Transcript Slide 1

Junior Ventures Finance Workbook
Spring 2012
Purpose and Goals
The Purpose of this workbook is to provide you with a framework and tools to
develop a budget and financial projections for your business
Goals
At the end of this workbook you will be
able to…
1. Determine your start up costs
2. Forecast a three year income
statement
3. Determine your company’s tax rate
4. Calculate loan payments
5. Articulate to a potential investor
how much money you need
2
Table Of Contents
1. Quick Facts……………………………………………Page 4
2. Start Up Costs & Sources of Capital……………….Page 8
3. Financial Statements…………………………………Page 17
4. Three Year Financial Projections……………………Page 28
5. Appendix……………………………………………….Page 34
3
Quick Facts!
Finance Quick Facts!
What is Business Finance?
 Forward thinking, about future possibilities
 Supports informed decision-making
 The “language of business”
Business Activities
+
Road to Success!
Finance
=
uccess
Businesses record and track money to…
 …be aware of success or failure (gain or loss of money)
…plan (when to grow, when to cut back)
…comply with Regulations and Laws (file taxes, file
financial statements)
…prove financial stability to investors, creditors, suppliers,
customers
… Demonstrate lawful and ethical business behavior
5
Finance Quick Facts!
A Budget is….
The Budget formula
…a Financial plan
…expressed in monetary terms
…an estimate of a desired target or goal
…drafted for a specific time period
Total Revenue – Total Expenses = Income before Taxes * Tax
rate = Net Income
We use a Budget to…
…plan (Budget as a Planning tool)
…monitor success or failure
…coordinate business activities with resources available
…track performance over time – forecasted
(expected outcome) versus actual outcome
Types of costs
Start up Costs: Usually a one-time cost for initial business
or project launch
On-going Costs: Costs that continue due to the day-today running of the business
Revenue: Dollar amount earned by a business from the sale of
products or services. AKA “Sales” or “Income”
Expenses: Dollar amount used by a business to create or earn the
revenue. AKA “The Costs associated with running a business”
Net Income: Difference between revenue and expenses. AKA
“The bottom line of running a business” (Positive = Profit,
Negative = Loss, $0 = Break Even)
Common budget expenses
 Employee salary (+ 40% for benefits)
 Rent expense (office, warehouse, storage)
 Computer and telephone equipment
 Office furniture and supplies
 Cleaning crew expense
 Marketing and advertising expenses
 Raw materials, product parts
Fixed Costs: Costs stay the same over time
Variable Costs: Costs changes over time
6
Start Up Costs & Capital Sources
How Much Money Do I Need to Get Started?
All the costs of getting your business up and running (Year 0) go into the start up
costs section of your business plan
There are two types of costs:
One Time
Costs
+
Ongoing
Costs
=
Start Up
Costs
8
One Time Costs (sample)
One time costs are expenses you will only need to pay once before you get your
business started
ONE TIME COSTS
EXPENSES
Fixtures and Equipment
$
10,000.00
Decorating and Remodeling
$
500.00
Installation Charges
$
5,000.00
Starting Inventory
$
200.00
Business Registration Fees
$
1,000.00
Deposits with Public Utilities
$
1,000.00
Rent Deposits
$
2,300.00
Legal and Professional Fees
$
1,000.00
Licenses and Permits
$
500.00
Advertising and Promotions
$
500.00
Cash
$
750.00
