EP2150 - Entrepreneurship Financials Sources of Financing for a small business Distinguish between...
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Transcript of EP2150 - Entrepreneurship Financials Sources of Financing for a small business Distinguish between...
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