Junior Ventures Finance Workbook

1. Junior Ventures Finance Workbook Spring 2012

2. Purpose and Goals The Purpose of this workbook is to provide you with a framework and tools to develop a budget and financial projections for your business Goals At the end of this workbook you will be able to… • Determine your start up costs • Forecast a three year income statement • Determine your company’s tax rate • Calculate loan payments • Articulate to a potential investor how much money you need

3. Table Of Contents • Quick Facts……………………………………………Page 4 • Start Up Costs & Sources of Capital……………….Page 8 3. Financial Statements…………………………………Page 17 4. Three Year Financial Projections……………………Page 28 5. Appendix……………………………………………….Page 34

4. Quick Facts!

5. Road to Success! Business Activities Finance + = uccess What is Business Finance?Forward thinking, about future possibilities Supports informed decision-making The “language of business” Finance Quick Facts! Businesses record and track money to… • …be aware of success or failure (gain or loss of money) • …plan (when to grow, when to cut back) • …comply withRegulations and Laws (file taxes, file financial statements) • …prove financial stability to investors, creditors, suppliers, customers • … Demonstrate lawful and ethical business behavior

6. Finance Quick Facts! The Budget formula Total Revenue – Total Expenses = Income before Taxes * Tax rate = Net Income Revenue: Dollar amount earned by a business from the sale of products or services. AKA “Sales” or “Income” Expenses: Dollar amount used by a business to create or earn the revenue. AKA “The Costs associated with running a business” Net Income: Difference between revenue and expenses. AKA “The bottom line of running a business” (Positive = Profit, Negative = Loss, $0 = Break Even) • A Budget is…. • …a Financial plan • …expressed in monetary terms • …an estimate of a desired target or goal • …drafted for a specific time period We use a Budget to… • …plan (Budget as a Planning tool) • …monitor success or failure • …coordinate business activities with resources available • …track performance over time – forecasted (expected outcome) versus actual outcome Common budget expenses Employee salary (+ 40% for benefits)  Rent expense (office, warehouse, storage) Computer and telephone equipment Office furniture and supplies Cleaning crew expense Marketing and advertising expenses Raw materials, product parts Types of costs Start up Costs: Usually a one-time cost for initial business or project launchOn-going Costs: Costs that continue due to the day-to-day running of the businessFixed Costs: Costs stay the same over time Variable Costs: Costs changes over time

7. Start Up Costs & Capital Sources

8. Ongoing Costs How Much Money Do I Need to Get Started? All the costs of getting your business up and running (Year 0) go into the start up costs section of your business plan There are two types of costs: = Start Up Costs One Time Costs +

9. One Time Costs (sample) One time costs are expenses you will only need to pay once before you get your business started

10. Exercise #1 One Time Costs Use your resource identification chart to list all the resources* you will need to purchase in order to start your business • Consider the following categories of expenses: • Office Furniture • Office Appliances • Office Technology • Office Equipment • Raw Materials • Rental Deposit • Licenses and/or Permits • Legal and/or Professional Fees • Initial advertising * Note: Do not include the dollar amounts. Research will be conducted at a later time to accurately estimate the costs for each line item

11. Monthly Costs (example) Monthly costs are ongoing costs that you will have every month for Year 0 and for the following years. When estimating the monthly costs for starting you business, project three months of expenses to fully cover your start up costs

12. Exercise #2 Monthly Costs Use your resource identification chart to list all the expenses you will experience each month • Consider the following categories of expenses: • Rent • Utilities • Telephone • Office Supplies • Maintenance & Cleaning • Insurance • Loan Interest • Legal & Professional Fees • Ongoing Advertising * Note: Do not include the dollar amounts. Research will be conducted at a later time to accurately estimate the costs for each line item

13. Start Up Cost (example) Put it all together and it should look something like this… Amount to ask for

14. Exercise #3 Start Up Capital Once you’ve identified all your one-time and monthly expenses, use the ‘Start-Up Cost Budgeting Worksheet’ to calculate the total estimated Start-Up Capital you will need in order to launch your business.