Contingency Fund
$
5,000.00
Other
$
200.00
$
28,850.00
Total:
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Exercise #1 One Time Costs
Use your resource identification chart to list all the resources* you will need to
purchase in order to start your business
Consider the following categories of expenses:
•
•
•
•
•
•
•
•
•
Office Furniture
Office Appliances
Office Technology
Office Equipment
Raw Materials
Rental Deposit
Licenses and/or Permits
Legal and/or Professional Fees
Initial advertising
* Note: Do not include the dollar amounts. Research will be conducted at a later time to accurately
estimate the costs for each line item
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Monthly Costs (example)
Monthly costs are ongoing costs that you will have every month for Year 0 and for
the following years. When estimating the monthly costs for starting you business,
project three months of expenses to fully cover your start up costs
MONTHLY COSTS
MONTHLY EXPENSES
3 MONTHS' EXPENSES
Salary of Owner
Other Employee Salaries
Employee Benefits
Rent
Advertising
Delivery Expense
$
$
$
$
$
$
5,000.00
1,333.34
7,333.34
1,600.00
200.00
100.00
$ 15,000.00
$ 40,000.00
$ 22,000.00
$
4,800.00
$
600.00
$
300.00
Telephone
Supplies
Other Utilities
Insurance
Interest on Loan
Maintenance
$
$
$
$
$
$
100.00
100.00
200.00
200.00
300.00
250.00
$
$
$
$
$
$
300.00
300.00
600.00
600.00
900.00
750.00
Legal and Professional Fees
Miscellaneous
$
$
100.00
100.00
$
$
300.00
300.00
$
86,750.00
Total:
11
Exercise #2 Monthly Costs
Use your resource identification chart to list all the expenses you will experience
each month
Consider the following categories of expenses:
•
•
•
•
•
•
•
•
•
Rent
Utilities
Telephone
Office Supplies
Maintenance & Cleaning
Insurance
Loan Interest
Legal & Professional Fees
Ongoing Advertising
* Note: Do not include the dollar amounts. Research will be conducted at a later time to accurately estimate the costs for each line item
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Start Up Cost (example)
Put it all together and it should look something like this…
ONE TIME COSTS
EXPENSES
MONTHLY
EXPENSES
3 MONTHS'
EXPENSES
Salary of Owner
$
5,000.00
$
15,000.00
Other Employee Salaries
$
1,333.34
$
40,000.00
Employee Benefits
$
7,333.34
$
22,000.00
Rent
$
1,600.00
$
4,800.00
MONTHLY COSTS
Fixtures and Equipment
$
10,000.00
Decorating and Remodeling
$
500.00
Installation Charges
$
5,000.00
Starting Inventory
$
200.00
Business Registration Fees
$
1,000.00
Advertising
$
200.00
$
600.00
Deposits with Public Utilities
$
1,000.00
Delivery Expense
$
100.00
$
300.00
Rent Deposits
$
2,300.00
Telephone
$
100.00
$
300.00
Legal and Professional Fees
$
1,000.00
Supplies
$
100.00
$
300.00
Licenses and Permits
$
500.00
Other Utilities
$
200.00
$
600.00
Advertising and Promotions
$
500.00
Insurance
$
200.00
$
600.00
Cash
$
750.00
Interest on Loan
$
300.00
$
900.00
Contingency Fund
$
5,000.00
Maintenance
$
250.00
$
750.00
Other
$
200.00
Legal and Professional Fees
$
100.00
$
300.00
Miscellaneous
$
100.00
$
300.00
Total:
$
28,850.00
Total:
$
86,750.00
Amount
to ask
for
Total Estimated Start Up Capital:
$ 115,600.00
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Exercise #3 Start Up Capital
Once you’ve identified all your one-time and monthly expenses, use the ‘Start-Up Cost
Budgeting Worksheet’ to calculate the total estimated Start-Up Capital you will need in
order to launch your business.
