EP2150 - EntrepreneurshipFinancials

• Sources of Financing for a small business• Distinguish between Debt and Equity Financing• Describe the importance of financial statements for small business• Explain the differences between financial statements for big business and small

business• Explain how the balance sheet, income statement and cash flow statement are

constructed• Create a balance sheet, income statement, and statement of cash flow for a small

business• Construct a projected income statement for a small business

Sources of FinancingHow will you finance your business?

Personal savingsCredit fromsuppliers

Loans and mortgagesfrom banks, creditunions and others

Governmentassistance programs

Lovemoney

Equity capitalfrom private

sourcesLeasing

Friends andneighbours

Local professionalsand angelinvestors

Prepare loan or grantrequest package

EmployeesVenture

capitalists

Debt vs. Equity Financing

Advantages of Debt Financing

• Useful for meeting a short-term deficit in cash flow

• Do not have to give up or share control of your business

• The term of the debt is generally limited

• May be acquired from a variety of lenders

• Information needed to obtain a loan is generally straightforward and part of your business plan

• The interest paid is tax-deductible

Debt vs. Equity Financing(Continued)

Disadvantages of Debt Financing

• Can be difficult to obtain for a risky project

• Taking on too much debt can be a burden on your cash flows

• If the funds aren’t used properly, it may be difficult for the business to repay the loan

• If it is a “demand” loan, it can be called by the lender at any time

• The lender may require you to provide a personal guarantee for the loan

• Lenders will often insist on certain restrictions being put into place

Debt vs. Equity Financing(Continued)

Advantages of Equity Financing

• An appropriate investor can contribute expertise, contacts, and new business as well as money

• Equity may be the only option to finance high-risk ventures

• Equity can be used to fund larger projects with longer time frames

Debt vs. Equity Finacing(Continued)

Disadvantages of Equity Financing

• You may have to give up some ownership and control of the business

• There is always the danger of incompatibility and disagreement among the investors

• It is much more difficult to terminate the relationship in disagreements occur

Major Sources of Funds

• Personal Funds• “Love Money”• Banks and Similar Institutions

– Operating Loans (Line of Credit)– Term Loans

• Federal Government– Canada Small Business Financing Program (CSBFA)– Industrial Research Assistance Program (IRAP)– Community Futures Development Corporations (CFDC)– Women’s Enterprise Initiative Loan Program– Aboriginal Business Canada – Youth Entrepreneurship– Business Development Bank of Canada (BDC)

Continued

• Provincial Government Programs• Venture Capital and “Angel” Investors• Other Sources of Financing (Bootstrapping)

– Personal Credit Cards– Canadian Youth Business Foundation – Suppliers’ Trade Credit and Inventory

Buying Plans– Leasing vs. Buying– Negotiated Leasehold Improvements– Advance Payment from Customers

Major Sources of Funds cont…

Dealing with banks• Know what your banker is looking for

• Don’t “tell” your banker, “show” her

• Interview your banker

• Passion makes perfect

• Ask for more money than you need

• Get your banker involved in your business

• Increase your credit when you don’t need it

•

Estimating Operating ResultsConduct Research

Estimate one-time start-up expenditures

Estimate expected monthly operating expenses

Develop short-term financial projections

Determine your breakeven point

Forecast yourcash flow

Pro forma income statement

Pro formabalance sheet

Sample Pro Forma Income Statement

TOUGH GUYS SPORTING GOODSPRO FORMA INCOME STATEMENT

For the year ending [date]

Net sales $833,333 (A)Less: Cost of goods sold:

Beginning inventory $220,000Plus: Net purchases 555,647Goods available for sale $775,647Less: Ending inventory 231,481

Cost of goods sold 544,166 (B)Gross margin $289,167 (C)Operating expenses 274,167 (D)

Net Profit (Loss) Before Income Tax $ 15,000 (E)

Completed Pro Forma Income StatementTOUGH GUYS SPORTING GOODSPRO FORMA INCOME STATEMENT

For the Year (date)

1. Gross Sales $833,3332. Less: Cash Discounts 0A. NET SALES 833,333

Cost of Goods Sold:3. Beginning Inventory $220,0004. Plus: Net Purchases 555,6475. Total Available for Sale $775,6476. Less: Ending Inventory 231,481B. COST OF GOODS SOLD $544,166C. GROSS MARGIN $289,167

Less: Variable Expenses7. Owner’s Salary 40,0008. Employees’ Wages and Salaries 85,1339. Supplies and Postage 0

10. Advertising and Promotion 18,33011. Delivery Expense 1,67012. Bad Debt Expense 013. Travel 014. Legal and Accounting Fees 10,83015. Vehicle Expense 016. Miscellaneous Expenses 45,833

