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Welcome to Unit 7Small Business Management
Your Instructor:Richard Wade
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Welcome to the Unit 7 Seminar
Creating a Successful Financial Plan
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But first …Let’s do a Quick review of the Unit 6
Seminar
Managing Cash Flows
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How much cash does the business need?• Minimum cash balance• Forecast sales• Forecast in-coming cash (control AR)• Forecast out-going cash (AP tips)
Cash vs Profit
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Cash Flow:
A method of measuring a company’s liquidity and its ability to pay its bills and other financial obligations on time by tracking the flow of cash into and out of the business over a period of time.
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• Balance Sheet – Assets– Liabilities– Owners Equity
• Income Statement– Revenue– COGS– Expenses– Income
• Statement of Cash Flows
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• Pro forma Financials
• Why is Break-Even Analysis important?
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Unit 7 Discussion Question 1
What do you know about Balance Sheets?
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What is a balance sheet?
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a “snapshot of a company’s financial condition.” Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time. A company balance sheet has three parts: assets, liabilities and ownership equity.
http://en.wikipedia.org/wiki/Balance_sheet
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What does a Balance Sheet do?
• It tells someone that if the company SOLD off all of its assets and paid all of its bills, how much would be left over for the owners?
A Balance Sheet provides a snapshot of what the company has (assets), what the company owes
(liabilities), and the difference between the two (equity).
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a:
Assets
=Liabilities
Owners’ Equity
+ The easiest way to understand Owner’s Equity is to think of it as, if we sold every asset of the company today and used the money to pay off everything that the company owed, whatever is left over afterwards goes to the owners. That is the stockholders (the owners’) equity in the firm. --- Owner’s Equity: What is left for the owners after all the liabilities are paid
Liabilities are any claims against an asset. For example, a debt owed by the firm is a liability. It could be a loan from a bank or a line of credit from a supplier. It will include salaries and wages yet to be paid to employees, accounts payable to vendors, and interest payable on borrowed money.--- Liabilities: Money OWED by the company to other parties
Assets are properties or items owned by a business that will provide future benefits. Examples would be cash on hand, supplies, equipment, buildings, land, marketable securities, products or inventory of merchandise available for sale, and accounts receivable from customers. --- Assets: the value everything that the company owns and that can be sold, if the company goes out of business
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Balance sheet StartASSETS
Cash $ 15.00
Accounts Receivable 0
Raw Materials not used yet 0
Office Equipment 0
Total Assets $ 15.00
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts Payable Dad’s loan $ 3.00
Subtotal $ 3.00
OWNERS' EQUITY
Common Stock $ 12.00
Retained Earnings 0
Total Liabilities and Owners' Equity
$ 15.00
What are the elements of the Balance Sheet ?
Cash is the funds on hand
Accounts Receivable is money OWED to the company
Raw Materials not used yet in this case are the things needed to make the lemonade that has not yet been sold (in inventory)
Office Equipment, in this case are things “owned” by the company that are not made into the lemonade sale
Accounts Payable are moneys that the company owes (Loan from Dad)
Common Stock in this case is the money that the sisters put into the company
Retained Earnings is money kept in the company for future growth
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Any questions ?
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Question
What is the Income Statement?
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What is an income statement
Income statement, also referred as profit and loss statement (P&L), earnings statement, operating statement or statement of operations,[1] is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the “top line” is transformed into the net income (the result after all revenues and expenses have been accounted for also known as the bottom line.
It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.
http://en.wikipedia.org/wiki/Income_statement
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Income Statement - End of First Day
REVENUE
Gross Revenue Sales of Lemonade $ 7.50
Cost of Goods Sold:
Water $ .30
Lemons 1.50
Ice .60
Sugar .30
Cups .30
Total Cost of Goods Sold 3.00
Net Revenue $ 4.50
EXPENSES
Supplies, Rent, Salaries, Utilities, etc.
Total Expenses
Income Before Tax $ 4.50
An Income Statement measures how successful is our operations.
It shows how much Revenue we took in (Sales)
From this amount it subtracts what it cost us in raw materials to make those sales – Cost of Goods Sold
It also subtracts any other expenses (marketing, administration, rent, etc,)
The result is a Net Income Before Taxes and Interest
An Income Statement DOES illustrate the company’s net income or net loss by subtracting expenses from revenues.