ONE TIME COSTS
EXPENSES
MONTHLY COSTS
MONTHLY EXPENSES
3 MONTHS' EXPENSES
Fixtures and
Equipment
Salary of Owner
$
-
Decorating and
Remodeling
Other Employee
Salaries
$
-
Installation Charges
Employee Benefits
$
-
Starting Inventory
Rent
$
-
Business Registration
Fees
Advertising
$
-
Deposits with Public
Utilities
Delivery Expense
$
-
Rent Deposits
Telephone
$
-
Legal and
Professional Fees
Supplies
$
-
Licenses and Permits
Other Utilities
$
-
Advertising and
Promotions
Insurance
$
-
Cash
Interest on Loan
$
-
Contingency Fund
Maintenance
$
-
Other
Legal and
Professional Fees
$
-
Miscellaneous
$
-
$
-
$
-
Total:
$
-
Total:
Total Estimated Start Up Capital:
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Asking for Money
A big part of “The Pitch” is asking potential investors and lenders for the money
To do that you NEED to know what they WANT to know. This includes:
Know the Business
What is the type of Business you are
Describe potential customers; how will your business help these customers
How much investment is being sought (your total start-up costs)
What partnerships, collaborations and affiliations are in place
What is the market size being pursued (describe)
Who are likely competitors
When will the business break-even
Know the People
Who is on your management team
Who are your advisors
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Sources of Capital
There are several possible financing options for your business
Financing Options
Entrepreneur’s
personal
resources
Organic
Growth
Financial
Institution Loans
Angel investors
Venture
capitalists
Public Offering
Business
Development
Program
Grants
Charitable Giving
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Financial Statements
The Three Major Financial Statements
•
Income Statement
A financial statement that contains a summary of a business' financial
operations for a specific period of time. It shows the net profit or loss for the
period by stating the company's revenues and expenses
•
Cash Flow Statement
Summary of a company's cash receipts and cash disbursements over a period of
time including cash to and cash from operating, investing, and financing activities,
along with the net increase or decrease in cash for the period
•
Balance Sheet
A quantitative summary of a company's financial condition at a specific point in
time, including assets, liabilities and net worth
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Income Statement
The income statement is similar to a report card for a company because it is
intended to help gauge the overall performance of the company
Fred’s Bread Company:
2013
Year End
Revenue
$5,144
(4,291)
(650)
$203
99
(91)
$5,841
(4,959)
(737)
$145
133
(83)
$211
$195
Employee Expenses
Non-Employee Expenses
Operating Income
Investment Income
Taxes @ 30%
Net Income
2014
Year End
19
Creating an Income Statement
The income statement is similar to a report card for a company because it is
intended to help gauge the overall performance of the company
Business Name:
Revenue
Employee Expenses
Non-Employee Expenses
Operating Income
Investment Income
Taxes @ 30%
Net Income
2013
Year End
$3,500
($3,080)
($390)
$30
$100
($39)
$91
2014
Year End
$3,780
($3,172)
($372)
$236
$135
($111)
$125
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Loans and Interest Payments
Loans are arrangements in which a lender gives money to the borrower and the
borrower agrees to repay the money with interest at some future point in time
• Lender: A private, public or institutional entity which makes funds available to
borrowers such as a Bank
• Borrower: You
• Interest: The fee charged by a lender for the use of borrowed money expressed as an
annual percentage of the principal
• Principal: the original amount of a debt borrowed on which interest is calculated
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Calculating Interest Payments:
Principal Borrowed: $100,000 Interest Rate: 5% The loan is for: 10 years
Total amount to repay the lender: $150,000
Yearly Loan Repayment: $15,000
Monthly Payment: $1,250
Formula: (Principal X Interest Rate X Years) + Principal = Total amount to repay the lender
Example: ($100,000 principal X .05 interest X 10 years ) + $100,000 principal = $150,000
Formula: Amount to repay the lender / 10 years = Yearly Loan Re-payment
Example: $150,000 / 10 years = $15,000
Formula: Yearly Loan Re-Payment / 12 months = Monthly Interest Payment
Example: $15,000 / 12 months = $1,250
22
Taxes
Taxes are fees charged by a government on a product, income or activity. The
purpose of taxation is to finance government expenses and public goods and
services.
Assumptions:
• For profit companies are charged a tax rate of 30%
• Non-profit income producing companies have a tax rate of 20%
• Non-profit, non income producing companies (such as homeless shelters) are not
liable to pay taxes
Calculating Tax Payments:
Formula: Income Before Taxes: $100,000 X Tax Rate: 30% = Tax Liability
Example: $100,000 X .30 = $30,000 is your tax liability
Tax Liability is a reduction of income
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Quick Quiz #1!
