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FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT &&
FINANCING YOUR FINANCING YOUR BUSINESS NOTESBUSINESS NOTES
BMA – ENT – 8: Analyze financial issues relating BMA – ENT – 8: Analyze financial issues relating
to successful business ownership.to successful business ownership.
ESSENTIAL QUESTIONSESSENTIAL QUESTIONS
• Why are budgets so important?Why are budgets so important?
• What financial records do small businesses need to keep?What financial records do small businesses need to keep?
• What is the foreign exchange rate and what does it mean?What is the foreign exchange rate and what does it mean?
• How does a small business owner know the financial status How does a small business owner know the financial status
of their business? of their business?
• What are start-up costs and operating costs?What are start-up costs and operating costs?
• Why is it important to create an effective business plan for Why is it important to create an effective business plan for
investors?investors?
THE PURPOSE OF THE THE PURPOSE OF THE FINANCIAL STATEMENTFINANCIAL STATEMENT
• Financial Plan Financial Plan – set of documents that – set of documents that
outline the essential financial facts about the outline the essential financial facts about the
new venture.new venture.
• Purpose:Purpose:
• Guides a company into the futureGuides a company into the future
• Attracts investors; lenders & investors Attracts investors; lenders & investors
provide money to businesses with sound provide money to businesses with sound
financial plansfinancial plans
AN EFFECTIVE FINANCIAL AN EFFECTIVE FINANCIAL PLANPLAN
• An effective financial plan:An effective financial plan:
• Identifying business assetsIdentifying business assets
• Determining needed capitalDetermining needed capital
• Describing start up and operating Describing start up and operating expensesexpenses
• Describing financial records managementDescribing financial records management
• Forecasting future financesForecasting future finances
• Describing growth financingDescribing growth financing
AN EFFECTIVE FINANCIAL AN EFFECTIVE FINANCIAL PLAN:PLAN:
IDENTIFYING BUSINESS IDENTIFYING BUSINESS ASSETSASSETS
• A financial plan identifies the assets that need to be A financial plan identifies the assets that need to be
purchased for the business or project.purchased for the business or project.
• Assets like cash, equipment, buildings, supplies, and Assets like cash, equipment, buildings, supplies, and
land must be researched, analyzed, and compared land must be researched, analyzed, and compared
before buying.before buying.
• The information obtained might show that buying The information obtained might show that buying
used items instead of new ones, or renting them used items instead of new ones, or renting them
would be best.would be best.
AN EFFECTIVE FINANCIAL AN EFFECTIVE FINANCIAL PLAN: DETERMINING NEEDED PLAN: DETERMINING NEEDED
CAPITALCAPITAL
• A financial plan describes and estimates the A financial plan describes and estimates the
amount of money a business needs to start and amount of money a business needs to start and
operate.operate.
• CapitalCapital - money supplied by investors, banks, or - money supplied by investors, banks, or
owners of a business.owners of a business.
• Start Up Capital Start Up Capital – the money used to pay for the – the money used to pay for the
various assets and expenses of a new venture or various assets and expenses of a new venture or
business.business.
• Major sources of start up capital for entrepreneurs Major sources of start up capital for entrepreneurs
are personal resources, like friends & family, are personal resources, like friends & family,
savings, loans, and investments.savings, loans, and investments.
AN EFFECTIVE FINANCIAL PLAN: AN EFFECTIVE FINANCIAL PLAN: DESCRIBING START UP & DESCRIBING START UP & OPERATING EXPENSESOPERATING EXPENSES
• A financial plan describes the expenses the A financial plan describes the expenses the
business will incur during start up and operations business will incur during start up and operations
and explains how a business will cover its expenses.and explains how a business will cover its expenses.
• Start up expenses often requires a large amount of Start up expenses often requires a large amount of
cash to cover expenses like business assets, cash to cover expenses like business assets,
remodeling costs, security deposits, advertising, remodeling costs, security deposits, advertising,
insurance, supplies, & permits.insurance, supplies, & permits.
• Operating expenses include payroll, rent, utility Operating expenses include payroll, rent, utility
bills, delivery charges, and bank fees.bills, delivery charges, and bank fees.
