9

9.1 Financing Your Business

9.2 Pro Forma Financial Statements
9.3 Recordkeeping for Businesses

Plan and Track

Your Finances
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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.

Chapter 9
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 Vocabulary
net worth
 debt-to-equity ratio
 equity capital
 venture capitalists
 debt capital
 collateral

Chapter 9
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Assess Your Financial Needs

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

Chapter 9
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Startup Costs
 Itemize startup costs.
 equipment and supplies
 furniture and fixtures
 vehicles
 remodeling
 legal and accounting fees
 licensing fees

Chapter 1
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Chapter 9
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Personal Financial Statement

 net worth =
assets ─ liabilities
 personal financial statement =
personal assets ─ personal liabilities

Chapter 9
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Chapter 9
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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.

Chapter 9
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 equity capital
 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

Chapter 9
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Debt Capital
 debt capital
 money loaned to a business with the
understanding that the money will be repaid
 usually with interest

Chapter 9
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Friends and Relatives

 Determine how the loan will affect your
relationship.
 Prepare a formal agreement regarding terms of the
loan.

Chapter 1
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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

Chapter 9
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 Types of secured loans include the

following:
 line of credit
 long-term loan
 accounts receivable financing
 inventory financing

Chapter 9
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 unsecured loans
 loans that are not guaranteed with collateral
 only made to creditworthy customers

Chapter 9
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 Reasons a bank may not lend money

include:
 The business is a startup.
 A lack of:
a solid business plan
 adequate experience
 confidence in the borrower
 adequate personal investment

Chapter 9
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 Other sources of loans include:

 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

Chapter 9
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Lesson 9.2

Pro Forma Financial Statements

Goals
 Prepare a pro forma cash flow statement.
 Prepare a pro forma income statement.
 Prepare pro forma balance sheet.

Chapter 9
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Vocabulary
 cash
flow statement
 income statement
 balance sheet

Chapter 9
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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

Chapter 9
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Forecast Receipts and Disbursements

 estimate
 monthly cash receipts
 monthly cash disbursements

Chapter 9
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Chapter 9
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Chapter 9
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Prepare the Cash Flow Statement

 net cash flow =
cash receipts ─ cash disbursements
 Proforma statements help you anticipate when
negative cash flows will occur.
 You can plan how to handle or avoid them.

Chapter 9
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Chapter 9
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Economic Effects on Cash Flow

 Changes in the economy can dramatically effect
the cash flow of businesses.
 Business owners should make conservative
estimates.

Chapter 9
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Income Statement
 income statement
 shows revenues and expenses incurred over a period
of time
 shows the profit or loss for the time period

Chapter 9
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Prepare a Pro Forma Income

Statement
 Thelong-term growth of your business can be
demonstrated by a pro forma income statement
prepared for multiple years.

Chapter 9
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 The pro forma income statement

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

Chapter 9
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Chapter 9
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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

Chapter 9
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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

Chapter 9
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 Types of Liabilities
 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

Chapter 9
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 Reductions in Assets
 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

Chapter 9
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Chapter 9
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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.

Chapter 9
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 Vocabulary
cash method
 accrual method
 transaction
 journals
 account
 check register
 payroll

Chapter 9
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Cash or Accrual Accounting

Methods
 The major difference between the cash and accrual
accounting methods is the timing of when
transactions are recorded.

Chapter 1
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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
 Thecash flow statement is prepared using the cash
method.

Chapter 1
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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 1
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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 1
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Recording Transactions
 transaction
 anybusiness activity that changes assets, liabilities or net
worth

Chapter 9
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Journals
journals
 accounting records of the transactions you
make for
 sales
 cash payments
 cash receipts
 purchases
 general

Chapter 1
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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 1
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 subsidiary ledgers
 used for accounts payable to show in detail the transactions with
each vendor from whom merchandise is purchased on account

Chapter 9
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Chapter 1
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 aging table
 a record keeping tool for tracking accounts receivable
 shows how long it takes customers to pay their bills

Chapter 9
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Chapter 9
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Business Records
 Good recordkeeping can help you make smart
business decisions.
 Incomplete records can cause you to mismanage
your business.

Chapter 1
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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

Chapter 9
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 Balance Your Account

 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.

Chapter 9
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Payroll Records
 payroll
 a list of people who receive salary or wage payments
from a business

Chapter 1
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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 1
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 Sales Tax
 Sales taxes are based on a percentage of sales.
 Each month you deposit sales tax into a government owned
account.

Chapter 9