RENAISSANCE ENTREPRENEURSHIP CENTER First Finance Class (FIN-1)

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1 Finance 1 (FIN-1)

2 RENAISSANCE ENTREPRENEURSHIP CENTER (FIN-1) Learning Outcomes At the conclusion of this class, you should: Know what will be covered in the six finance class sessions. Have reviewed some key on-line sites to obtain financial information. Be able to know the difference between the three financial projections that will be covered in this class: income projection, cash flow projection and balance sheet Be able to use at least three vocabulary words associated with an income projection, cash flow projection or balance sheet. Have started to develop "costs of goods sold" and "operating expenses" for placement in your own partial business income statement (to be assigned for homework) Have received a market research assignment about pricing as homework (additional information on pricing will be presented in your next Marketing class. FINANCE CLASS CURRICULUM First class Introduction to Finance - Understand COGS/expenses Discuss what's included in the finance classes Discuss the three financial statements to be covered including a profit and loss projection, cash flow projection, and balance sheet. Review financial terms and definitions Clarify methods for calculating the costs of goods sold (COGS) for both product and services Work on a one-month income projection s operating expenses using assumed or estimated data (handed out prior to tonight s class). Create a partial income projection (one-month expenses) and identify pricing strategies typically used (to be assigned for homework). Second class Profitability - Understand breakeven analysis and Profit and Loss statement Review a one-month partial income projection with a focus on COGS/operating expenses. Initiate pricing and breakeven analysis for your business. Complete pricing and breakeven analysis for use in the next class for projecting sales in the income projection (to be assigned as homework). Third class Consolidation Income Statement/Initial Cash Flow Review COGS/operating expense/breakeven sales data (review of previous homework). Expand COGS/operating expense/breakeven sales data into one-year individual comprehensive income projections; complete one year income projection (to be assigned as homework). Review segments of a cash flow projection. Discuss cash flow aspects of the case study and contrast them with the case study s income statement. Consider revenue timing questions, inventory projections and start-up costs (review of materials from Basics of Money) to prepare for cash flow projection work. 1

3 Fourth class Personal Finance and Money/Cash Flow Guest Teacher: Finance expert as guest speaker on personal finance and money issues Discuss interactions between income and cash flow projections. Consolidate cash flow understanding through completion of annualized cash flow projections; note connection with start-up estimates, inventory projections, and revenue timing questions. Review balance sheet terms. Fifth class Cash Flow/Balance Sheet Issues Review the financial narrative requirements of the business plan Complete cash flow projections. Review details of the balance sheet and show how it is generated. Discuss ratios with a focus on gross margin, quick and current ratios. Sixth class Finance Sources/Banking + Integration of Financial Statements/Group Presentations Guest Teacher: Finance expert as guest speaker on money, lending and alternative sources Discuss the interaction between income, cash flow and balance sheet statements Present a group consultation project. Evaluate class and review any outstanding finance questions. Review financial section requirements for the business plan. 2

4 RENAISSANCE ENTREPRENEURSHIP CENTER What is "finance"? How does it differ from bookkeeping or accounting? "Finance" involves the use of bookkeeping or accounting data to improve a business's operations and/or attract financing. Finance can also be defined as the use of numerical/accounting information to make business decisions. For example, financial data will help you to make sense and/or apply much of the marketing information that you will be gathering over the next several weeks. Bookkeeping and accounting data help you understand your business's finances and its operations. Finance always involves the use of bookkeeping or accounting information; bookkeeping or accounting does not always involve finance. What three basic business financial issues should I be concerned with? How much money is my business making (or losing) (this question relates to the business's profit/loss or income projection)? Will I have enough cash to meet my business's needs when I need to pay my bills (this question relates to the business's cash flow projection)? How much does my business own? How much does my business owe (these questions relate to the business's balance sheet)? 3

5 RENAISSANCE ENTREPRENEURSHIP CENTER (REVIEW OF FINANCIAL STATEMENTS FROM BP-3: BASICS OF MONEY CLASS) What are the component parts and functions of the three financial statements? 1. Profit and Loss statement: An Profit and Loss statement shows what your business has earned (profits) or lost (losses) over a given period of time. It is also called an income or P&L statement. Its main components are: Income/Sales/Revenues LESS: Cost of goods sold EQUALS: Gross Profit LESS: Operating Expenses EQUALS: Operating Profit LESS: DRAW Equals: Net Profit () () () 2. Cash flow statement: A cash flow statement shows how much money your business is actually receiving and how much money it is actually spending over a given period of time, advising you about the amount of cash you can expect to have on hand in a future period. Its main components are: Beginning Cash PLUS: Cash In LESS: Cash out EQUALS: Ending cash () 3. Balance Sheet: A balance sheets shows what your business owns and what it owes at a particular point in time. Its main components are: Assets (cash, accounts receivable, inventory, equipment) LESS: Liabilities (accounts payable, loans) EQUALS: Equity () 4