AN EFFECTIVE FINANCIAL PLAN: AN EFFECTIVE FINANCIAL PLAN: DESCRIBING FINANCIAL RECORDS DESCRIBING FINANCIAL RECORDS
MANAGEMENTMANAGEMENT
A financial plan describes who and how the business A financial plan describes who and how the business
will document and report financial records.will document and report financial records.
Some business owners maintain their own records Some business owners maintain their own records
using accounting software while hire professionals.using accounting software while hire professionals.
A financial plan also describes any legal agreements A financial plan also describes any legal agreements
that influence the way records are kept. that influence the way records are kept.
AN EFFECTIVE FINANCIAL AN EFFECTIVE FINANCIAL PLANPLAN
Forecasting Future Forecasting Future FinancesFinances
• A financial plan forecasts finances A financial plan forecasts finances
to project future profitability.to project future profitability.
• Financial forecast - Financial forecast - an estimate an estimate
of a business’s financial outlook of a business’s financial outlook
for each of the next few years.for each of the next few years.
• The forecast should consider The forecast should consider
business condition in the future business condition in the future
and should list conservative and should list conservative
figures. For example, estimates figures. For example, estimates
for income should be low and for income should be low and
estimates for expenses should be estimates for expenses should be
high.high.
Describing Growth Describing Growth FinancingFinancing
• A financial plan explains how A financial plan explains how
the business will acquire the business will acquire
money to grow or expand, in money to grow or expand, in
order to remain competitive.order to remain competitive.
• Unexplained growth can be Unexplained growth can be
chaotic.chaotic.
• Investors and lenders want to Investors and lenders want to
know that a business has know that a business has
thoughtfully developed thoughtfully developed
strategies to finance strategies to finance
controlled growth.controlled growth.
BUDGETSBUDGETS
• BudgetBudget – a plan specifying how money will be used – a plan specifying how money will be used or spent during a particular period. or spent during a particular period.
• Budgeting helps business owners predict how much Budgeting helps business owners predict how much money the business will need and helps to control money the business will need and helps to control spending.spending.
• There are three main types of budgets:There are three main types of budgets:• Start up budget that plans income & expenses Start up budget that plans income & expenses
from the time of start up until a profit is madefrom the time of start up until a profit is made• Cash budget that plans the actual money the Cash budget that plans the actual money the
business owner spends on a daily, weekly, or business owner spends on a daily, weekly, or monthly basis.monthly basis.
• Operating budget that plans for the amount Operating budget that plans for the amount expected to be spent and earned over a given expected to be spent and earned over a given period of time, usually six months or a year.period of time, usually six months or a year.
ACCOUNTING FOR BUSINESSACCOUNTING FOR BUSINESS
•AccountingAccounting – the systematic process – the systematic process
of recording and reporting the of recording and reporting the
financial position of a person or an financial position of a person or an
organization. organization.
• Purpose:Purpose:• Keeping track of the money that a company spends Keeping track of the money that a company spends
and receivesand receives
• To collect, record, report financial transactions that To collect, record, report financial transactions that
affect the operation of a businessaffect the operation of a business
ACCOUNTING FOR BUSINESSACCOUNTING FOR BUSINESS
• An An accountantaccountant maintains and reviews business maintains and reviews business
records. An records. An auditaudit is a review of accounting records. is a review of accounting records.
• Accounting is often referred to as the “language of Accounting is often referred to as the “language of
business” because it is the way of communicating business” because it is the way of communicating
how well a business is doing and it has its own how well a business is doing and it has its own
terminology.terminology.
• A business manager, an employee of a firm, or A business manager, an employee of a firm, or
investor can use accounting records to gauge the investor can use accounting records to gauge the
health of the firm that they are working for or in health of the firm that they are working for or in
which they want to invest.which they want to invest.
FINANCIAL CLAIMS IN FINANCIAL CLAIMS IN ACCOUNTINGACCOUNTING
• AssetsAssets – property and other items of value – property and other items of value
owned by a business. They are either current owned by a business. They are either current
or fixed.or fixed.• Current Assets Current Assets – assets that are either used up or – assets that are either used up or
converted to cash during the normal cycle of the converted to cash during the normal cycle of the
business or one year. Cash, supplies, merchandise, business or one year. Cash, supplies, merchandise,
and accounts receivable are all current assets. and accounts receivable are all current assets. • Accounts Receivable Accounts Receivable – the total amount of money owed to – the total amount of money owed to
a business. It represents money to be received in a business. It represents money to be received in
payments after good or services are sold on credit.payments after good or services are sold on credit.