Continued

TOUGH GUYS SPORTING GOODSPRO FORMA INCOME STATEMENT

For the Year (date) - Continued

D. TOTAL VARIABLE EXPENSES $201,796Less: Fixed Expenses

17. Rent 38,33318. Repairs and Maintenance 5,00019. Utilities (Heat, Light, Power) 8,17020. Telephone 1,00021. Taxes and Licences 022. Depreciation 10,00023. Interest 6,66724. Insurance 5,00025. Other Fixed Expenses 0E. TOTAL FIXED EXPENSES $ 74,170F. TOTAL OPERATING EXPENSES $274,167 *G. NET OPERATING PROFIT (LOSS) $ 15,000

* Numbers may not match operating expense percentages exactly due to rounding.

Determining Your Cash Flow1. Cash Flow from Operating Activities

(+) Cash received from customers

(+) Any other operating cash receipts

(=) Total Cash Receipts from Operations (A)

(-) Cash paid to suppliers

(-) Cash paid to employees

(-) Interest paid

(-) Taxes paid

(-) Other cash payments for expenses

(=) Total Cash Payments from Operations (B)

Total Net Cash Provided from Operations = (A) – (B)

Continued

2. Cash Flow from Investment Activities

(+) Cash proceeds from the sale of assets

(-) Cash disbursements for the purchase of property or equipment

(=) Total Net Cash Provided from Investment Activities

Continued

3. Cash Flow from Financing Activities

(+) Cash received from bank and other loans

(+) Capital contributions by owners

(+) Proceeds from issuing stock

(=) Total Cash Received from Financing (A)

(-) Repayment of principal on loans

(-) Dividends paid to shareholders

(-) Cash withdrawals by owners

(-) Other funds removed from the business

(=) Total Cash Payments for Financing (B)

Total Net Cash Provided by Financing = (A) – (B)

Continued

TOTAL NET CASH FORECAST

Total Net Cash Provided by Operations

Plus Total Net Cash Provided by Investment

Plus Total Net Cash Provided by Financing

Sample Cash Flow Forecast

Year 1Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total

Cash Flow from Operations (during month)

1. Cash Sales 17,136 25,500 33,500 43,500 48,500 56,000 62,500 55,500 43,500 39,500 36,500 43,500 505,1362. Payments for Credit Sales 0 17,000 22,333 29,000 32,333 37,333 41,667 37,000 29,000 26,333 24,333 29,000 325,3333. Investment Income 0 0 0 0 0 0 0 0 0 0 0 0 04. Other Cash Income 0 0 0 0 0 0 0 0 0 0 0 0 0

A. TOTAL CASH ON HAND $17,136 $42,500 $55,833 $72,500 $80,833 $93,333$104,167 $92,500 $72,500 $65,833 $60,833 $72,500 $833,333

Less Expenses Paid(during month)1

5. Inventory or New Material -31,570 -39,562 -48,002 -54,332 -61,823 -62,983 -53,488 -44,204 -40,406 -41,461 -38,296 -21,608 -537,7396. Owner’s Salary -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -3,325 -39,9007. Employees’ Wages

and Salaries -5,155 -7,223 -9,437 -11,451 -12,961 -14,748 -15,024 -12,759 -10,545 -9,639 -9,890 -6,568 -85,5018. Supplies and Postage 0 0 0 0 0 0 0 0 0 0 0 0 09. Advertising and Promotion -751 -1.052 -1,375 -1,668 -1,888 -2,149 -2,189 -1.859 -1,536 -1,404 -1,441 -957 -18,27010. Delivery Expense -68 -96 -125 -152 -172 -195 -199 -169 -140 -128 -131 -87 -1,66111. Travel 0 0 0 0 0 0 0 0 0 0 0 0 012. Legal and Accounting Fees -3,000 -700 -700 -700 -700 -700 -700 -700 -700 -700 -700 -700 10,70013. Vehicle Expense 0 0 0 0 0 0 0 0 0 0 0 0 014. Maintenance Expense 0 -1,500 0 0 -1,000 0 -1,300 0 -300 0 -900 0 -5,00015. Rent -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -3,200 -38,40016. Utilities -580 -580 -580 -580 -580 -580 -580 -580 -580 -580 -580 -580 -6,96017. Telephone -100 -100 -100 -100 -100 -100 -100 -100 -100 -100 -100 -100 -1,20018. Taxes and Licences 0 0 0 0 0 0 0 0 0 0 0 019. Interest Payments 0 -240 -348 -476 -536 -624 -632 -496 -332 -280 -268 -280 -4,51220. Insurance -1,000 0 -1,000 0 -1,000 0 -1000 0 -1000 0 0 0 -5,00021. Other Cash Expenses -1,877 -2,631 -3,437 -4,171 -4,721 -5,372 -5,472 -4,647 -3,841 -3,511 -3,602 -2,392 -45,696

