Accounting and Finance for Entrepreneurs FINANCE 292 FIN292All Rights Reserved Slide 1

Accounting and Finance

for Entrepreneurs

FINANCE 292

*Chapter 1Determining Startup Requirements

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DETERMINING STARTUP REQUIREMENTS

Creating the Business Plan1. Most experts agree that creating the Business Plan is Job

#1a. It defines your company

b. It describes the products or services you offer

c. It describes your business organization

d. It describes your management team

e. It describes how you plan to market your products

f. It describes in reasonable detail an estimate of your startup costs

g. It describes in detail the expected path of sale for the first 2 or 3 years

2. The summary of items a through g above will be included in the executive summary. FIN292



Startup Capital Requirements1. The 2 major considerations

a. How much working capital will you need to launch the venture?

b. How long will it take for sales revenues to cover your operating costs?

2. Keep in mind most businesses lose money in the early goinga. The 1st hurdle is to breakeven

b. The 2nd hurdle is to grow the business to a point where we are generating operating profits

c. Operating profits will enable your business to pay you [and your partners] a salary

3.A final note: many businesses fail in the 1st year due to a lack of sufficient working capital

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Estimating Start-up Costs1. How much capital you will require is a function of the

nature of the business you intend to launcha. A small coffee shop similar to Starbucks can probably be

launched for around $10,000 to $15,000 in the equipment and furnishings

b. An online resale business can be started for less than $5,000 in equipment and website design costs

c. A modest full service restaurant on the other hand may require upwards of $100,000

d. You must also consider things like rent and necessary renovations to meet the requirements of your business.

e. Finally, you must decide what is essential and what is optional

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Estimating Start-up Costs (con’t)2. Working Capital

a. Working capital is typically cash and bank

b. Working also includes things like inventory

c. Working Also includes receivables if you extend credit to your customers

d. You'll need to budget or allocate your cash resources to paying your rent and your suppliers on a timely basis

e. You will also need to allocate a portion of your working capital to cover marketing expenses

f. Don't forget to allocate cash to pay for things like licenses and permits

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Business Organization and IRS Documentation1. There are 4 basic types of businesses

a. Sole proprietorship: Maximum personal liability

b. Partnership: personal liability is defined by the partnership agreement

c. Sub-Chapter S corporations: the extent of personal liability is defined by the court in a bankruptcy proceeding

d. Limited liability companies (LLC) : The extent of personal liability is defined by the court in a bankruptcy proceeding

e. Corporations: personal liability limited to the amount of your investment. There may be exceptions if the corporate veil is waived

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Business Organization and IRS Documentation1. Sole proprietors will report their business income and

allowable expenses on their personal Form 1040. The business owner may be required to file forms 940, 941, or 942 to record Social Security, Medicare taxes, and federal unemployment taxes paid to the IRS. Refer to IRS publication 334 for details.

2. Partnerships: a partner’s share of income will also be reported on their personal Form 1040. In addition, partners must file form 1065 also called schedule K–1. Partnerships must also pay self-employment and payroll taxes: See IRS publication 583 for specific instructions

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Business Organization and IRS Documentation3. Limited liability companies: LLCs may elect to be taxed

as corporations, partnerships, or simply on the individuals form 1040. If the LLC decides to be taxed as a Corporation, they must inform the IRS using Form 8832. If they elect to be taxed like a partnership, they will file a form 1065 with the IRS. If neither form is filed the IRS will treat the LLC like a proprietorship for taxing purposes.

4. Sub-chapter S corporations: profits passed directly to the owners and will be reported on their individual form 1040. The owners must also file IRS form 2553 and the business will file a 1020S.

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SOURCES OF START-UP CAPITAL1. Cash: your in-hand liquid resources. Checking and

savings accounts, savings bonds, and cash sitting in a money market account. The cash value of a whole life policy may also be available (assuming you obtained a whole life policy as part of your estate planning).

2. Bank Loans: Borrowing money from commercial banks by a new business is always a problem. These loans will always require collateral: the equity in your home, the cash surrender value of insurance policies, titles to automobiles that are paid for and retain market value.

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SOURCES OF START-UP CAPITAL3. Credit cards: The SBA reports the ten percent of all dollars

used to finance new businesses come from personal and/or business credit cards. Using credit cards must be done with care. Interest rates can run as high as 18% to 20%. The monthly payments must be made on time to avoid penalties and late fee charges. Recent changes in bankruptcy laws make it much more difficult to walk away from your debt if the business fails. Also, keep in mind that excessive use of credit card debt will affect your FICO scores.