• Fixed Assets Fixed Assets – items of value that will be held for more than – items of value that will be held for more than
one year. Equipment and buildings are fixed assets.one year. Equipment and buildings are fixed assets.
FINANCIAL CLAIMS IN FINANCIAL CLAIMS IN ACCOUNTINGACCOUNTING
• EquityEquity – financial claims to all assets or the present – financial claims to all assets or the present value of an asset less all claims against it.value of an asset less all claims against it.
• LiabilitiesLiabilities – creditors’ (creditor: the business or – creditors’ (creditor: the business or person selling the property or services a person/ person selling the property or services a person/ business has agreed to pay later) claims to the assets business has agreed to pay later) claims to the assets of a business; they are the debts of the company. of a business; they are the debts of the company. Liabilities include accounts payable.Liabilities include accounts payable.• Accounts payable Accounts payable – represents the short-term liabilities that – represents the short-term liabilities that
a business owes to creditors.a business owes to creditors.
• Owner’s Equity Owner’s Equity – an owner’s claim to the assets of – an owner’s claim to the assets of the business; owner’s capital the business; owner’s capital
THE ACCOUNTING EQUATIONTHE ACCOUNTING EQUATION
Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s EquityAssets show the value of everything that the business owns or Assets show the value of everything that the business owns or
possesses.possesses.
Liabilities are the right that credits have to the assets.Liabilities are the right that credits have to the assets.
Owner’s Equity shows the rights that the owner has to the assets.Owner’s Equity shows the rights that the owner has to the assets.
Financial Statements Financial Statements – documents that summarize the – documents that summarize the
changes resulting from business transactions that occur changes resulting from business transactions that occur
during an accounting period. Financial statements provide during an accounting period. Financial statements provide
information that business owners use to make financial information that business owners use to make financial
decisions.decisions.The federal government requires corporations to release their The federal government requires corporations to release their
financial records to the public.financial records to the public.
Income Statement Income Statement (aka profit or loss statement) – a report of (aka profit or loss statement) – a report of
revenue, expenses, and net income or net less over an revenue, expenses, and net income or net less over an
accounting period. accounting period.
THE ACCOUNTING EQUATIONTHE ACCOUNTING EQUATION
• Balance Sheet Balance Sheet – a report of the balances in all assets, – a report of the balances in all assets,
liability, and owner’s equity accounts at the end of an liability, and owner’s equity accounts at the end of an
accounting period. accounting period.
• Statement of Cash Flows Statement of Cash Flows – a financial report that – a financial report that
shows incoming and outgoing money during an shows incoming and outgoing money during an
accounting period.accounting period.
• Cash Flows Cash Flows – the money that is available to a business at – the money that is available to a business at
any given time.any given time.
• Firms can run out of cash even when they make a profit Firms can run out of cash even when they make a profit
most things are sold on credit. Lenders and investors most things are sold on credit. Lenders and investors
expect business loan applicants to show a consistently expect business loan applicants to show a consistently
positive cash flow.positive cash flow.
FINANCING YOUR FINANCING YOUR BUSINESSBUSINESS
VOCABULARYVOCABULARY
1.1. AssetsAssets – what you own – what you own
2.2. LiabilitiesLiabilities – what you owe – what you owe
3.3. Net worth Net worth ((equityequity) - the difference between ) - the difference between
what you own (assets) and what you owe what you own (assets) and what you owe
(liabilities)(liabilities)
4.4. PersonalPersonal financialfinancial statementstatement – prepared to – prepared to
calculate your net worthcalculate your net worth
5.5. DebtDebt – dollars you have borrowed – dollars you have borrowed
6.6. EquityEquity – dollars you have invested in your – dollars you have invested in your
businessbusiness
VOCABULARYVOCABULARY
7.7. Debt-to-Equity RatioDebt-to-Equity Ratio – the relation between dollars you – the relation between dollars you
have borrowed (debt) and dollars you have invested in your have borrowed (debt) and dollars you have invested in your
business (equity).business (equity).
