Junior Ventures Finance Workbook

Spring 2012

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The Purpose of this workbook is to provide you with a framework and tools to develop a budget and financial projections for your business

GoalsAt the end of this workbook you will be able to…

1. Determine your start up costs 2. Forecast a three year income

statement3. Determine your company’s tax rate 4. Calculate loan payments5. Articulate to a potential investor

how much money you need

Purpose and Goals

3

Table Of Contents

1. Quick Facts……………………………………………Page 4

2. Start Up Costs & Sources of Capital……………….Page 8

3. Financial Statements…………………………………Page 17

4. Three Year Financial Projections……………………Page 28

5. Appendix……………………………………………….Page 34

Quick Facts!

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What is Business Finance?

Forward thinking, about future possibilities Supports informed decision-making The “language of business”

uccess+ =

Business Activities Finance Road to Success!

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 with Regulations and Laws (file taxes, file financial statements)

…prove financial stability to investors, creditors, suppliers, customers

… Demonstrate lawful and ethical business behavior

Finance Quick Facts!

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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

Types of costs

Start up Costs: Usually a one-time cost for initial business or project launch

On-going Costs: Costs that continue due to the day-to-day running of the business

Fixed Costs: Costs stay the same over time

Variable Costs: Costs changes over time

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

Finance Quick Facts!

Start Up Costs & Capital Sources

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All the costs of getting your business up and running (Year 0) go into the start up costs section of your business plan

How Much Money Do I Need to Get Started?

There are two types of costs:

=+ Ongoing Costs

One Time Costs

Start Up Costs

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One Time Costs (sample)

One time costs are expenses you will only need to pay once before you get your business started

ONE TIME COSTS EXPENSES

Fixtures and Equipment $ 10,000.00

Decorating and Remodeling $ 500.00

Installation Charges $ 5,000.00

Starting Inventory $ 200.00

Business Registration Fees $ 1,000.00

Deposits with Public Utilities $ 1,000.00

Rent Deposits $ 2,300.00

Legal and Professional Fees $ 1,000.00

Licenses and Permits $ 500.00

Advertising and Promotions $ 500.00

Cash $ 750.00

Contingency Fund $ 5,000.00

Other $ 200.00

Total: $ 28,850.00

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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

* Note: Do not include the dollar amounts. Research will be conducted at a later time to accurately estimate the costs for each line item

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

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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

MONTHLY COSTS MONTHLY EXPENSES 3 MONTHS' EXPENSES

Salary of Owner $ 5,000.00 $ 15,000.00

Other Employee Salaries $ 1,333.34 $ 40,000.00

Employee Benefits $ 7,333.34 $ 22,000.00

Rent $ 1,600.00 $ 4,800.00

Advertising $ 200.00 $ 600.00

Delivery Expense $ 100.00 $ 300.00

Telephone $ 100.00 $ 300.00

Supplies $ 100.00 $ 300.00

Other Utilities $ 200.00 $ 600.00

Insurance $ 200.00 $ 600.00

Interest on Loan $ 300.00 $ 900.00

Maintenance $ 250.00 $ 750.00

Legal and Professional Fees $ 100.00 $ 300.00

Miscellaneous $ 100.00 $ 300.00

Total: $ 86,750.00

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Exercise #2 Monthly Costs

Use your resource identification chart to list all the expenses you will experience each month

* Note: Do not include the dollar amounts. Research will be conducted at a later time to accurately estimate the costs for each line item

Consider the following categories of expenses:

• Rent• Utilities• Telephone• Office Supplies• Maintenance & Cleaning• Insurance• Loan Interest• Legal & Professional Fees• Ongoing Advertising

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Start Up Cost (example)

Put it all together and it should look something like this…

Amount to ask

for

Amount to ask

for

ONE TIME COSTS EXPENSES MONTHLY COSTS MONTHLY EXPENSES

3 MONTHS' EXPENSES

Fixtures and Equipment $ 10,000.00 Salary of Owner $ 5,000.00 $ 15,000.00

Decorating and Remodeling $ 500.00 Other Employee Salaries $ 1,333.34 $ 40,000.00

