors. 7.Be thoroughly prepared before approaching lenders and investors. 8.Entrepreneurs cannot overestimate the importance of making sure that the “chemistry” among themselves, their companies, and their funding sources is a good one. 9.Plan an exit strategy 13 - 23 (continued) Ch. 13: Sources of Financing: Debt & Equity

24. Copyright © 2014 Pearson Education Equity Capital Represents the personal investment of the owner(s) in the business. Is called risk capital because investors assume the risk of losing their money if the business fails. Does not have to be repaid with interest like a loan does. Means that an entrepreneur must give up some ownership in the company to outside investors. 13 - 24 Ch. 13: Sources of Financing: Debt & Equity

25. Copyright © 2014 Pearson Education Debt Capital Must be repaid with interest. Is carried as a liability on the company’s balance sheet. Can be just as difficult to secure as equity financing, even though sources of debt financing are more numerous. Can be expensive, especially for small companies, because of the risk/return tradeoff. 13 - 25 Ch. 13: Sources of Financing: Debt & Equity

26. Copyright © 2014 Pearson Education Sources of Equity Financing Personal savings Friends and family members Crowd funding Angels Partners Venture capital companies Corporate venture capital Public stock sale – “going public” Simplified registrations and exemptions 13 - 26 Ch. 13: Sources of Financing: Debt & Equity (continued) Ch. 13: Sources of Financing: Debt & Equity

27. Copyright © 2014 Pearson Education Crowd Funding Crowd funding taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web sites and raise money from ordinary people who invest as little as $100. ► The amount of capital sought tends to be small – less than $10,000. ► The returns for investment are tokens – discount coupons and free samples. 13 - 27 Ch. 13: Sources of Financing: Debt & Equity

28. Copyright © 2014 Pearson Education Angels Wealthy individuals who invest in emerging entrepreneurial companies in exchange for equity (ownership) stakes. An excellent source of “patient money” for investors needing relatively small amounts of capital typically ranging from $100,000 (sometimes less) to as much as $5 million. Willing to invest in the early stages of a business. 13 - 28 Ch. 13: Sources of Financing: Debt & Equity

29. Copyright © 2014 Pearson Education Partners Giving up personal control Diluting ownership Sharing profits “For every penny you get in the door, you have to give something up.” 13 - 29 Ch. 13: Sources of Financing: Debt & Equity

30. Copyright © 2014 Pearson Education Venture Capital Companies Most often, venture capitalists invest in a company across several stages. On average, 96-98% of venture capital goes to: ► Early stage investments (companies in the early stages of development). ► Expansion stage investments (companies in the rapid growth phase). Only about 2% of venture capital goes to businesses in the startup or seed phase. 13 - 30 Ch. 13: Sources of Financing: Debt & Equity (continued) Ch. 13: Sources of Financing: Debt & Equity

31. Copyright © 2014 Pearson Education Corporate Venture Capital About 300 large corporations across the globe invest in start-up companies. Approximately 14% of all venture capital invested is from corporations. Capital infusions are just one benefit; corporate partners may share marketing and technical expertise. 13 - 31 Ch. 13: Sources of Financing: Debt & Equity

32. Copyright © 2014 Pearson Education Going Public Initial public offering (IPO) - when a company raises capital by selling shares of its stock to the public for the first time. Since 2001, the average number of companies making IPOs each year is 134. Few companies with less than $25 million in annual sales make IPOs. 13 - 32 Ch. 13: Sources of Financing: Debt & Equity

33. Copyright © 2014 Pearson Education Advantages of “Going Public” Ability to raise large amounts of capital Improved corporate image Improved access to future financing Attracting and retaining key employees Using stock for acquisitions Listing on a stock exchange 13 - 33 Ch. 13: Sources of Financing: Debt & Equity In addition to the text Ch. 13: Sources of Financing: Debt & Equity

34. Copyright © 2014 Pearson Education Disadvantages of “Going Public” Dilution of founder’s ownership Loss of control Loss of privacy Reporting to the SEC Filing expenses Accountability to shareholders Pressure for short-term performance Timing 13 - 34 Ch. 13: Sources of Financing: Debt & Equity In addition to the text Ch. 13: Sources of Financing: Debt & Equity

35. Copyright © 2014 Pearson Education The Nature of Debt Financing Debt financing is a popular tool used by entrepreneurs to acquire capital. Borrowed capital allows entrepreneurs to maintain complete ownership of their businesses, but must be repaid with interest. Small businesses are considered more risky than corporate customers. ► Prime rate 13 - 35 Ch. 13: Sources of Financing: Debt & Equity

36. Copyright © 2014 Pearson Education Other Methods of Financing Factoring Accounts Receivable – selling accounts receivable outright Leasing – assets rather than buying them Credit cards 13 - 36 Ch. 13: Sources of Financing: Debt & Equity

37. Copyright © 2014 Pearson Education Conclusion Capital is key for entrepreneurs. In the face of a capital crunch, business’s need for capital has never been greater. Sources of capital may include: ► Family and Friends ► Angel Investors ► Initial Public Offering ► Traditional Bank Loan ► Asset-based Borrowing ► Federal, SBA Loans, and others 13 - 37 Ch. 13: Sources of Financing: Debt & Equity 13 - 37