8.8. EquityEquity capitalcapital – money invested in a business in return for – money invested in a business in return for
a share in the profits of the business.a share in the profits of the business.
9.9. VentureVenture capitalistcapitalist – individual or company that make a – individual or company that make a
living investing in startup companies.living investing in startup companies.
10.10. Debt capital Debt capital – money loaned to a business that must be – money loaned to a business that must be
repaid with interestrepaid with interest
11.11. CollateralCollateral – property that the borrower forfeits if s/he – property that the borrower forfeits if s/he
defaults on the loandefaults on the loan
ASSESS YOUR FINANCIAL ASSESS YOUR FINANCIAL NEEDS- START-UP COSTSNEEDS- START-UP COSTS
• Itemizing your startup costs is an important part of Itemizing your startup costs is an important part of
determining how much money you need and determining how much money you need and
ensure you have accounted for all items and ensure you have accounted for all items and
money neededmoney needed
• Common startup itemsCommon startup items• Equipment and suppliesEquipment and supplies
• Furniture and fixturesFurniture and fixtures
• Licensing and permitsLicensing and permits
• InsuranceInsurance
• Legal and accounting feesLegal and accounting fees
• RemodelingRemodeling
ASSESS YOUR FINANCIAL NEEDS- ASSESS YOUR FINANCIAL NEEDS- PERSONAL FINANCIAL PERSONAL FINANCIAL
STATEMENTSTATEMENT
• In order to determine if you have the resources you In order to determine if you have the resources you
need to finance your business, begin by assessing need to finance your business, begin by assessing
your net worth.your net worth.• Total Assets – Total Liabilities = Net Worth (aka equity)Total Assets – Total Liabilities = Net Worth (aka equity)
• When obtaining financing, you must consider your When obtaining financing, you must consider your
company’s debt to equity ratio which measures how company’s debt to equity ratio which measures how
much money a company can safely borrow over time.much money a company can safely borrow over time.• Total Liabilities / Total Equity = Debt to Equity RatioTotal Liabilities / Total Equity = Debt to Equity Ratio
• A high ratio indicates a business is mostly financed through A high ratio indicates a business is mostly financed through
debt; a low ratio indicates a business is primarily financed debt; a low ratio indicates a business is primarily financed
through equitythrough equity
SOURCES OF FUNDING - SOURCES OF FUNDING - CONTRIBUTIONSCONTRIBUTIONS
• Personal Contributions: Many entrepreneurs use Personal Contributions: Many entrepreneurs use
their personal savings to finance the start of their their personal savings to finance the start of their
business which can, in turn, help them get a bank business which can, in turn, help them get a bank
loan.loan.
• Friends and Relatives: A good source of equity Friends and Relatives: A good source of equity
capital because they are familiar with your capital because they are familiar with your
business idea and know whether you are business idea and know whether you are
trustworthy and a good risk taker.trustworthy and a good risk taker.
• Venture Capitalists: Carefully research Venture Capitalists: Carefully research
opportunities that they believe will make above opportunities that they believe will make above
average profitsaverage profits
SOURCES OF FUNDING – DEBT SOURCES OF FUNDING – DEBT CAPITALCAPITAL
• Friends and Relatives: Be aware the loan may also Friends and Relatives: Be aware the loan may also
come with advice and the business owner may lose come with advice and the business owner may lose
a friend if s/he is unable to repay the loan.a friend if s/he is unable to repay the loan.
• Commercial Bank Loans: Most businesses take out Commercial Bank Loans: Most businesses take out
loans to repay with interest over a certain time loans to repay with interest over a certain time
period.period.• Secured LoansSecured Loans: backed by collateral: backed by collateral
• Unsecured LoansUnsecured Loans: not guaranteed by collateral: not guaranteed by collateral
TYPES OF SECURE LOANSTYPES OF SECURE LOANS
• Line of creditLine of credit: An agreement by a bank to lend up : An agreement by a bank to lend up
to a certain amount of money. Most businesses to a certain amount of money. Most businesses
establish lines of credit so that funds are readily establish lines of credit so that funds are readily
available to help them make purchases.available to help them make purchases.