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Any questions ?
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Question
How might you analyze and validate the information in your pro forma Income Statement that you include in your business plan in a way that makes investors trust the data is accurate?
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The Pro Forma Income Statement
Financial forecasts must be based in reality; otherwise the resulting financial plan is nothing more than a hopeless dream. When creating a projected income statement, an entrepreneur has two options:
1.To develop a sales forecast and work down 2.or set a profit target and work up
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The Pro Forma Income Statement
Financial forecasts must be based in reality; otherwise the resulting financial plan is nothing more than a hopeless dream. When creating the a projected income statement, an entrepreneur has two options:
1.To develop a sales forecast and work down
Talk to existing business owners in the industry (outside of the local trading area of course) can provide sales insights
Purchase published financial information from sources such as RMA and Dun & Bradstreet.
Web searches and trips to the local library
Interviews with potential customers
Test Marketing an actual product or service can also reveal the number of customers a company can expect to attract.
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Multiplying the number of of customers by projected prices yields a revenue estimate. One method for checking the accuracy of a sales revenue estimate is to calculate the revenue other companies in the same industry generate per employee and compare it to your own projected revenue per employee.
The Pro Forma Income Statement
1.To develop a sales forecast and work down
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The Pro Forma Income Statement
Financial forecasts must be based in reality; otherwise the resulting financial plan is nothing more than a hopeless dream. When creating the a projected income statement, an entrepreneur has two options:
2. or set a profit target and work up
Or entrepreneurs can create a projected income statement targeting a profit figure and then “working up” to determine the sales level they must achieve to reach it. The next step is to estimate the expenses that the business will incur in securing those sales.
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Any questions ?
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Question
What are Fixed Assets and why is this important in your business plan?
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What are fixed assets?Assets acquired for long-term use in a business.
Moreover, a fixed/non-current asset can also be defined as an asset not directly sold to a firm's consumers/end-users. As an example, a baking firm's current assets would be its inventory (in this case, flour, yeast, etc.), the value of sales owed to the firm via credit (,i.e. debtors or accounts receivable), cash held in the bank, etc. Its non-current assets would be the oven used to bake bread, motor vehicles used to transport deliveries, cash registers used to handle cash payments, etc. Each aforementioned non-current asset is not sold directly to consumers.These are items of value which the organization has bought and will use for an extended period of time; fixed assets normally include items such as land and buildings, motor vehicles, furniture, office equipment, computers, fixtures and fittings, and plant and machinery. These often receive favorable tax treatment (depreciation allowance) over short-term assets. According to International Accounting Standard (IAS) 16, Fixed Assets are assets whose future economic benefit is probable to flow into the entity, whose cost can be measured reliably.
http://en.wikipedia.org/wiki/Fixed_asset
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Any questions ?
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• What are Current Liabilities and why are these important in your business plan?
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• What are Current Liabilities and why are these important in your business plan? Current liabilities are considered liabilities of the business
that are to be settled in cash within the fiscal year or the operating cycle, whichever period is longer. For example, accounts payable for goods, services or supplies that were purchased for use in the operation of the business and payable within a normal period of time would be current liabilities. Bonds, mortgages and loans that are payable over a term exceeding one year would be fixed liabilities or long-term liabilities. However, the payments due on the long-term loans in the current fiscal year could be considered current liabilities if the amounts were material.The proper classification of liabilities is essential when considering a true picture of an organization's fiscal health.
http://en.wikipedia.org/wiki/Current_liability
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Any questions ?
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• How do your find the Cost-of-Goods Sold?
• Service industry companies have no COGS (no inventory)
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Manufacturers, wholesalers, and retailers calculate costs of good sold by adding purchases to beginning inventory and subtracting ending inventory.
The reason why service providing companies typically have no cost of goods sold is because they do not carry inventory.
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Any questions ?
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Next… Unit 8 Seminar
Building a Powerful Marketing Plan
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Build a marketing plan• Who is target market?• What does target want / need?
Research! Go get them (marketing tactics) Now keep them
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Questions?? Wrap-up
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T H A N K Y O U
F O R
A T T E N D I N G
SEE YOU IN THE DISCUSSION THREAD
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Questions?? Wrap-up