4. Small business administration loans: the SBA's website www.sba.gov filled with lots of information regarding loan grants as well venture capital for high-growth technology companies. The 7(a) loan program is by far the most common.

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SOURCES OF START-UP CAPITAL5. A home equity line of credit (HELOC) is a preferred

method for two reasons:a. You may draw only what you need when you need it.

b. The interest is tax deductible on your personal 1040.

HELOC rates are determined by your FICO scores – so having a good credit history will be very important.

6. Selling unneeded personal assets such as a second home, a boat, or land held for future use or for speculative purposes. If you are still making payments on these assets, now is a god time to lighten the debt load and free up some cash to invest in your business.

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Borrowing from Friends and/or Family7. Borrowing money from family or very good friends is

made much easier if they trust you to pay it back. You should make it very clear that this is a loan and not the purchase of a part interest in the business.

CHAPTER SUMMARY8. Starting a new business requires planning and

preparation.

9. The more you know and the better you are financed, the better your prospects will be for succeeding.

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SELECTED WEB-BASED READINGS FROM ENTREPRENEUR.COM

1. http://www.entrepreneur.com/article/228193: The Basics of Using Credit Cards to Fund Your New Business

2. http://www.entrepreneur.com/article/222524: Mark Cuban's 12 Rules for Startups.

3. http://www.entrepreneur.com/article/220221: From Grad Student to Social Media Millionaire

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SBA.GOV: 10 Steps to Starting a Business

1. Write a Business Plan.

2. Get business help, training

3. Choose a Location

4. Finance the Business

5. Determine Legal Form of Business

6. Register your Business’ Name

7. Get an IRS Tax Id number

8. Register for state and local taxes

9. Obtain permits and licenses

10. Understand your employer responsibilities


Writing the Business Plan

Section 1: The Business – Product – Service to be Offered

1. What is your business? a. Describe in a reasonable amount of detail what your business

will do in terms of serving your clients’ needs.1) What type of services will you offer?

2) What types of products will you sell?

3) Where are you in terms of developing you concept?

b. What plans do you have for additional products of services to be added in the future?

c. Who will you compete with? Do you have any competitive advantages?



Section 2: The Market1. How are you defining your market?

a. Gourmet Pizza? Custom Clothing? Specialized services?

b. How big is the potential market?

c. What characteristics does this market have that suggests a good business opportunity?

d. Are there other businesses already serving this market?1) What are their strengths and weaknesses

2) How do you intend to “crash” the party?



Section 3: The Competition1. Are you competing head-to-head with other businesses?

2. Are there alternatives to your product/service?

3. Does your product/service have unique features?a. Cost

b. Quality

c. Functionality

4. Will the attractiveness of this product/service attract new competitors?



Section 4: Risks and Opportunities1. What is the biggest risk you face today? In the not too

distant future?a. Financial

b. Ease of entry

c. Availability of alternatives

2. What difficulties do you anticipate and how do you expect to overcome them?

3. What are the most significant opportunities for you to develop?

a. Specialized market niches

b. Product specialization



Section 5: The Owner/Management Team1. Who will be running the business?

a. Experience

b. Special talents

c. Education

d. Proven leader

2. Who else will be involved in the day-to-day management / oversight of the business?

a. Their skills, experience, talents, education.



Section 5: Operations1. Where will you locate your business?

2. Will all work be done in house or will some be outsourced?

3. How many people will it take to run the business?a. In the beginning

b. During the growth phase

4. Is specialized training required for the staff?a. How much will it cost in terms of time and effort?

b. What incentives will you offer to keep trained (and experienced) employees from going elsewhere?



Section 6: Capital Requirements1. How much will you need to launch the business?

a. Facility

b. Equipment

c. Miscellaneous

2. Do you anticipate additional capital as the business grows?

3. How long do you think it will take to reach the breakeven point in sales?

4. Sources?



Section 7: Preparing Pro Forma Statements1. Income Statement

a. Projections by month or quarter: Sales, Costs, Profits(Loss)

b. Projections must be reasonable

2. Balance Sheeta. Assets

b. Liabilities

c. Equity

3. Cash Flowsa. Operating

b. External Capital


The Executive Summary

Section 0: Recapping the Business Plan1. You’ll prepare this section last – why?

2. A précis or synopsis of each section.

3. Only the key points should be covered.

4. Don’t gloss over the bad and the ugly – it’s as important as the good.

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Accounting and Finance for Entrepreneurs FINANCE 292 FIN292All Rights Reserved Slide 1