Plan and Track Your Finances

1. 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 Chapter 9

3. Lesson 9.1Finance 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. Chapter 9

4. Terms • net worth • debt-to-equity ratio • equity capital • venture capitalists • debt capital • collateral Chapter 9

5. Assess Your Financial Needs • Itemize startup costs. • Determine the amount of capital required to start your business. Chapter 9

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7. Personal Financial Statement • net worth = assets ─ liabilities • personal financial statement = personal assets ─ personal liabilities Chapter 9

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

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 Chapter 9

12. What are some of the ways entrepreneurs can get equity capital? Chapter 9

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 Chapter 9

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 Chapter 9

15. Types of secured loans include the following: • line of credit • long-term loan • accounts receivable financing • inventory financing Chapter 9

16. unsecured loans • loans that are not guaranteed with collateral • only made to creditworthy customers Chapter 9

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 Chapter 9

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 Chapter 9

19. Where can entrepreneurs look for debt financing? Chapter 9

20. Lesson 9.2Pro Forma Financial Statements Goals • Prepare a pro forma cash flow statement. • Prepare a pro forma income statement. • Prepare a pro forma balance sheet. Chapter 9

21. Terms • cash flow statement • income statement • balance sheet Chapter 9

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 Chapter 9

23. Forecast Receipts and Disbursements • estimate • monthly cash receipts • monthly cash disbursements Chapter 9

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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 Chapter 9

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28. Economic Effects on Cash Flow • Changes in the economy can dramatically effect the cash flow of businesses. • Business owners should make conservative estimates. Chapter 9

29. What does a cash flow statement show? Chapter 9

30. Income Statement • income statement • shows revenues and expenses incurred over a period of time • shows the profit or loss for the time period Chapter 9

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. Chapter 9

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 Chapter 9

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34. What does an income statement show? Chapter 9

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 Chapter 9

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 Chapter 9

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 Chapter 9

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 Chapter 9

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40. Name one example each of a current liability, a long-term liability, a current asset, and a fixed asset. Chapter 9

41. Lesson 9.3Record 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. Chapter 9

42. Terms • transaction • journals • account • check register • payroll Chapter 9

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 Chapter 9

44. ledgers • A general ledger is made up of accounts. • account • an accounting record that provides financial detail for a particular business item Chapter 9

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 Chapter 9

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47. What is the difference between a journal and a ledger? Chapter 9

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 Chapter 9

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. Chapter 9

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