Financial Projections HACC Institute for Entrepreneurial Studies David McNaughton 221-1213 [email protected]
Nov 01, 2014
Financial Projections
HACC Institute for Entrepreneurial Studies
David McNaughton 221-1213 [email protected]
The Ambiguous Financial WorldHow do you handle it?
Dealing with Bankers and Accountants
•Learn some of the terminology
•What does the bank look for?
•Sources of funding
•Investors
Expectations from this class
Understand what your own personal financial obligations are for the next 12 months
Use that information to prepare your business forecast
Understand the basic accounting terms What records are required by law to be kept Use of the three basic financial sheets
Reason to Keep Records
Law Must be separate, complete, permanent, and
accurate
Management To properly evaluate your business Assist in decision making
Outside Help
If you will be using an accountant for taxes, meet with him prior to the start of your business so that he can help you define exactly what records should be kept
Then evaluate how you will create these records – computerized or handwritten ledgers
Doing this correctly from the beginning is essential
Personal Budgeting
What income do you need to survive? Completing the personal budgeting statement The importance of this information How is this related to my business
development?
Personal Budget Preparation
Start with all your income Then list actual expenses or calculate an
average Plan for savings Adjustments Determine minimum living expenses
Minimum Living expenses
Worksheet
What does this tell us?
How does this relate to my business?
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Vocabulary (The Basics)
Account payable – A liability backed by the general reputation and credit standing of the deptor
Account receivable – A promise to receive cash from a customer for whom goods and/or services have been provided by the activity
Accrual Basis Accounting – Accounting that records the impact of a business event as it occurs, regardless of whether the transaction affected cash.
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Vocabulary (The Basics)
Accrued Expense – An expense the business has incurred but not yet paid
Accrued Revenue – A revenue that has been earned but not yet collected in cash
Adjusting Entry – Entry made at the end of the period to assign revenues to the period in which they are earned; and expenses to the period in which they are incurred.
Asset – An economic resource that is expected to be of benefit in the future.
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Vocabulary (The Basics)
Book Value of an Asset – The assets cost minus accumulated depreciation
Cash Basis Accounting – Accounting that records transactions only when cash is received or paid. This methodology excludes receivables, payables, and depreciation in its computations.
Chart of Accounts – List of all accounts and their account numbers in the ledger
Current Assets – An asset that is expected to be converted to cash, sold, or consumed during the next 12 months, or within the business’s normal operating cycle
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Vocabulary (The Basics)
Current Liabilities – A debt due to be paid with cash or with goods and services within one year or within the entity’s operating cycle
Current Ratio – Measures the ability to pay current liabilities with the current assets. (Current Assets/Current Liabilities)
Debt Ratio – This ratio measures the ability to pay for both current and long term debts (total liabilities) (Total Liabilities/Total assets) Lower debt ratio is preferred (.60 is safe, .80 is risky)
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Vocabulary (The Basics)
GAAP – Accounting guidelines formulated by the Financial Accounting Standards Board (FASB) that govern how accountants measure, process and communicate financial information
Journal – The chronological accounting record of an entity’s transactions
Liability – An economic obligation such as a debt payable
Liquidity – Measure of how quickly an item can be converted to cash
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Vocabulary (The Basics)
Matching principle – The basis for recording expenses (Identify all expenses, measure expenses and match them against the revenues earned in the same span of time)
Net Income – Excess of total revenues over total expenses. (Net Earnings or Net Profit)
Net Loss – Excess of total expenses over total revenues
Note Payable – A written promise of future payment
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Vocabulary (The Basics)
Note Receivable – A written promise for future collection of cash
Posting – Copying amounts from the journal to the ledger