Installation Charges $ 5,000.00 Employee Benefits $ 7,333.34 $ 22,000.00

Starting Inventory $ 200.00 Rent $ 1,600.00 $ 4,800.00

Business Registration Fees $ 1,000.00 Advertising $ 200.00 $ 600.00

Deposits with Public Utilities $ 1,000.00 Delivery Expense $ 100.00 $ 300.00

Rent Deposits $ 2,300.00 Telephone $ 100.00 $ 300.00

Legal and Professional Fees $ 1,000.00 Supplies $ 100.00 $ 300.00

Licenses and Permits $ 500.00 Other Utilities $ 200.00 $ 600.00

Advertising and Promotions $ 500.00 Insurance $ 200.00 $ 600.00

Cash $ 750.00 Interest on Loan $ 300.00 $ 900.00

Contingency Fund $ 5,000.00 Maintenance $ 250.00 $ 750.00

Other $ 200.00 Legal and Professional Fees $ 100.00 $ 300.00

Miscellaneous $ 100.00 $ 300.00

Total: $ 28,850.00 Total: $ 86,750.00

Total Estimated Start Up Capital: $ 115,600.00

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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.

ONE TIME COSTS EXPENSES MONTHLY COSTS MONTHLY EXPENSES 3 MONTHS' EXPENSES

Fixtures and Equipment       Salary of Owner       $ -

Decorating and Remodeling      

Other Employee Salaries       $ -

Installation Charges       Employee Benefits       $ -

Starting Inventory       Rent     $ -

Business Registration Fees       Advertising       $ -

Deposits with Public Utilities       Delivery Expense       $ -

Rent Deposits       Telephone     $ -

Legal and Professional Fees       Supplies     $ -

Licenses and Permits       Other Utilities       $ -

Advertising and Promotions       Insurance     $ -

Cash     Interest on Loan       $ -

Contingency Fund       Maintenance       $ -

Other    Legal and Professional Fees       $ -

Miscellaneous       $ -

Total: $ - Total: $ -

Total Estimated Start Up Capital:   $ -

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Asking for Money

To do that you NEED to know what they WANT to know. This includes:

Know the BusinessWhat is the type of Business you areDescribe potential customers; how will your business help these customersHow much investment is being sought (your total start-up costs)What partnerships, collaborations and affiliations are in placeWhat is the market size being pursued (describe)Who are likely competitorsWhen will the business break-even

Know the PeopleWho is on your management teamWho are your advisors

A big part of “The Pitch” is asking potential investors and lenders for the money

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Entrepreneur’s Entrepreneur’s personal personal resourcesresources

Financial Financial Institution LoansInstitution Loans

Angel investorsAngel investors Public OfferingPublic Offering

Financing OptionsFinancing Options

BusinessBusinessDevelopmentDevelopment

ProgramProgramCharitable GivingCharitable GivingGrantsGrants

Sources of Capital

There are several possible financing options for your business

OrganicOrganicGrowthGrowth

Venture Venture capitalistscapitalists

Financial Statements

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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 a specific point in time, including assets, liabilities and net worth

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Revenue

Employee ExpensesNon-Employee Expenses

$203

Net Income $211

$5,841(4,959)

(737)

$195

Operating Income $145

$5,144(4,291)

(650)

2013Year End

2014Year End

Income Statement

Investment Income

Taxes @ 30%99 133

(83)(91)

Fred’s Bread Company:

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

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Revenue

Employee ExpensesNon-Employee Expenses

$30

Net Income $91

$3,780($3,172)

($372)

$125

Operating Income $236

$3,500($3,080)

($390)

2013Year End

2014Year End

Creating an Income Statement

Investment Income

Taxes @ 30%$100 $135

($111)($39)

Business Name:

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

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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

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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 principal X .05 interest X 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

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Taxes

• 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

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.

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

Assumptions:

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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?

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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

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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

1. What are the total revenues?

2. What are the total expenses?

3. What is the net income?

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Quick Quiz #2 Answers

1. Total Revenue: $3,125.00Formula: # of customers X charge per customer = Total Revenue

Calculation: 1,250 customers X $2.50/customer = $3,125

2. Total Expenses: $1,562.50Formula: # of customers X expenses per customer = Total Expenses

Calculation: 1,250 customers X $1.25/customer = $1,562.5

3. Net Income: $1,250Formula: Total Revenue – Total Expenses = Operating Income Before Taxes

Calculation: $3,125 - $1,562.50 = $1,562.50Formula: Operating Income Before Taxes X Tax Rate = Tax Liability

Calculation: $1,562.50 X .2 = $312.50Formula: Operating Income Before Taxes – Tax Liability = Net Income

