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Business

Business. Understanding the B ig P icture. A S tep B ack. What does it mean to have a job An organization is willing to pay you to help them They have to make money By hiring you, they are betting that you will generate more revenue than your salary. A Step Back.

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Business

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  1. Business Understanding the Big Picture

  2. A Step Back • What does it mean to have a job • An organization is willing to pay you to help them • They have to make money • By hiring you, they are betting that you will generate more revenue than your salary

  3. A Step Back • What does it mean to be an entrepreneur • Start your own organization and generate your own revenue • You [and investors] are betting on yourself to generate profit • If you’re in it for the money • You have to generate more profit/year than the salary you turned down • If you’re in it for the fun • Go for it! • Do it now

  4. Every Organization Has to Make Money • Even non-profits and charities have to keep the lights on • As much as we’d rather just write code • Someone has to make sure all the bills and salaries are paid on time

  5. How Organizations Make Money • Hire a combination of employees with specific skills and organize them towards a profitable goal • How expensive are employees?

  6. The Employee

  7. Employer Expenses • Salary • Social security 6.2% • Medicare 1.45% • Federal Unemployment $56 • State Unemployment: Varies 2-10% • Workers Comp: Varies • Benefits: Varies • Health Insurance • Retirement • Vacation

  8. Employee Taxes • Social security 6.2% • Medicare 1.45% • Federal Income Tax • State Income Tax • Varies by state

  9. Federal Income Tax • Tax brackets are widely misunderstood! • No such thing as making a little more money and paying a lot more in taxes

  10. 2014 Federal Income Tax - Single • {Income : $89,300 , Federal Income Tax : $16,631} • {Income : $89,400 , Federal Income Tax : $16,656}

  11. Deductions • The previous example was misleading • After deductions, the taxable income of both salaries were in the same bracket • Itemized deductions • Claim everything that is a tax deductible • Complicates filing for taxes • For most people, it will not save money • Standard deduction • The default deduction if you don’t itemize • Filing single: $6200 • Taxable income is income minus deductions

  12. Example Revised – Filing Single • Income : $95,500 • Taxable Income after standard deduction: $89300 • Federal Tax: $18181 • Effective tax rate: 19% • Income : $95,600 • Taxable Income after standard deduction: $89400 • Federal Tax: $18208 • Effective tax rate: 19%

  13. Benefits • Your salary is only the beginning • Insurance (Health, Dental, Vision) • Very expensive to purchase independently • Vacation • Profit-sharing and bonuses • Take them if you can get them • Stock Options

  14. Benefits – 401K • Most common employer sponsored retirement plan • Set income aside and invest to earn interest • Varying level of flexibility for investments • Common for employer to match a % of contributions • Pre-tax contributions • Effectively an additional deduction on your taxable income • Contributions + interest are taxed when withdrawn • Similar to Tradition IRA • Sometimes an option to use post-tax income • No tax during retirement • Similar to Roth IRA • Penalties for withdrawing before retirement

  15. Accounting

  16. Accounting – The Big Three • Income Statement • Did the company make money? • Balance Sheet • What does the company own? • Statement of Cash Flow • How liquid is the company? • The business world works in quarters • Public corporations report to shareholders every 3 months

  17. Accounting – Income Statement • Revenue • How much capital was generated • Mostly through sales • Expenses • How capital much was used • Income • Income = Revenue – Expenses; • The bottom line on the income statement • What all investors are watching • Usually translated into Earnings Per Share (EPS)

  18. Microsoft Income Statement (Abridged)

  19. Accounting – Balance Sheet • Assets • Everything a company owns • Includes cash, accounts receivable, properties, equipment, investments, goodwill • Liabilities • Everything a company owes • Includes debt, accounts payable, deferred tax, and other financial obligations • Equity • Equity = Assets – Liabilities; • The sheet must balance this equation

  20. Apple Balance Sheet (Abridged)

  21. Cash Flow • A measure of liquidity (Flexibility) • Cash is the most liquid asset • Everyone wants it • Non-cash assets make a company rigid • Slower to adapt • Susceptible to market changes • Bottom line is the change in cash on hand

  22. Facebook Cash Flow

  23. Cash Flow Scenario • A small startup has $100,000 cash • Sells $1M in product that will cost $100,000 to produce • $900,000 profit! • Revenue increases by $1M on the income statement • Accounts receivable increases by $1M on the balance sheet • Equity and Income look great: $900,000 • Common to wait 90 days after delivery for a payment • Cash flow looks bad in the short term: ($100,000) • Startup must go an entire quarter with no cash • Can’t fill any orders while waiting • Taking orders during this time can cause a successful business to fail • Desperately look for new loans and investments

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