Financing the Business

Transcription

1 Financing the Business The financial section of a business plan puts together the financial information relative to your business information is presented in financial documents, or statements, which determine how much money you need to operate the business and how much money you may need to borrow There are five important financial statements to prepare: 1. personal financial statement 2. start-up cost estimate 3. income statement 4. balance sheet 5. cash-flow statement 1

2 Personal Financial Statement A summary of your current personal financial condition this is an important component of any loan application This document compares assets to your liabilities at a particular point in time assets are anything you own of monetary value liabilities are any forms of debt you owe On this document you should: be honest about the value of your assets list all your cash assets, personal assets and investments list your debts, such as charge accounts, mortgages and loans 2

3 Personal Financial Statement Assets Cash $ Savings Account $7, Auto (2002 sedan) $12, Real Estate (residence) $50, TOTAL ASSETS $70, Liabilities Accounts payable (credit cards) $3, Notes payable (mortgage) $27, Taxes payable $3, Car loan $6, TOTAL LIABILITIES $39, TOTAL ASSETS $70, TOTAL LIABILITIES $39, NET WORTH $31,

4 Start-up Cost Estimate A financial statement used to determine how much costs are involved in starting the business start-up costs are a projection of what it will cost for first year of operation vary from business to business based on the following factors: nature of proposed business size of business kind and amount of inventory needed estimated time from starting business and earning income any operating expenses to be paid before received revenue 4

5 Start-up Cost Estimate One-time vs. Continuing Costs one-time costs are costs which will not be repeated after business is operating licenses and/or permits installation charges for equipment continuing costs are costs which must be paid throughout the business life monthly rent payroll utilities taxes inventory 5

6 Income Statement The next step, after estimating start-up costs, is to determine the amount you expect to earn and spend when the business is operating smaller businesses tend to fail because their revenue fails to meet the expenses of business operations Income statements are used to calculate revenue, costs and expenses of a business, also called a profit and loss statement this document summarizes business income and expenses during a specific period 6

7 Income Statement, Part 1 Month 1 Month 2 Month 3 TOTAL SALES 43,000 43,900 45, ,900 Returns & Allowances 1, ,050 3,150 NET SALES 41,880 42,920 43, ,750 Costs of Goods Sold 20,150 19,875 21,000 61,025 Subtract returns and allowances from total sales to determine net sales GROSS PROFIT 2, ,045 22,950 67,725 Subtract costs of goods sold from net sales to determine gross profit 7

8 Operating Costs Are the costs associated with running the business Are divided into variable and fixed expenses variable expenses are those which change from billing period to billing period for example: utilities and office supplies fixed expenses are those which are the same each billing period for example: rent and insurance 8

9 Income Statement, Part 2 Operating Expenses Variable Expenses Advertising Office Supplies Utilities Operating expenses are the costs of operating a business; they are divided into variable and fixed expenses Telephone Miscellaneous Total Variable Expenses ,210 Fixed Expenses Rent ,800 Insurance Salaries and Payroll Taxes 7,000 7,000 7,000 21,000 Total Fixed Expenses 7,850 7,850 7,850 23,550 TOTAL EXPENSES 8,580 8,580 8,700 25,760 Total Expenses are determined by adding the total variable expenses with total fixed expenses 9

10 Income Statement, Part 3 NET INCOME FROM OPERATIONS Other income Other Expensese NET PROFIT (LOSS) BEFORE TAXES Taxes NET PROFIT (LOSS) AFTER TAXES Calculate Net Profit After Taxes by subtracting taxes from net profit before taxes. The remaining amount represents profit after income taxes are paid for a certain period of time (3 months in this case) Subtract total expenses from gross profit to determine NET INCOME FROM OPERATIONS Calculate Net Profit Before Taxes by adding other income to net income from operations, then subtracting other expense 10

11 The Balance Sheet The summary of a business s assets, liabilities and equity current assets: assets expected to convert to money within the year inventory bank accounts fixed assets: assets used over a long period to operate the business buildings land equipment 11

12 The Balance Sheet Second section of balance sheet reports a company s liabilities current liabilities: debts expected to be paid off within the year employee salaries taxes long-term liabilities: debts not expected to be paid off within the year long-term loans mortgages 12

13 The Balance Sheet Third section of balance sheet reports a company s equity, or net worth many people who start businesses invest some of their own savings; the savings amount is equity, or ownership interest, in the business this equity will be used to buy assets and to operate the business therefore, the assets owned and debts to be paid affect a business equity 13

14 Cash-Flow Statement Shows when a company expects cash coming into the business and cash paid out Cash-flow statements itemizes: cash started with cash expenditures plans for how you expect to receive cash plans for when you expect to receive cash This statement also can tell you when you need to come up with more money and when you will have money left over Most lenders will expect you to estimate cash flow for the first year of operation 14

15 Cash-Flow Statement Steps to preparing a cash-flow statement: 1. add any cash you have at the moment and money from loans to find total start-up money 2. subtract start-up costs from total start-up money to estimate cash left for operation 3. take the cash you expect to receive from sales for every month during first year; include any income from business investments or additional loans 4. add all sources of cash receipts to determine the total cash income for each month 5. list costs of goods for your inventory (separate these by goods paid with cash and goods paid with credit) you expect to pay for next month; add these purchases together 15

16 Cash-Flow Statement Steps to preparing a cash-flow statement: 6. list any expenses you expect to pay during the month 7. total all expenses for the month 8. list amounts to be used for capital expenditures 9. list all other payments to be made 10. add all cash expenditures and subtract the total cash payments from total cash received to determine net cash flow 11. add beginning cash balance from start-up column to the net cash flow for the month the result is the monthly cash surplus when costs of operating business are higher than the income, there is a monthly cash deficit instead of surplus 16

17 Break-Even Point Is the point where the company s total costs will exactly equal its total revenue Is a figure use to evaluate whether the company will be able to cover all of its costs by charging a particular price for its products or services Is calculated by dividing the total amount of costs and expenses for a product by its selling price the end result is a numerical value indicating how many products the company must sell before their revenue and costs break even BEP = Total Costs Selling Price 17

18 Assessment 18

19 Assessment 1. A successful entrepreneur does NOT necessarily need which of the following? A. Superior organizational skills B. Strong coaching abilities C. Tremendous drive D. A strong support system 2. Which of the following accurately describes a franchise? A. A business which is developed by a group of people through social media B. An agreement to operate a business in the name of an established company C. A company which sells no products, but a large variety of services D. A nonprofit organization created to improve relations among business owners 19

20 Assessment 3. Which of the following is the least common form of business organization? A. Corporation B. Franchise C. Partnership D. Sole proprietorship 4. A formal proposal which provides detailed descriptions of a new business to potential investors and lenders is known as which of the following? A. A company summary B. A business support initiative C. A entrepreneurial manual D. A business plan 20

21 Assessment 5. Which of the following accurately describes a balance sheet? A. A guide to a business s pricing policies B. An explanation of how a business spends and earns money C. A summary of a business s assets, liabilities and equity D. A description of a business s products and services 21