Entrepreneurship: Ideas in Action 5e © 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter Chapter Chapter Chapter 99

Plan and Track Your Finances9.1 Financing Your Business 9.1 Financing Your Business

9.2 Pro Forma Financial Statements 9.2 Pro Forma Financial Statements

9.3 Recordkeeping for Businesses 9.3 Recordkeeping for Businesses

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 2

Lesson 9.1

Financing 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.

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 3

Vocabulary net worth debt-to-equity ratio equity capital venture capitalists debt capital collateral

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 4

Assess Your Financial Needs

Estimate startup costs. Create a personal financial statement. Prepare pro forma financial statements.

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Startup Costs

Itemize startup costs. equipment and supplies furniture and fixtures vehicles remodeling legal and accounting fees licensing fees

Chapter 1Slide 5

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Chapter 9Slide 6

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Chapter 9Slide 7

Personal Financial Statement

net worth =

assets ─ liabilities personal financial statement =

personal assets ─ personal liabilities

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Chapter 9Slide 8

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 1Slide 9

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

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Chapter 9Slide 10

Equity Capital

debt-to-equity ratio the relation between the dollars you have

borrowed and the dollars you have invested in your business

total liabilities ÷ total equity Lenders prefer low debt-to-equity ratios.

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 11

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 and companies that make a living investing in startup companies

equity capital

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 1Slide 12

What are some of the ways entrepreneurs can get equity capital?

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Chapter 9Slide 13

Debt Capital

debt capital money loaned to a business with the

understanding that the money will be repaid usually with interest

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Friends and Relatives

Determine how the loan will affect your relationship.

Prepare a formal agreement regarding terms of the loan.

Chapter 1Slide 14

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Chapter 9Slide 15

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

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Chapter 9Slide 16

line of credit long-term loan accounts receivable financing inventory financing

Types of secured loans include the following:

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 17

loans that are not guaranteed with collateral

only made to creditworthy customers

unsecured loans

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Chapter 9Slide 18

The business is a startup. A lack of:

a solid business plan adequate experience confidence in the borrower adequate personal investment

Reasons a bank may not lend money include:

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 19

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

Other sources of loans include:

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 1Slide 20

Where can entrepreneurs look for debt financing?

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Chapter 9Slide 21

Lesson 9.2

Pro Forma Financial StatementsGoals Prepare a pro forma cash flow

statement. Prepare a pro forma income statement. Prepare pro forma balance sheet.

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 22

Vocabulary cash flow statement income statement balance sheet

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 23

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

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 24

Forecast Receipts and Disbursements estimate

monthly cash receipts monthly cash disbursements

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Chapter 9Slide 25

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Chapter 9Slide 26

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Chapter 9Slide 27

Prepare the Cash Flow Statement net cash flow =

cash receipts ─ cash disbursements Pro forma statements help you

anticipate when negative cash flows will occur. You can plan how to handle or avoid them.

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 28

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Chapter 9Slide 29

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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Chapter 1Slide 30

What does a cash flow statement show?

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Chapter 9Slide 31

Income Statement

income statement shows revenues and expenses incurred

over a period of time shows the profit or loss for the time period

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 32

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.

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 33

Revenue Cost of goods sold Gross profit Operating expenses Net income before taxes Taxes Net income/loss after taxes

The pro forma income statement consists of:

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Chapter 9Slide 34

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 1Slide 35

What does an income statement show?

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Chapter 9Slide 36

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

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 37

Prepare a Pro Forma Balance Sheet Types of Assets

current assets can be converted to cash easily

accounts receivable the amounts owed to a business by its credit

customers fixed assets

cannot be converted into cash easily

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Chapter 9Slide 38

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

Types of Liabilities

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Chapter 9Slide 39

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

Reductions in Assets

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Chapter 9Slide 40

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Chapter 1Slide 41

Name one example each of a current (liquid) asset, a fixed (illiquid) asset, a current liability, and a long-term liability.

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 42

Lesson 9.3

Recordkeeping for Businesses Goals Differentiate between alternative methods of

accounting. 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.

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 43

Vocabulary cash method accrual method transaction journals account check register payroll

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Cash or Accrual Accounting Methods The major difference between the cash

and accrual accounting methods is the timing of when transactions are recorded.

Chapter 1Slide 44

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Cash Method

cash method revenue is not recorded until cash (or a

check) is actually received expenses are not recorded until they are

actually paid

The cash flow statement is prepared using the cash method.

Chapter 1Slide 45

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Accrual Method

accrual method revenue is recorded when the sale occurs expenses are recorded when you receive

the goods or services

Chapter 1Slide 46

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Choosing an Accounting Method Only very small businesses use the

cash method. A business must use the accrual

method if: annual sales exceed $5 million the company stocks inventory that will be

sold to the public and has annual sales of over $1 million

Chapter 1Slide 47

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 1Slide 48

What is the main difference between the cash and accrual methods of accounting?

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 49

Recording Transactions

transaction any business activity that changes assets,

liabilities or net worth

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Journals

journals accounting records of the transactions

you make for sales cash payments cash receipts purchases general

Chapter 1Slide 50

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Ledgers

A general ledger is made up of accounts.

account an accounting record that provides

financial detail for a particular business item

Chapter 1Slide 51

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Chapter 9Slide 52

used for accounts payable to show in detail the transactions with each vendor from whom merchandise is purchased on account

subsidiary ledgers

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Chapter 1Slide 53

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 54

a record keeping tool for tracking accounts receivable

shows how long it takes customers to pay their bills

aging table

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 55

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 1Slide 56

What is the difference between a journal and a ledger?

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Business Records

Good recordkeeping can help you make smart business decisions.

Incomplete records can cause you to mismanage your business.

Chapter 1Slide 57

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Chapter 9Slide 58

Banking Records

A business checking account should be established.

check register a booklet where you record information for

each check written amount date name of person or business receiving your

payment

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Chapter 9Slide 59

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

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Payroll Records

payroll a list of people who receive salary or wage

payments from a business

Chapter 1Slide 60

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Tax Records Income tax

Businesses that earn a profit must pay income tax. quarterly

Payroll Taxes and Deductions deduct taxes from employees paychecks

submit taxes to the government unemployment insurance taxes social security and Medicare taxes voluntary deductions

Chapter 1Slide 61

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Chapter 9Slide 62

Sales taxes are based on a percentage of sales.

Each month you deposit sales tax into a government owned account.

Sales Tax

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 1Slide 63

What kinds of bank, payroll, and tax records do you have to keep?

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 64

PERFORMANCE COMPETENCIES

Articulate the need for the loan Explain the process of applying for a loan

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 65

Demonstrate good communication skills Demonstrate the ability to make a

professional presentation Answer questions effectively

Explain the type of loan

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Chapter 9Slide 66

GIVE IT A TRY

Identify the appropriate type of loan Complete an application for a loan Provide justification for the loan selected Write a report in appropriate business style Demonstrate correct spelling and grammar

Entrepreneurship: Ideas in Action 5e© 2011 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 9Slide 67

Develop business contacts Implement written and oral skills Develop familiarity with procedures of financial

institutions

Learn and apply financial business decision-making skills