• Long term loanLong term loan: Loan repayable over a period : Loan repayable over a period
longer than a year; generally made to help a longer than a year; generally made to help a
business make improvements that will boost profits.business make improvements that will boost profits.
TYPES OF SECURE LOANSTYPES OF SECURE LOANS
• Accounts receivable financingAccounts receivable financing: Balances owed by : Balances owed by
customers who have charged merchandise and services at customers who have charged merchandise and services at
your business (accounts receivable) . As the account your business (accounts receivable) . As the account
receivable are paid by customers, those payments are receivable are paid by customers, those payments are
forwarded to the bank has loan repayment.forwarded to the bank has loan repayment.
• Inventory financingInventory financing: Occurs when banks use the inventory : Occurs when banks use the inventory
held by a business as collateral. Banks usually require the held by a business as collateral. Banks usually require the
value of the inventory be at least double the amount of the value of the inventory be at least double the amount of the
loan. Banks are often reluctant because if the business loan. Banks are often reluctant because if the business
defaults on the loan, the bank ends up with inventory it may defaults on the loan, the bank ends up with inventory it may
have trouble selling. have trouble selling.
REASONS A BANK MAY NOT REASONS A BANK MAY NOT LEND MONEYLEND MONEY
• The business is a startup: The business is a startup: • New businesses have no record of repaying loansNew businesses have no record of repaying loans
• Lack of a solid business plan: Lack of a solid business plan: • A company with a poorly written or poorly conceived A company with a poorly written or poorly conceived
business plan will not be able to obtain financing from a business plan will not be able to obtain financing from a
bankbank
• Lack of adequate experience:Lack of adequate experience:• Banks want to be sure the people setting up or running a Banks want to be sure the people setting up or running a
business show they are familiar with the industry and business show they are familiar with the industry and
have the management experience to operate their own have the management experience to operate their own
business.business.
OTHER SOURCES OF LOANSOTHER SOURCES OF LOANS
• Small Business Administration Small Business Administration – SBA aids – SBA aids
entrepreneurs most often by guaranteeing loans entrepreneurs most often by guaranteeing loans
made by commercial banks which means the SBA made by commercial banks which means the SBA
will repay a certain percentage of the loan to the will repay a certain percentage of the loan to the
bank if the entrepreneur defaults.bank if the entrepreneur defaults.
• Small Business Investment Companies Small Business Investment Companies – –
SBICs are licensed by the SBA to make loans to SBICs are licensed by the SBA to make loans to
and invest capital with entrepreneurs.and invest capital with entrepreneurs.
OTHER SOURCES OF LOANSOTHER SOURCES OF LOANS
• Minority Enterprise Small Business Investment CompaniesMinority Enterprise Small Business Investment Companies
– MESBICs are special kinds of SBICs that lend money to small – MESBICs are special kinds of SBICs that lend money to small
businesses owned by members of ethnic minorities.businesses owned by members of ethnic minorities.
• Department of Housing and Urban Development Department of Housing and Urban Development – HUD – HUD
provides grants to cities to help improve impoverished areas. provides grants to cities to help improve impoverished areas.
Cities use these grants to make grants to make loans to private Cities use these grants to make grants to make loans to private
developer who must use the loans to finance projects in needy developer who must use the loans to finance projects in needy
areas.areas.
OTHER SOURCES OF LOANSOTHER SOURCES OF LOANS
• The Economic Development The Economic Development
Administration Administration – The EDA partners with – The EDA partners with
distressed communities throughout the US distressed communities throughout the US
to foster job creation, collaboration, and to foster job creation, collaboration, and
innovation by lending money to businesses innovation by lending money to businesses
that operate in and benefit economically that operate in and benefit economically
distressed parts of the country.distressed parts of the country.
OTHER SOURCES OF LOANSOTHER SOURCES OF LOANS
• State Governments State Governments – Almost all states have – Almost all states have
economic development agencies and finance economic development agencies and finance
authorities that make or guarantee loans to small authorities that make or guarantee loans to small
businesses.businesses.
• Local and Municipal Governments Local and Municipal Governments – City, county, – City, county,
or municipal governments sometimes make loans of or municipal governments sometimes make loans of
$10,000 or less to local businesses.$10,000 or less to local businesses.