Plan and Track Your Finances

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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. Slide 2

3 Assess Your Financial Needs Estimate startup costs. Create a personal financial statement. Prepare pro forma financial statements. Slide 3

4 Startup Costs Itemize startup costs. equipment and supplies furniture and fixtures vehicles remodeling legal and accounting fees licensing fees Chapter 1 Slide 4

5 Slide 5

6 Personal Financial Statement net worth = assets liabilities personal financial statement = personal assets personal liabilities Slide 6

7 Slide 7

8 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. Slide 8

9 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 Slide 9

10 Using page 249 as an example, create a start up cost statement to include in your business plan. Equipment & supplies Furniture & fixtures Inventory Remodel/Rent/Building Vehicles (if needed) Legal & accounting fees (if needed) Licensing fees The total will be the amount you are asking for in a loan. Chapter 1 Slide 10

11 Debt Capital debt capital money loaned to a business with the understanding that the money will be repaid usually with interest Slide 11

12 Borrowing from Friends and Relatives Determine how the loan will affect your relationship. Prepare a formal agreement regarding terms of the loan. Chapter 1 Slide 12

13 Commercial Bank Loans secured loans loans that are backed by collateral collateral property that the borrower forfeits if he or she defaults on the loan Slide 13

14 Types of secured loans include the following: line of credit long-term loan accounts receivable financing inventory financing Slide 14

15 unsecured loans loans that are not guaranteed with collateral only made to creditworthy customers Slide 15

16 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 Slide 16

17 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 Slide 17

18 SBA loans: Net Bookmark page 254 Chapter 1 Slide 18

19 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. Slide 19

20 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 Slide 20

21 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. Slide 21

22 Slide 22

23 Economic Effects on Cash Flow Changes in the economy can dramatically effect the cash flow of businesses. Business owners should make conservative estimates. Slide 23

24 Income Statement income statement shows revenues and expenses incurred over a period of time shows the profit or loss for the time period Slide 24

25 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. Slide 25

26 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 Slide 26

27 Slide 27

28 Balance Sheet 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 Slide 28

29 Prepare a Pro Forma Balance Sheet Types of Assets current assets can be converted to cash easily (inventory, cash) accounts receivable the amounts owed to a business by its credit customers fixed assets cannot be converted into cash easily (equipment, vehicles) Slide 29

30 Types of Liabilities long-term liabilities debts that are payable over a year or longer (loans) 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 Slide 30

31 Reductions in Assets allowance for uncollectible accounts the amount a company estimates it will not receive from customers depreciation the lowering of an asset s value to reflect its current worth Slide 31

32 Slide 32

33 Using pages as guides, create a pro forma cash flow statement, a pro forma income statement, and a pro forma balance sheet. Remember: these are made-up numbers, but should be reasonable. Chapter 1 Slide 33

34 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. Slide 34

35 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 Slide 35

36 Cash Accounting 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 Slide 36

37 Accrual Accounting Method accrual method revenue is recorded when the sale occurs expenses are recorded when you receive the goods or services Chapter 1 Slide 37

38 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 Slide 38

39 Recording Transactions transaction any business activity that changes assets, liabilities or net worth Slide 39

40 Journals journals accounting records of the transactions you make for sales cash payments cash receipts purchases general Chapter 1 Slide 40

41 Ledgers A general ledger is made up of accounts. account an accounting record that provides financial detail for a particular business item Chapter 1 Slide 41

42 subsidiary ledgers used for accounts payable to show in detail the transactions with each vendor from whom merchandise is purchased on account Slide 42

43 Chapter 1 Slide 43

44 aging table a record keeping tool for tracking accounts receivable shows how long it takes customers to pay their bills Slide 44

45 Slide 45

46 Business Records Good recordkeeping can help you make smart business decisions. Incomplete records can cause you to mismanage your business. Chapter 1 Slide 46

47 1.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 Slide 47

48 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. Slide 48

49 2. Payroll Records payroll a list of people who receive salary or wage payments from a business Chapter 1 Slide 49

50 3. Tax Records Income tax 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 Slide 50

51 Sales Tax Sales taxes are based on a percentage of sales. Each month you deposit sales tax into a government owned account. Slide 51

52 Complete the Finance Section of your Business Plan III. Projected Financial Statements A. Identification of Risk B. Financial Statements 1. Startup Cost 2. Cash Flow Statement 3. Income Statement 4. Balance Sheet C. Funding Request Chapter 1 Slide 52

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