Financial Projections

HACC Institute for Entrepreneurial Studies

David McNaughton 221-1213 dwmcnaug@hacc.edu

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