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The Business Plan: Financial Statements

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Equity Fin.: Venture Capitalists. Interested in: Very rapid growth companies ... Equity Fin.: Stock Sales. Public? Not a new company! Private, up to $1 million ... – PowerPoint PPT presentation

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Title: The Business Plan: Financial Statements


1
The Business Plan Financial Statements
FM20731 Entrepreneurship
  • Week 9 November 30, 2004

2
Stitch
3
Financing
  • How will you get the money?
  • Debt financing
  • Borrowed
  • Equity financing
  • Sell portion of the company

4
Debt financing
  • Borrowed
  • Must be repaid with interest
  • Interest rate usually prime plus 1-3
  • Repayments can be a burden for startup
  • Personal assets used for collateral at risk!
  • Term depends on type of asset(s) bought
  • Real Estate 15-30 years
  • Equipment 3-5 years

5
Debt Financing Bank Loans
  • Can be difficult to find
  • Different banks have different tastes
  • Some have tried 30 banks before success!
  • SBA Small Business Lending Report
  • Ranks banks by loans to small businesses
  • Use to find a bank to pursue

6
Debt Financing Government
  • Federal
  • Small Business Association
  • Provides many services
  • Including loan programs
  • Guarantees loans from local banks
  • If you default, they pay
  • State local
  • Provide loan programs
  • Varies

7
Debt Financing Finance Cos
  • Finance high-risk companies
  • Finance specific situations
  • Usually much higher rate

8
Equity Financing
  • Investment, not a loan
  • Investor gets portion of company
  • Share in profits
  • Share in sale of company
  • May also get part of control

9
Equity Financing Personal Funds
  • You may invest your own money
  • May be expected by other investors
  • Skin in the game
  • Dont risk more than you can lose

10
Equity Fincng Private Investors
  • Friends Family
  • May strain or ruin relationship
  • Disagreements
  • Business failure
  • Wealthy individuals
  • A/k/a Angels
  • Matching networks exist
  • Partner(s)
  • See Legal section

11
Equity Fin. Venture Capitalists
  • Interested in
  • Very rapid growth companies
  • 25-40 annual rate of return
  • Go public or get sold within 5-7 years
  • So, invest 1 mil., expect at least 3-5 mil.
  • Excellent management team
  • Often invest in specific industry(ies)
  • May want 40 ownership or more than 50
  • Rather own 100 of 1 mil. or 45 of 10 mil.?

12
Equity Fin. Stock Sales
  • Public?
  • Not a new company!
  • Private, up to 1 million
  • May be OK in your state check

13
Accounting Methods Cash Basis
  • Record a sale when payment received
  • Record an expense when bill is paid
  • Good for business that
  • Doesnt use credit for purchases
  • Doesnt extend credit
  • E.g. small restaurant

14
Accounting Methods Cash Basis
  • What if dont pay for inventory for 60 days?
  • What if give credit for 30 days?
  • So
  • Buy inventory on day 1
  • Pay on day 61
  • Sell on day 2
  • Get paid on day 31
  • Month 1 no expenses, no sales
  • Month 2 sales, no expenses
  • Month 3 no sales, expenses

15
Accounting Methods Accrual Basis
  • Record sales when made
  • Record expenses when incurred
  • More complicated
  • More accurate for businesses with credit

16
Accounting Methods Completed-Contract Method
  • For projects that extend over time
  • Record sales/expenses as completed

17
Balance Sheet
  • Compares possessions and debts
  • On a single day

18
Assets Tangible vs. Intangible
  • Tangible
  • Machinery
  • Equipment
  • Intangible
  • Patent
  • Goodwill

19
Assets Current vs. fixed
  • Current assets easily converted into cash
  • Cash
  • Accounts receivable (A/R)
  • Inventory
  • Supplies
  • Prepaid expenses
  • Fixed assets more permanent
  • Machinery, equipment
  • Land buildings
  • Renovations
  • Vehicles

20
Liabilities
  • Current
  • Accounts payable (A/P)
  • Accrued expenses
  • E.g. unpaid wages
  • Notes payable
  • Short-term loans
  • Due within 12 months
  • Current portion of long-term debt
  • Long-term
  • Debts due more than 12 months away
  • E.g. 20,000 equipment loan
  • 4 years at 12 interest
  • First year
  • Pay 6,584
  • 2,400 interest
  • 4,184 principal
  • Current 4,184
  • Long-term 15,816
  • (20,000 4,184)

21
Equity
  • Also called net worth or capital account
  • Assets minus liabilities
  • Investment plus retained earnings
  • Retained earnings could be negative
  • May not represent value of company
  • But, may be compared to liabilities by lenders
  • Liabilities plus Equity must equal Assets
  • Why?

22
Example Startup Expenses
  • To create the opening balance sheet above
  • Inventory 60,000
  • Furniture and Fixtures 15,000
  • Machinery and Equipment 10,000
  • Prepaid Expenses 4,000
  • Supplies 2,000
  • Deposits 4,000
  • Building Renovations 25,000
  • Working Capital 20,000
  • Total 140,000

23
Example Source of Funds
  • Owner invests 40,000
  • Borrows 100,000 from bank
  • 7 years
  • 10 interest
  • First year payment 20,540
  • 10,000 in interest
  • 10,540 in principal

24
Projected Income Statement
  • Determines how much profit or loss

25
Includes
  • Sales
  • A/k/a income, revenue
  • If accrual, payments may not be received yet
  • Cost of goods sold (COGS)
  • Calculation depends on type of firm
  • Gross margin
  • A/k/a gross profit
  • Sales minus COGS
  • Operating expenses
  • Ongoing costs of selling and managing company
  • Net profit
  • After expenses
  • Not net of taxes and other outlays

26
Projected Cash Flow
  • Indicates cash available over time
  • Even if profitable, cash may not be available!
  • Why?
  • Owner(s) may take out cash
  • Principal paid on loan is not an expense, still
    paid out
  • Money may be tied up in inventory
  • Included in purchases and ending inventory
  • Money may be tied up in A/R
  • May count sales without receiving payment
  • Seasonality may affect cash flow, not
    profitability

27
Cash Flow Example (Service Business)
28
Include in Your Business Plan
  • Balance Sheet
  • Projected Income Statement
  • EXTRA CREDIT
  • Projected Cash Flow

29
Progress Reports
  • Market Research
  • Marketing plans
  • Etc.

30
Next Classes
  • December 7
  • Managing Growth
  • Exit Strategies
  • Work in class
  • December 14
  • Business Plans due
  • Final presentations
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