Calculation: $1562.50 – $312.50 = $1,250 Net Income

Three Year Financial Projections

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Building Three Year Projections

The Budget Formula is also the Income Statement Formula:

Total Revenue – Total Expenses = Income before TaxesIncome before Taxes X Tax rate = Tax Liability

Income before Taxes – Tax Liability = Net Income

1) 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)

There are only three steps to take to develop your financial projections for the years ahead

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Year 1 Income Statement (example) Year 1

REVENUESSales $ 120,000.00

Total Revenues $ 120,000.00

EXPENSESSalary of Owner $ 6,000.00 Other Salaries & Benefits $ 12,000.00 Rent $ 6,000.00 Advertising $ 2,400.00 Delivery expense $ 1,200.00 Supplies $ 1,200.00 Telephone $ 1,200.00 Other Utilities $ 2,400.00 Insurance $ 2,400.00 Interest on Loan $ 3,600.00 Maintenance $ 3,000.00 Legal and Professional Fees $ 1,200.00 Miscellaneous $ 1,200.00

Total Expenses $ 43,800.00

Income before Taxes $ 76,200.00

Taxes @ 30% $ 22,860.00

Net Income $ 53,340.00

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Assumptions (examples)

• 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

Determine your assumptions for growth for each line item

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

REVENUES

Sales $120,000.00

Total Revenues $120,000.00

EXPENSES

Salary of Owner $ 6,000.00

Other Salaries & Benefits $ 12,000.00

Rent $ 6,000.00

Advertising $ 2,400.00

Delivery expense $ 1,200.00

Supplies $ 1,200.00

Telephone $ 1,200.00

Other Utilities $ 2,400.00

Insurance $ 2,400.00

Interest on Loan $ 3,600.00

Maintenance $ 3,000.00

Legal and Professional Fees $ 1,200.00

Miscellaneous $ 1,200.00

Total Expenses $ 43,800.00

Income before Taxes $ 76,200.00

Taxes @ 30% $ 22,860.00

Net Income $ 53,340.00

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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

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Three Year Projections (example)

8% & 10% growth Y2 and Y3 respectively

8% & 10% growth Y2 and Y3 respectively

Fixed CostsFixed Costs

3% growth each year

3% growth each year

75% & 50% reduction Y2 and Y3 respectively

75% & 50% reduction Y2 and Y3 respectively

5 year lease at a flat rate

5 year lease at a flat rate

Using your business assumptions, forecast Y 2 and Y 3 income statements

Year 1 Year 2 Year 3

REVENUES

Sales $120,000.00 $129,600.00 $ 142,560.00

Total Revenues $120,000.00 $129,600.00 $ 142,560.00

EXPENSES

Salary of Owner $ 6,000.00 $ 6,180.00 $ 6,365.00

Other Salaries & Benefits $ 12,000.00 $ 12,360.00 $ 12,731.00

Rent $ 6,000.00 $ 6,000.00 $ 6,000.00

Advertising $ 2,400.00 $ 1,800.00 $ 900.00

Delivery expense $ 1,200.00 $ 1,200.00 $ 1,200.00

Supplies $ 1,200.00 $ 1,200.00 $ 1,200.00

Telephone $ 1,200.00 $ 1,200.00 $ 1,200.00

Other Utilities $ 2,400.00 $ 2,400.00 $ 2,400.00

Insurance $ 2,400.00 $ 2,400.00 $ 2,400.00

Interest on Loan $ 3,600.00 $ 3,600.00 $ 3,600.00

Maintenance $ 3,000.00 $ 3,000.00 $ 3,000.00

Legal and Professional Fees $ 1,200.00 $ 1,200.00 $ 1,200.00

Miscellaneous $ 1,200.00 $ - $ -

Total Expenses $ 43,800.00 $ 42,540.00 $ 42,196.00

Income before Taxes $ 76,200.00 $ 87,060.00 $ 100,364.00

Taxes @ 30% $ 22,860.00 $ 26,118.00 $ 30,109.20

Net Income $ 53,340.00 $ 60,942.00 $ 70,254.80

Appendix

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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!

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Salary & Other Expense Information

www.salary.com This 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.com This is an online Commercial Real Estate Network.

http://boston.craigslist.org/ This is the infamous list of local classifieds and forums

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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

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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.

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Definitions (continued)

Quantitative: That is 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