6 RENAISSANCE ENTREPRENEURSHIP CENTER BUSINESS FINANCE TERMS PROFIT AND LOSS STATEMENT TERMS Assumptions: Preconceived notions or educated estimates on which the owner might base reasonable financial projections or other probable developments. Break-Even Point: The level of sales at which total revenue equals total costs incurred; the point at which the business is meeting expenses with no profit, no loss. Cost of Goods Sold: Purchase price of merchandise sold by a retailer; the costs of materials and labor directly used in making a product, that are deducted from sales to determine gross profit (or converted to a percentage as gross margin). Draw: Monies deducted from the operating profit and used by the owner to cover personal expenses including business taxes owed if the business is a sole proprietorship or partnership. Any monies remaining in the business after the draw is taken are referred to as Net Profit. Eighty/Twenty Principle: A phenomenon in which a venture may earn 80 percent of its business from 20 percent of its product line, while spending 80 percent of its effort to gain the remaining 20 percent of volume. Financial Statements: Periodic accounting reports of a company s activities including the income statement, cash flow statement and balance sheet. When drafted before a business opens, financial statements are called pro forma (projected) projections. Gross Margin: Sales minus cost of goods sold converted to a percentage; the gross profit on the income statement converted to a percentage. Gross Markup: The difference between what the customer and the retailer pay for goods converted to a percentage; the gross markup is usually expressed as a percentage between the cost of the goods and the selling price. Gross Profit: Sales minus costs of goods sold. Income Statement: The statement of revenues and expenses used to calculate a business s income for a given period. Keystone: A retail policy by which a merchant doubles the cost of a product; i.e. 50 percent margin or 100 percent markup on cost. Every industry has their "keystone" or standard margins. Loss Leader: A product/service priced below cost to attract customers to a retail business. 5

7 BUSINESS FINANCE TERMS (continued) RENAISSANCE ENTREPRENEURSHIP CENTER Markdown: Reduction in price (usually in connection with retail pricing). Margins: Features of the financial statements converted to a percentage such as gross margin (gross profit converted to a percentage), operating margin (operating profit converted to a percentage), etc. Net Profit: The profit remaining after the costs of goods sold, operating expenses/overhead, and draw/taxes are subtracted from the business sales. Net Sales: The dollar amount of sales made during a specific time period, excluding sales tax and any returns or allowances. Operating Expenses: Costs including selling, administrative, and general overhead costs involved in a business' operations throughout the time period. Overhead: Operating costs not directly associated with the product or its marketing, such as rent, employee salaries, administrative expenses, etc. Operating Profit: The profit remaining after costs of goods sold and operating expenses are subtracted from the business sales. Profit Margin: Used to indicate profitability, profit margins are developed by converting the gross profit, operating profit, or net profit to a percentage. Sales Forecast: A future projection of sales volume of a product or service. CASH FLOW PROJECTION TERMS Accounts Receivable: Money due from customers carried as obligations on the cash flow and balance sheet statements. Aging of Accounts Receivable: An inventory of accounts receivable classified by how old the debt is. Beginning Cash: Cash logged in the business at the start of a particular point in time. Beginning cash can be registered as a result of ending cash left in the business from a preceding period or from initial capital infused into the business at its start. Capital: A term commonly used as a synonym for cash. C.O.D. -- Cash on Delivery: The buyer must pay for the goods at the time of delivery. 6

8 BUSINESS TERMS (continued) RENAISSANCE ENTREPRENEURSHIP CENTER Cash Flow: Refers to the predictable flow of cash through a business, i.e. initial cash plus cash received compared to actual cash expended. Cash Flow Statement: The details of the cash requirements of a business. Cash In: Cash added to the business during a particular period of time. Cash In can come from any source and is added to pre-existing cash on hand (Beginning Cash) on the cash flow statement. Cash Out: Cash subtracted from the business, during a particular period of time. Cash Out can be used for any expense and is subtracted from Beginning Cash plus Cash In on the cash flow statement. Deficit Financing: Borrowing money to pay expenses that exceed cash on hand. Delinquency: A past due credit account or debt payment. Ending Cash: Cash logged in the business at the end of a particular point in time. Ending cash can be registered as a result of subtracting Cash Out from Beginning Cash plus Cash In amounts placed in the businesses during a particular period of time. First In, First Out (FIFO): Is a cash flow assumption used to value inventory and the cost of goods sold. It assumes that the first items purchased are the first items sold. Invoice: An itemized list of goods sent by the seller to the buyer, usually listing prices, terms of the sale, shipping dates, or any other information relevant to the sale. Inventory: A finished good held for sale as well as raw materials and unfinished goods (work in progress) held for later production. Last In, First Out (LIFO): Is a cash flow assumption used to value inventory and the cost of goods sold. It assumes that the last items purchased are the first items sold. Lenders: Financial institutions, non-profits, government agencies, or individuals willing to lend money to a business at a specified interest rate. Line of Credit: Short-term financing usually granted by a bank up to a predetermined limit; the debtor borrows as needed up to the limit of credit without the need to re-negotiate the loan. Payables: Money owed by a business to its suppliers and employees. 7