Calculate the Yearly Interest Expense:
Fred’s Auto Shop receives a 5-year small business
loan from Bank of America for $12,500 at a 7% interest
rate. How much does Fred pay in interest each year?
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Quick Quiz #1 Answers
Principal Borrowed: $12,500
Interest Rate: 7% or .07
Length of Loan Repayment Plan: 5 years
Principal Borrowed: $125,000 Interest Rate: 7% The loan is for: 5 years
($12,500 X .07 X 5 years) + $12,500 = $16,875 Total amount to be repaid to the lender
$16,875 / 5 years = $3,750 Yearly Loan Re-payment or $281.25 monthly payment
25
Quick Quiz #2!
Build an Income Statement for Jane’s Bagel Shop (Hint: Refer to Quick Facts)
Jane’s Bagel Shop
Tax Rate is 20%
JBS has 1,250 customers
JBS charges $2.50 per customer
JBS expenses are $1.25 per customer
1. What are the total revenues?
2. What are the total expenses?
3. What is the net income?
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Quick Quiz #2 Answers
1.
Total Revenue: $3,125.00
Formula: # of customers X charge per customer = Total Revenue
Calculation: 1,250 customers X $2.50/customer = $3,125
2.
Total Expenses: $1,562.50
Formula: # of customers X expenses per customer = Total Expenses
Calculation: 1,250 customers X $1.25/customer = $1,562.5
3. Net Income: $1,250
Formula: Total Revenue – Total Expenses = Operating Income Before Taxes
Calculation: $3,125 - $1,562.50 = $1,562.50
Formula: Operating Income Before Taxes X Tax Rate = Tax Liability
Calculation: $1,562.50 X .2 = $312.50
Formula: Operating Income Before Taxes – Tax Liability = Net Income
Calculation: $1562.50 – $312.50 = $1,250 Net Income
27
Three Year Financial Projections
Building Three Year Projections
There are only three steps to take to develop your financial projections for the
years ahead
1) Develop an Income Statement for your Business for Year 1 (slide 29)
2) Determine your growth assumptions (i.e. inflation, revenue growth etc. some line items may stay fixed for three years – slide 30)
3) Use your assumptions to forecast Year 2 and Year 3 financial (slide 32)
The Budget Formula is also the Income Statement Formula:
Total Revenue – Total Expenses = Income before Taxes
Income before Taxes X Tax rate = Tax Liability
Income before Taxes – Tax Liability = Net Income
29
Year 1 Income Statement (example)
Year 1
REVENUES
Sales
$
120,000.00
Total Revenues
$
120,000.00
EXPENSES
Salary of Owner
Other Salaries & Benefits
Rent
Advertising
Delivery expense
Supplies
Telephone
Other Utilities
Insurance
Interest on Loan
Maintenance
Legal and Professional Fees
Miscellaneous
$
$
$
$
$
$
$
$
$
$
$
$
$
6,000.00
12,000.00
6,000.00
2,400.00
1,200.00
1,200.00
1,200.00
2,400.00
2,400.00
3,600.00
3,000.00
1,200.00
1,200.00
Total Expenses
$
43,800.00
Income before Taxes
$
76,200.00
Taxes @ 30%
$
22,860.00
Net Income
$
53,340.00
30
Assumptions (examples)
Determine your assumptions for growth for each line item
Assumptions
REVENUES
Sales
$120,000.00
Total Revenues
$120,000.00
EXPENSES
Salary of Owner
$
Other Salaries & Benefits
$ 12,000.00
6,000.00
Rent
$
6,000.00
Advertising
$
2,400.00
Delivery expense
$
1,200.00
Supplies
$
1,200.00
Telephone
$
1,200.00
Other Utilities
$
2,400.00
Insurance
$
2,400.00
Interest on Loan
$
3,600.00
Maintenance
$
3,000.00
Legal and Professional Fees
$
1,200.00
Miscellaneous
$
1,200.00
Total Expenses
$ 43,800.00
Income before Taxes
$ 76,200.00
Taxes @ 30%
$ 22,860.00
Net Income
$ 53,340.00
• Growth due to inflation ~ 3% each year
• As a general rule of thumb: add 40% to the actual
salary amount to cover workers comp, unemployment
insurance, disability insurance, health plan coverage,
vacation, sick time, etc.