B. TOTAL EXPENDITURES (50,626) (60,209) (71,630) (80,155) (92,006) (93,967) (87,210) (72,040) (66,005) (64,328) (62,434) (45,658) (840,419)

Pro Forma Cash Flow Forecast for Tough Guys Sporting Goods12-Month Cash Flow Projections

Minimum CashBalance Required = 5,000

1. Expenses and other payments should be entered as negative (-) numbers.

Continued

Sample Cash Flow Forecast (Continued)

Year 1Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total

Capital

Purchase of Fixed Assets 0 0 0 0 0 0 0 0 0 0 0 0 0Sale of Fixed Assets 0 0 0 0 0 0 0 0 0 0 0 0 0

C. CHANGE IN CASH FROMPURCHASE OR SALE OF ASSETS $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Financing

Payment of Principal of Loan 0 0 0 0 0 0 -17,000 -20,500 -6,500 -1,500 0 -31,200 -76,700Inflow of Cash from Bank Loan 30,000 13,500 16,000 7,500 11,000 1,000 0 0 0 0 1,500 0 80,500Issuance of Equity Positions 0 0 0 0 0 0 0 0 0 0 0 0 0Repurchase of Outstanding

Equity 0 0 0 0 0 0 0 0 0 0 0 0 0

D. CHANGE IN CASH FROM FINANCING $30,000 $13,500 $16,000 $7,500 $11,000$1,000($17,000)($20,500) ($6,500) ($1,500) $1,500(-$31,200) $3,800

E. INCREASE (DECREASE)IN CASH ($626) ($4,209) $203 ($155) ($172) $357 ($44) ($41)($5) $5 ($101) $1,502 ($3,286)

F. CASH AT BEGINNING OF $10,000 $9,374 $5,165 $5,367 $5,212 $5,040 $5,397 $5,354 $5,313 $5,308 $5,313 $5,212 $10,000 2

PERIOD

G. CASH AT END OF PERIOD $9,374 $5,165 $5,367 $5,212 $5,040 $5,397 $5,354 $5,313 $5,308 $5,313 $5,212 $6,714 $6,714

MEET MINIMUM CASHBALANCE Accept. Accept. Accept. Accept. Accept. Accept. Accept. Accept. Accept. Accept. Accept. Accept. Accept.

Pro Forma Cash Flow Forecast for Tough Guys Sporting Goods12-Month Cash Flow Projections (Continued)

Minimum CashBalance Required = 5,000

2. This entry should be the same amount as for the beginning of the year. All other rows will be the total for the entire year.

Copyright © 2000, McGraw-Hill Ryerson Limited

Slide 7.4B Building a Dream

Sample Pro Forma Balance Sheet

ASSETSCurrent Assets:

1. Cash 6,7002. Accounts Receivable 29,0003. Inventory 231,0004. Other Current Assets 30,000 ________

A. Total Current Assets $296,700Fixed Assets:

5. Land and Buildings 0less depreciation 0

6. Furniture and Fixtures 46,000less depreciation 2,300 43,700

7. Equipment 0less depreciation 0

8. Trucks and Automobiles 0less depreciation 0

9. Other Fixed Assets 34,000less depreciation 3,000 31,000 _______

B. Total Fixed Assets $ 74,700C. Total Assets (C = A + B) $371,400

TOUGH GUYS SPORTING GOODS BALANCE SHEETEnd of Year 1

Continued

LIABILITIESCurrent Liabilities (due within 12 months)

10. Accounts Payable 150,00011. Bank Loans/Other Loans 30,00012. Taxes Owed _______

D. Total Current Liabilities $180,000Long-Term Liabilities

13. Notes Payable (due after one year) 140,00014. Other Long-Term Liabilities 35,400 _______

E. Total Long-Term Liabilities $175,400F. Total Liabilities (F = D + E) $355,400

NET WORTH (CAPITAL)SHARE CAPITAL

Common Shares 1,000Preferred Shares 0

RETAINED EARNINGS 15,000G. Total Net Worth (G = C - F) $ 16,000H. Total Liabilities and Net Worth (H = F + G) $371,400

TOUGH GUYS SPORTING GOODS BALANCE SHEETEnd of Year 1 (Continued)

Determining Your Break-Even Point

100 200 300 500400 600 700

Sales Revenue (thousands of dollars)

100

200

300

400

500

600

700

Exp

ense

s (t

ho

usa

nd

s o

f d

oll

ars)

Fixed Expenses

Loss Area

Breakeven Point

Total Costs

Sales

Profit Area

800

800

900

900