Plan and Track Your Finances

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1 Chapter 9 Plan and Track Your Finances 9.1 Finance Your Business 9.2 Pro Forma Financial Statements 9.3 Record Keeping for Businesses

2 Ideas in Action Electronic Safekeeping Katelin Shea addressed the unmet need in the marketplace for attractive, personalized covers for electronic equipment. Her advice to other entrepreneurs starting a business is to: solve a problem fill a gap expand on a hobby Slide 2

3 Lesson 9.1 Finance 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 3

4 Terms net worth debt-to-equity ratio equity capital venture capitalists debt capital collateral Slide 4

5 Assess Your Financial Needs Itemize startup costs. Determine the amount of capital required to start your business. Slide 5

6 Slide 6

7 Personal Financial Statement net worth = assets liabilities personal financial statement = personal assets personal liabilities Slide 7

8 Slide 8

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

10 Equity Capital debt-to-equity ratio the relation between the dollars you have borrowed and the dollars you have invested in your business The higher percentage of your own money that you have invested, the easier it will be for you to get others to invest. Slide 10

11 equity capital the 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 or companies that make a living investing in startup companies Slide 11

12 What are some of the ways entrepreneurs can get equity capital? Slide 12

13 Debt Capital debt capital money loaned to a business with the understanding that the money will be repaid usually with interest Friends and Relatives determine how the loan will affect your relationship prepare a formal agreement regarding repayment terms Slide 13

14 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 14

15 Types of secured loans include the following: line of credit long-term loan accounts receivable financing inventory financing Slide 15

16 unsecured loans loans that are not guaranteed with collateral only made to creditworthy customers Slide 16

17 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 personal investment Slide 17

18 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 18

19 Where can entrepreneurs look for debt financing? Slide 19

20 Lesson 9.2 Pro Forma Financial Statements Goals Prepare a pro forma cash flow statement. Prepare a pro forma income statement. Prepare a pro forma balance sheet. Slide 20

21 Terms cash flow statement income statement balance sheet Slide 21

22 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 22

23 Forecast Receipts and Disbursements estimate monthly cash receipts monthly cash disbursements Slide 23

24 Slide 24

25 Slide 25

26 Prepare the Cash Flow Statement net cash flow = cash receipts cash disbursements Tracking monthly cash flow statements enables you to anticipate periods of positive and negative cash flow Slide 26

27 Slide 27

28 Economic Effects on Cash Flow Changes in the economy can dramatically effect the cash flow of businesses. Business owners should make conservative estimates. Slide 28

29 What does a cash flow statement show? Slide 29

30 Income Statement income statement shows revenues and expenses incurred over a period of time shows the profit or loss for the time period Slide 30

31 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 31

32 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 32

33 Slide 33

34 What does an income statement show? Slide 34

35 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 35

36 Prepare a Pro Forma Balance Sheet fixed assets used for many years current assets items that are used up in normal business operations accounts receivable the amounts owed to a business by its credit customers Slide 36

37 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 Slide 37

38 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 38

39 Slide 39

40 Name one example each of a current liability, a long-term liability, a current asset, and a fixed asset. Slide 40

41 Lesson 9.3 Record Keeping for Businesses Goals 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 41

42 Terms transaction journals account check register payroll Slide 42

43 Recording Transactions transaction any business activity that changes assets, liabilities or net worth journals accounting records of the transactions you make for sales cash payments cash receipts purchases general Slide 43

44 ledgers A general ledger is made up of accounts. account an accounting record that provides financial detail for a particular business item Slide 44

45 subsidiary ledger used for accounts payable to show in detail the transactions with each vendor from whom merchandise is purchased on account aging table a record keeping tool for tracking accounts receivable shows how long it takes customers to pay their bills Slide 45

46 Slide 46

47 What is the difference between a journal and a ledger? Slide 47

48 Business Records A business checking account should be established. check register booklet (or electronic register) where you record information for each check written amount date name of person or business receiving your payment Slide 48

49 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 49

50 Slide 50

51 Payroll Records payroll a list of people who receive salary or wage payments from a business Slide 51

52 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 taxes voluntary deductions Slide 52

53 Sales Tax Sales taxes are based on a percentage of sales. Each month you deposit sales tax into a government owned account. Slide 53

54 What kinds of bank, payroll, and tax records do you have to keep? Slide 54

55 PERFORMANCE INDICATORS EVALUATED Explain the opportunity for business expansion. Present convincing rationale for expanding a business into two surrounding communities. Develop a complete financial plan for a business venture. Slide 55

56 Request a business loan from a financial institution. Present financial information to obtain a loan from a financial institution. Organize a financial proposal for a growing business. Manage time and information for an effective presentation. Slide 56

57 THINK CRITICALLY 1. Why does a financial institution want to know the future sales potential of the business s target market? 2. What does a business s workforce have to do with a business loan? Slide 57

58 3. Why should the business project how quickly a loan will be repaid? 4. Why must the team describe the target market demographics for the two new proposed locations for the business? Slide 58

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