Understanding Capital Financing Options for Entrepreneurs

1. Unit 3Financial Analysis

2. Unit 3 Vocabulary • Capital Expenditures • Cash Basis • Cash Flow • Character • Chart of Accounts • Collateral • Comparative Financial Statement • Conditions • Contingency Fund • Credit Bureaus • Credits • Accounting Period • Accounts Payable • Accounts Receivable • Accrual Basis • Angel • Assets • Balance Sheet • Bootstrapping • Budget • Calendar Year • Capacity • Capital

3. Unit 3 Vocabulary • GAAP • General Journal • General Partner • Income Statement • Initial Public Offering (IPO) • Journal • Journalizing • Liabilities • Net Profit on Sales Ratio • Operating Capital • Operating Ratio • Current Assets • Current Ratio • Debt Capital • Debits • Due Diligence • Equity • Equity Capital • Factor • Financial Reports • Fiscal Year • Fixed Assets • Fixed Expenses

4. Unit 3 Vocabulary • Venture Capital • Venture Capitalists • Working Capital • Owner’s Equity • Posting • Private Placement • Pro forma • Quick Ratio • Ratio Analysis • Risk Capital • Statement of Cash Flows • Stock • Subchapter S Corporation • Trade Credit • Variable Expenses

5. Unit 3 EssentialQuestion 1(MKT-EN-4) • What information is needed to compile a business plan worksheet?

6. Essential Question 1A(MKT-EN-4G) • What are the sources of capital available to entrepreneurs?

7. Start up Financing • Sources of Financing • Equity Capital: Cash raised for a business in exchange for an ownership stake in the business or equity. • Risk Capital: (Equity funding) money invested in companies where there is financial risk. • Sources of Equity Financing: • Personal Savings • Friends and Family • Private Investors • Partners • Venture Capitalists • Government-sponsored venture capital funds

8. Start up Financing • Sources of Financing • Debt Capital: Money raised by taking out loans. • Sources of Debt Financing: • Banks and Credit Unions • Trade Credit • Minority Enterprise Development Programs • Commercial Finance Companies • SBA Loans • Small Business Investment Companies (SBICs)

9. Essential Question 1B(MKT-EN-4H) • How do the sources of capital compare and contrast?

10. Start up Financing • Sources of Financing • Equity Capital • Advantage: Money does not have to be paid back even if business fails • Disadvantage: You are giving up a percentage of ownership and/or control and profit • Debt Capital: • Advantage: You maintain ownership, control and profits • Disadvantage: Money has to be paid back even if business fails

11. Unit 3 EssentialQuestion 2(MKT-EN-7) • What are the processes, strategies, and systems needed to guide the financial organization of an entrepreneurial entity?

12. Essential Question 2A(MKT-EN-7A) • What are the fixed and variable costs for start up and maintenance of a business?

13. Start up Financing • Start up Costs • Fixed Expenses: Expenses that do not change with the number of units produced. • Rent • Loans • Insurance • Management Salaries • Promotion

14. Start up Financing • Start up Costs • Variable Expenses: Expenses that change with the number of units produced. • Supplies • Utilities • Worker wages / Commission • Production materials • Maintenance • Transportation • All operating expenses

15. Essential Question 2B(MKT-EN-7B) • What are the terms used in financial reports?

16. Financial Terms • Definitions • Assets: Items of value that belong to a business or individual. • Liabilities: Monies owed to others. • Equity: Ownership or investment. • Liquidity: The ease of converting assets to cash. Items with high liquidity are savings, stocks, mutual funds, etc. Items with low liquidity are houses, equipment, etc. • Solvency: Measure of indebtedness. If assets are greater than liabilities then you are solvent. If liabilities are greater than assets then you are insolvent.

17. Financial Terms • Definitions • Ratio Analysis: The comparison of two or more amounts on a financial statement and the evaluation of the relationship between them. • Current Assets: Cash or any other item that can be converted to cash quickly and used within a year. • Current Liabilities: Debts due within a year.

18. Financial Terms • Ratio Analysis • Current Ratio • Obtained from the balance sheet. • Indicates the ability of a business to pay its bills. • Is measured by: • A ratio of 2:1 or higher is good.

19. Financial Terms • Ratio Analysis • Working Capital • Obtained from the balance sheet. • Indicates the capital available to carry out daily operations. • Is measured by: Current Assets – Current Liabilities • Amount of working capital needed is determined by industry average.

20. Financial Terms • Ratio Analysis • Debt Ratio • Obtained from the balance sheet. • Indicates the solvency of a business. • Is measured by: • A ratio of 50% to 75% is good for business operation. This indicates the majority of the business is financed by creditors and provides a negative incentive for takeovers. • A ratio of 40% or less is required for a business or personal loan.

21. Financial Terms • Ratio Analysis • Net Profit on Sales • Obtained from the income statement. • Indicates the amount of money left from each dollar derived from sales. • Is measured by: • Amount of net profit on sales is determined by industry average. • If net profit on sales is lower than industry average, it may indicate that prices are too low or costs are too high.

