Chapter 59.1 Finance Your Business
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Ideas in Action
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
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Determine the amount of capital required to start your business.
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Why is the net worth of an entrepreneur important to potential investors in the business?
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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.
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the money invested in a business in return for a share in the profits of the business
Sources of equity include:
Venture Capitalists
individuals or companies that make a living investing in startup companies
equity capital
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What are some of the ways entrepreneurs can get equity capital?
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Debt Capital
debt capital
money loaned to a business with the understanding that the money will be repaid
usually with interest
Friends and Relatives
prepare a formal agreement regarding repayment terms
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collateral
property that the borrower forfeits if he or she defaults on the loan
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only made to creditworthy customers
unsecured loans
A lack of:
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The Economic Development Administration
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Prepare a pro forma income statement.
Prepare a pro forma balance sheet.
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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
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net cash flow =
Tracking monthly cash flow statements
enables you to anticipate periods of positive and negative cash flow
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Economic Effects on Cash Flow
Changes in the economy can dramatically effect the cash flow of businesses.
Business owners should make conservative estimates.
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shows revenues and expenses incurred over a period of time
shows the profit or loss for the time period
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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.
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what a business owns
what a business owes
how much a business is worth at a point in time
assets =
fixed assets
accounts receivable
the amounts owed to a business by its credit customers
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current liabilities
debts that must be paid in full in less than a year
accounts payable
long-term liabilities
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the amount a company estimates it will not receive from customers
depreciation
the lowering of an asset’s value to reflect its current worth
allowance for uncollectible accounts
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Name one example each of a current liability, a long-term liability,
a current asset, and a fixed asset.
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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.
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any business activity that changes assets, liabilities or net worth
journals
sales
account
an accounting record that provides financial detail for a particular business item
ledgers
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used for accounts payable to show in detail the transactions with each vendor from whom merchandise is purchased on account
aging table
shows how long it takes customers to pay their bills
subsidiary ledger
What is the difference between a journal and a ledger?
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check register
booklet (or electronic register) where you record information for each check written
amount
date
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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.
Balance Your Account
payroll
a list of people who receive salary or wage payments from a business
Payroll Records
quarterly
unemployment insurance taxes
Social Security taxes
Sales taxes are based on a percentage of sales.
Each month you deposit sales tax into a government owned account.
Sales Tax
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What kinds of bank, payroll, and tax records do you have to keep?
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Present convincing rationale for expanding a business into two surrounding communities.
Develop a complete financial plan for a business venture.
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Present financial information to obtain a loan from a financial institution.
Organize a financial proposal for a growing business.
Manage time and information for an effective presentation.
Request a business loan from a financial institution.
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THINK CRITICALLY
Why does a financial institution want to know the future sales potential of the business’s target market?
What does a business’s workforce have to do with a business loan?
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Why must the team describe the target market demographics for the two new proposed locations for the business?
Why should the business project how quickly a loan will be repaid?
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