9 BUSINESS TERMS (continued) RENAISSANCE ENTREPRENEURSHIP CENTER Receivables: Money owed to a business by its clients. Start-Up/Seed Capital: Money needed to launch a new venture during the pre-start-up and initial period of operations. Undercapitalization: Starting a new enterprise with too little money to carry it through the beginning stages of development. BALANCE SHEET TERMS Assets: The resources, properties, or property rights owned by an individual or a business. Balance Sheet: An accounting statement showing the financial condition of a company at one point in time. Collateral: The assets, such as real property or an automobile, which are offered as security for a loan. Current Assets: Cash or property that can be converted to cash in a short period of time, usually accounts receivable, inventory and short-term notes receivable. Debt: Funds or assets acquired by borrowing. Debt Financing: Money rented from a bank or other financial institution that must be repaid with interest. Depreciation: The periodic allocation of the cost of a tangible long-lived asset over its estimated useful life. Equity: The owner s capital investment in the business; the portion of the business that the owner owns free and clear of other obligations. Inventory: An asset item on a company s balance sheet consisting of finished goods held for sale and raw materials and unfinished goods (work-in-process) held for production. Intangible asset: Characterized by the rights, privileges and benefits of possession rather than by physical existence. These assets are normally considered to have a higher degree of uncertainty than tangible assets. 8

10 BUSINESS TERMS (continued) RENAISSANCE ENTREPRENEURSHIP CENTER Leasehold Improvement: An improvement to leased property, considered an intangible asset to the lessee that becomes the property of the lessor at the end of the lease. Liability: A debt of the business; an amount owed or an obligation to perform a service to creditors, employees, government bodies or others; a claim against assets. Liquidation: The process of converting assets into cash. Liquidity: A term used to describe the solvency of a business, with special reference to how quickly assets can be converted into cash. Loan: Debt money for private business, usually from a bank, other lending institution or individual Loan Agreement: a document that states what a business can or cannot do as long as it owes money and states terms of repayment and penalties.. Long-Term Debt: Loans that are to be paid back over a period greater than a year. Net Worth: The value of a given business, represented by the excess of the total assets over the total liabilities (amounts owed at a given moment in time to outside creditors). Owner s Equity: See Equity. The components of the business that the owner owns free and clear of any obligations. Ratio: One of several techniques used to assess earning power, solvency, etc. Usually involves a comparison of numbers from one or more financial statements. Retained earnings: Earnings retained from the operations of a business and detailed on the balance sheet (in new assets, lower liabilities, and cash or cash equivalents). Return on Investment (ROI): The profit that an investor hopes to make when investing money in a business. Short-Term Debt: Loans that are to be repaid within one year. Term Loan: A loan with an original maturity beyond one year. Working Capital: Current assets minus current liabilities. Contrasted with capital investment, which is a longer-term use of funds, working capital cycles through a business in a variety of forms including inventory, accounts and notes receivable, and cash and securities. 9

11 RENAISSANCE ENTREPRENEURSHIP CENTER HOMEWORK ASSIGNMENTS 1. Complete your one month partial Profit and Loss statement, filling in all of your operating expenses along with a realistic draw. If you are a product business, please also complete the "costs of goods sold" analysis for each product that you plan to sell. (See form in this section and/or in your class account.) 2. Review, revise, and/or complete the Determining Price exercise. A. Interview other similar business owners B. Choose the best way for you to do this exercise 10

12 RENAISSANCE ENTREPRENEURSHIP CENTER Financial-Related Websites Useful ratios, business statistics and benchmarks. Yahoo Finance Google Finance Business Journal - Finance Section Financial Times US Edition Business Week Check out the Entrepreneurs General Financial Website New York Stock Exchange City of SF guide to Business US Census (For research in later classes) 11

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