Revenue – Amounts earned by delivering goods or services to a customer
Transaction – An event that affects the financial position of a particular entity and can be recorded later
Trial Balance – A list of all accounts with their balances taken from the ledger used to ensure that total debits equal total credits
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Vocabulary (The Basics)
Unearned Revenue – A liability created when a business collects cash from customers in advance of doing work (deferred income)
Business Records
Sales records Cash Receipts Cash Disbursements Accounts Receivable Capital Equipment Insurance Payroll
Sales Record
All income derived from the sale of your product or service
One category or many as total sales Or many by different products or service
Cash Receipts
Money generated through cash sales Money collected from accounts receivable
not your sales numbers
A cash & carry business only accepts cash at point of sale so all receipts are considered cash
Cash Disbursements
Operating expenses or accounts payable Pay by check
Problems with petty cash accounts Records kept together Check, invoice, receipt, and record
Accounts Receivable
Sales from credit ( not credit cards)
Managed monthly and aged
Be prudent with extensions of credit beyond 60 days
Capital Equipment
Detailed Records on major purchases What is major? Only items you would depreciate Not leased equipment Record should include
Date purchased Vendor Description How paid for Check number
Insurance
Records of all insurance
Include carriers
List of filed claims
Payroll
All payroll tax information for at least four years
There are 20 different kinds of employee records that must be kept
Ways to keep track of records
Bookkeeping
Computerized
List of records to keep
Amount and sources of gross receipts Cash register tapes Bank deposit slips Receipt Books Invoices Credit card charge slips Any 1099-MISC forms
List of records to keep
Purchases Cancelled Checks Cash register receipts Credit card sales slips Invoices
List of records to keep
Expenses Cancelled checks Cash register tapes Account statements Credit card sales slips Invoices Petty cash Slips and records Expenses that are subject to special rules
List of records to keep
Assets When and how acquired Purchased price Cost of improvements Deductions taken How asset was used How and when asset was disposed of Selling price Expenses of sale
How records are kept
Journals and ledgers Business checkbook and reconciliation Single verse double entry system Computerized Microfilm Electronic storage
Cash Accounting vs Accrual
When do I have to use Accural
Inventory
Accepting credit Not credit cards
Structure of business
Financial Statements
Balance Sheet
Income Statement (or Profit Statement)
Statement of Cash Flow
Order of Importance
Cash Flow Statement
Balance Sheet
Income Statement
Balance Statement Review
Uses (Assets = Liabilities + Worth)
Represents a snapshot at a specific time
Shows what you own and what you owe
Balance Sheet FormatAssets Liabilities Cash Accounts payable Accounts receivable Accrued Expenses Inventory Current Portion of debt Prepaid Expenses Income Taxes payable Current Assets Current Liabilities
Other assets Long Term Debt Fixed Asset at cost Capital Stock Accumulated Depreciation Retained Earnings
Net Fixed Assets Shareholders’ Equity Total Assets Total Liabilities & Equity
Balance Sheet - Terminology
Total assets Current assets
Cash, accounts receivable, inventory Fixed assets
Land Building & equipment (less accumulated
depreciation) Net building & equipment
Balance Sheet - Terminology
Total liabilities Current liabilities
Accounts payable, notes payable, taxes payable Long-term liabilities (debt)
Total equity Preferred stock Common stock par value Paid-in capital in excess of par (common) Retained earnings
Balance Sheet
Income Statement Review
Sales – Costs – Expenses = Income
For a Period of Time
Usually a Quarter or Year
Income Statement Format (Traditional)Net Sales
Cost of Goods
Gross MarginSales & Marketing
Research & DevelopmentGeneral & Administration
Operating ExpenseIncome From Operations
Interest IncomeIncome Taxes
Net Income
Inco
me
Sta
tem
ent
Cash Flow Statement
Think of as a Check Register Summary
Shows cash in, cash out, and balance.
Cash Flow Statement Format
Ratios
Current Ratio = current assets at least 1
current liabilities Gross Margin = net sales – CGS Highest
Gross Margin % = gross margin Climbing
net sales Debt/ Worth = total liabilities Low as
net worth possible
More Ratios
Review of other ratios Quick Ratio Debt Ratio Inventory Turnover Days Sales Outstanding Investment Turn-over ratio Operating Margin Gross Margin Net Margin ROI, ROA, ROE
Financial Projection Tool
www.entr-203.wikispaces.com