15. Asking for Money A big part of “The Pitch” is asking potential investors and lenders for the money To do that you NEED to know what they WANT to know. This includes: Know the Business What is the type of Business you are Describe potential customers; how will your business help these customers How much investment is being sought (your total start-up costs) What partnerships, collaborations and affiliations are in place What is the market size being pursued (describe) Who are likely competitors When will the business break-even Know the People Who is on your management team Who are your advisors

16. Business Development Program Entrepreneur’s personal resources Financial Institution Loans Angel investors Public Offering Charitable Giving Grants Organic Growth Venture capitalists Sources of Capital There are several possible financing options for your business Financing Options

17. Financial Statements

18. The Three Major Financial Statements • Income Statement A financial statement that contains a summary of a business' financial operations for a specific period of time. It shows the net profit or loss for the period by stating the company's revenues and expenses • Cash Flow Statement Summary of a company's cash receipts and cash disbursements over a period of time including cash to and cash from operating, investing, and financing activities, along with the net increase or decrease in cash for the period • Balance Sheet A quantitative summary of a company's financial condition at aspecific point in time, including assets, liabilities and net worth

19. Income Statement The income statement is similar to a report card for a company because it is intended to help gauge the overall performance of the company 2013 Year End 2014 Year End Fred’s Bread Company: $5,144 • $5,841 Revenue (4,291) (4,959) EmployeeExpenses (650) (737) Non-Employee Expenses $203 $145 Operating Income Investment Income 99 133 Taxes @ 30% (91) (83) $211 $195 Net Income

20. Creating an Income Statement The income statement is similar to a report card for a company because it is intended to help gauge the overall performance of the company 2013 Year End 2014 Year End Business Name: $3,500 • $3,780 Revenue ($3,080) ($3,172) EmployeeExpenses ($390) ($372) Non-Employee Expenses $30 $236 Operating Income Investment Income $100 $135 Taxes @ 30% ($39) ($111) $91 $125 Net Income

21. Loans and Interest Payments Loans are arrangements in which a lender gives money to the borrower and the borrower agrees to repay the money with interest at some future point in time • Lender: A private, public or institutional entity which makes funds available to borrowers such as a Bank • Borrower: You • Interest: The fee charged by a lender for the use of borrowed money expressed as an annual percentage of the principal • Principal: the original amount of a debt borrowed on which interest is calculated

22. Calculating Interest Payments: Principal Borrowed: $100,000 Interest Rate: 5% The loan is for: 10 years Total amount to repay the lender: $150,000 Yearly Loan Repayment: $15,000 Monthly Payment: $1,250 Formula: (Principal X Interest Rate X Years) + Principal = Total amount to repay the lender Example: ($100,000 principalX .05 interestX 10 years ) + $100,000 principal = $150,000 Formula: Amount to repay the lender / 10 years = Yearly Loan Re-payment Example:$150,000 / 10 years= $15,000 Formula: Yearly Loan Re-Payment / 12 months = Monthly Interest Payment Example:$15,000 / 12 months= $1,250

23. Taxes Taxes are fees charged by a government on a product, income or activity. The purpose of taxation is to finance government expenses and public goods and services. • For profit companies are charged a tax rate of 30% • Non-profit income producing companies have a tax rate of 20% • Non-profit, non income producing companies (such as homeless shelters) are not liable to pay taxes Assumptions: Calculating Tax Payments: Formula: Income Before Taxes: $100,000 X Tax Rate: 30% = Tax Liability Example: $100,000 X .30 = $30,000 is your tax liability Tax Liability is a reduction of income

24. Quick Quiz #1! Calculate the Yearly Interest Expense: Fred’s Auto Shop receives a 5-year small business loan from Bank of America for $12,500 at a 7% interest rate. How much does Fred pay in interest each year?

25. Quick Quiz #1 Answers Principal Borrowed: $12,500 Interest Rate: 7% or .07 Length of Loan Repayment Plan: 5 years Principal Borrowed: $125,000 Interest Rate: 7% The loan is for: 5 years ($12,500 X .07 X 5 years)+ $12,500 = $16,875 Total amount to be repaid to the lender $16,875 / 5 years = $3,750 Yearly Loan Re-payment or $281.25 monthly payment

26. Quick Quiz #2! Build an Income Statement for Jane’s Bagel Shop (Hint: Refer to Quick Facts) Jane’s Bagel Shop Tax Rate is 20% JBS has 1,250 customers JBS charges $2.50 per customer JBS expenses are $1.25 per customer • What are the total revenues? • What are the total expenses? • What is the net income?

