EP2150 - Entrepreneurship Financials • 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
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EP2150 - Entrepreneurship Financials Sources of Financing for a small business Distinguish between Debt and Equity Financing Describe the importance of.
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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
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