22. Financial Terms • Ratio Analysis • Operating Ratio • Obtained from the income statement. • Indicates the relationship between an expense and sales. • Each expense is measured separately. • Is measured by: • Amount of operating ratio is determined by industry average. • If your percentage is higher than the industry average, it could be an indicator that you are spending too much in that expense area.

23. Financial Terms • Ratio Analysis • Quick Ratio • Obtained from the balance sheet. • Indicates the liquidity of a business without relying on inventory. • Is measured by: • Amount of quick ratio is determined by industry average.

24. Financial Terms • Ratio Analysis • Return on Equity (ROE) • Obtained from the balance sheet and income statement. • Indicates the amount of money earned for each dollar invested. • Is measured by: • Amount of ROE is determined by industry average.

25. Essential Question 2C(MKT-EN-7C) • What are the various elements needed for a tentative budget for a business including an income statement, balance sheet, and cash flow statement?

26. Financial Statements • Budget: A formal, written statement of expected revenue and expenses for a future period of time. It will include a projected (pro forma) income statement, cash flow statement, and balance sheet.

27. The Income Statement • Income Statement: A summary of the business’s revenue and expenses and is used to calculate Net Income or Loss.

28. Total Sales Returns and Allowances = Net Sales Cost of goods Sold = Gross Profit Operating Expenses = Net Income from Operations + Other Income Other Expenses = Net Profit Before Taxes Income Taxes = Net Profit (Loss) The Income Statement

29. Cost of Goods Sold is calculated by: Beginning Inventory + Purchases = Goods Available for Sale Ending Inventory = Cost of Goods Sold The Income Statement

31. Balance sheet: A summary of a business’s assets, liabilities, and owner’s equity. Assets = Liabilities + Owner’s Equity A balance sheet consists of: Current assets: Cash or any other item that can be converted to cash quickly and used within a year. Fixed assets: Items that will be held for more than a year. (Automobiles, equipment, buildings, etc) Current liabilities: Debts due within a year. Long-term liabilities: Debts that will not be paid off within the year. Owner’s Equity: The value or worth of the business. The Balance Sheet

33. Cash Flow Statement • Cash Flow: The amount of cash available at any time. • Cash Flow Statement: A report of how much cash a business took in and where the cash went. • Cash Flow also helps you see if you will have enough money when you need to pay your bills.

35. Calculating Lifetime Value • Lifetime Value:A prediction of the net profit attributed to the entire future relationship with a single customer. • There are many nuances to be considered in calculating lifetime value.

36. Calculating Lifetime Value • A rough estimate can be obtained by taking the annual revenue you earn from a single customer and subtract the money spent on acquiring and serving them.

37. Calculating Lifetime Value • Example:The average new car customer is age 20-80. This customer will purchase a new car every five years at an average cost of $35,000. The customer will make a total of 13 purchases and generate $455,000 in gross sales. Assuming $2000 in profit per sale, this equates to $26,000 in profit over the lifetime of the customer.

38. Calculating Lifetime Value • Customer lifetime value helps business owners make important business decisions about sales, marketing, product development, and customer support.

39. Calculating Lifetime Value • It helps answer the following questions: • Sales: What type of customers should sales representative spend most of their time trying to recruit? • Marketing: How much should be spent to acquire a new customer? • Product: What products/services, specifically tailored for business’s best customers, should be offered? • Customer support: How much money should be spent to service and retain customers?

40. Essential Question 2D(MKT-EN-7D) • What are the various tax liabilities?

41. Laws that Affect Taxes • Sales Taxes: Percentage of the price of an item that goes to a state or local government. • Federal Unemployment Tax: The Federal Unemployment Tax Act (FUTA) requires employers to pay 6.2% of their employee’s gross pay as insurance for workers who are temporarily out of work.

42. Laws that Affect Taxes • State Unemployment Tax: The State Unemployment Tax Act (SUTA) requires employers to pay a percentage (varies with the state – 2.7% on the first $8500 with step decreases depending on hiring/firing history in Georgia) of their employee’s gross pay for workers who are temporarily out of work. • Business Income Taxes: Your business’s legal status regulates the amount of local, state, and federal income taxes paid.

43. Laws that Affect Taxes • Other Business Taxes: Depending on the business, there may be other local, state, and/or federal taxes. • Environmental taxes • Communication and air transportation taxes • Fuel taxes • First retail sale on heavy trucks, trailors and tractors • Manufactures taxes on the sale and use of a variety of different articles • There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways • Businesses that accept wagers or conduct a wagering pool or lottery

44. Laws that Affect Taxes • Payroll Taxes: • Federal Insurance Contributions Act of 1935(FICA): Established the Social Security Tax. • Is 13% of the employee’s gross pay. • Employee pays 6.5%. • Employer pays 6.5%. • If you are self-employed you are considered both the employer and employee and are required to pay the full 13%.

45. Laws that Affect Taxes • Medicare Tax • Is 2.9% of the employee’s gross pay. • Employee pays 1.45%. • Employer pays 1.45%. • If you are self-employed you are considered both the employer and employee and are required to pay the full 2.9%.