27. Quick Quiz #2 Answers • Total Revenue: $3,125.00 Formula: # of customers X charge per customer = Total Revenue Calculation: 1,250 customers X $2.50/customer = $3,125 • Total Expenses: $1,562.50 Formula: # of customers X expenses per customer = Total Expenses Calculation: 1,250 customers X $1.25/customer = $1,562.5 • Net Income: $1,250 Formula: Total Revenue – Total Expenses = Operating Income Before Taxes Calculation: $3,125 - $1,562.50 = $1,562.50 Formula: Operating Income Before Taxes X Tax Rate = Tax Liability Calculation: $1,562.50 X .2 = $312.50 Formula: Operating Income Before Taxes – Tax Liability = Net Income Calculation: $1562.50 – $312.50 = $1,250 Net Income

28. Three Year Financial Projections

29. Building Three Year Projections There are only three steps to take to develop your financial projections for the years ahead • Develop an Income Statement for your Business for Year 1 (slide 29) • 2) Determine your growth assumptions (i.e. inflation, revenue growth etc. - some line items may stay fixed for three years – slide 30) • 3) Use your assumptions to forecast Year 2 and Year 3 financial (slide 32) The Budget Formula is also the Income Statement Formula: Total Revenue – Total Expenses = Income before Taxes Income before Taxes X Tax rate = Tax Liability Income before Taxes – Tax Liability = Net Income

30. Year 1 Income Statement (example)

31. Assumptions (examples) Determine your assumptions for growth for each line item • Growth due to inflation ~ 3% each year • As a general rule of thumb: add 40% to the actual salary amount to cover workers comp, unemployment insurance, disability insurance, health plan coverage, vacation, sick time, etc. • If you can justify an increase greater than inflation then do so • Average $350 in supplies per employee • Some line items will be fixed costs so they will not grow Assumptions Note: There are no “set rules” for assumptions, it is an educated guess at what you think will happen to your business over time. The assumptions must be documented and accompany (either before or after) your financials

32. Exercise #4 Business Assumptions Determine the assumptions that will drive your financial statement forecasts and the rationale for the assumptions. Consider what type of business you are having. Assumptions Justification

33. Three Year Projections (example) Using your business assumptions, forecast Y 2 and Y 3 income statements 8% & 10% growth Y2 and Y3 respectively 3% growth each year 5 year lease at a flat rate 75% & 50% reduction Y2 and Y3 respectively Fixed Costs

34. Appendix

35. Additional Resources for Young Entrepreneurs http://www.sba.gov This is the U.S Small Business Administration site; it includes tips, business plans, financial and legal information. http://www.score.org/topics/young_entrepreneurs SCORE "Counselors to America's Small Business" is a great source of free and confidential small business advice for entrepreneurs. They have helped Vermont Teddy Bear, Jelly Belly Candy and others. http://entrepreneurs.about.com/b/a/216258.htm This is a compilation of many websites that are dedicated to helping you start your business. Great Reference Material!

36. Salary & Other Expense Information www.salary.comThis website lists salary information for a great number of job titles based on zip code. It has a section for small business. www.mass.gov This is the official website for the Commonwealth of Massachusetts. Under the For Businesses section you can find a lot of useful information regarding real estate, licenses and taxes as well as other type of information regarding small businesses www.cityfeet.comThis is an online Commercial Real Estate Network. http://boston.craigslist.org/This is the infamous list of local classifieds and forums

37. Definitions Angel Investors: are wealthy individuals who provide capital for a business start up, mostly in exchange for ownership. Assumptions: Statements taken for granted or accepted as true without proof; suppositions from which conclusions can be drawn Break Even: A business breaks even when its total expenses equals its total revenue. Business Development Programs: Programs, usually state or federal, that assist small businesses in variety of ways by providing them with resources such as education, funding etc. Capital: Money used by entrepreneurs and businesses to make products or provide services Cash: Legal tender or coins that can be used in exchange goods, debt, or services. Sometimes also including the value of assets that can be converted into cash immediately (bank accounts or marketable securities – government bonds) Equity: Stock Expense: Expense or expenditure is an outflow of money to another person or group to pay for an item or service

38. Definitions (continued) Financial Institutions: Common types of financial institutions include banks, credit unions, stock brokerages, asset management firms. They transfer money from investors to companies that need them. Financial Operations: Any type of work that deals with money and finances Financial Projections: Statements made about your financial needs in the future Financial Stability: The avoidance of financial crisis Incur: Acquiring or coming into something Organic Growth: The process of business expansion due to increased output, sales, or both Public Offering: Initial public offering (IPO) is when a company issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand.

39. Definitions (continued) Quantitative: Thatis or may be estimated by quantity or can be measured Sources of Capital: Where will money come from Tax Liability: The amount of tax you owe Venture Capitalists: A venture capitalist (also known as a VC) is a person or investment firm that makes investments in early-stage, high-potential growth companies , and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. Year 0: The year you start up your business