• If you can justify an increase greater than inflation
then do so
• Average $350 in supplies per employee
• Some line items will be fixed costs so they will not
grow
Note: There are no “set rules” for assumptions, it
is an educated guess at what you think will
happen to your business over time. The
assumptions must be documented and
accompany (either before or after) your financials
31
Exercise #4 Business Assumptions
Determine the assumptions that will drive your financial statement forecasts and the
rationale for the assumptions. Consider what type of business you are having.
Assumptions
Justification
32
Three Year Projections (example)
Using your business assumptions, forecast Y 2 and Y 3 income
statements
Year 1
Year 2
Year 3
REVENUES
Sales
$120,000.00
$129,600.00
$ 142,560.00
Total Revenues
$120,000.00
$129,600.00
$ 142,560.00
EXPENSES
Salary of Owner
Other Salaries & Benefits
Rent
Advertising
Delivery expense
Supplies
Telephone
Other Utilities
Insurance
Interest on Loan
Maintenance
Legal and Professional Fees
Miscellaneous
$ 6,000.00
$ 12,000.00
$ 6,000.00
$ 2,400.00
$ 1,200.00
$ 1,200.00
$ 1,200.00
$ 2,400.00
$ 2,400.00
$ 3,600.00
$ 3,000.00
$ 1,200.00
$ 1,200.00
$ 6,180.00
$ 12,360.00
$ 6,000.00
$ 1,800.00
$ 1,200.00
$ 1,200.00
$ 1,200.00
$ 2,400.00
$ 2,400.00
$ 3,600.00
$ 3,000.00
$ 1,200.00
$
-
$ 6,365.00
$ 12,731.00
$ 6,000.00
$
900.00
$ 1,200.00
$ 1,200.00
$ 1,200.00
$ 2,400.00
$ 2,400.00
$ 3,600.00
$ 3,000.00
$ 1,200.00
$
-
Total Expenses
$ 43,800.00
$ 42,540.00
$ 42,196.00
Income before Taxes
$ 76,200.00
$ 87,060.00
$ 100,364.00
Taxes @ 30%
$ 22,860.00
$ 26,118.00
$ 30,109.20
Net Income
$ 53,340.00
$ 60,942.00
$ 70,254.80
8% & 10%
growth Y2 and
Y3 respectively
3% growth each
year
5 year
lease at a
flat rate
75% & 50%
reduction Y2 and Y3
respectively
Fixed Costs
33
Appendix
Additional Resources for Young Entrepreneurs
http://www.sba.gov
This is the U.S Small Business Administration site; it includes tips, business plans,
financial and legal information.
http://www.score.org/topics/young_entrepreneurs
SCORE "Counselors to America's Small Business" is a great source of free and
confidential small business advice for entrepreneurs. They have helped Vermont Teddy
Bear, Jelly Belly Candy and others.
http://entrepreneurs.about.com/b/a/216258.htm
This is a compilation of many websites that are dedicated to helping you start your
business. Great Reference Material!
35
Salary & Other Expense Information
www.salary.com This website lists salary information for a great number of job titles
based on zip code. It has a section for small business.
www.mass.gov This is the official website for the Commonwealth of Massachusetts.
Under the For Businesses section you can find a lot of useful information regarding real
estate, licenses and taxes as well as other type of information regarding small businesses
www.cityfeet.com This is an online Commercial Real Estate Network.
http://boston.craigslist.org/ This is the infamous list of local classifieds and forums
36
Definitions
Angel Investors: are wealthy individuals who provide capital for a business start up, mostly in exchange for
ownership.
Assumptions: Statements taken for granted or accepted as true without proof; suppositions from which
conclusions can be drawn
Break Even: A business breaks even when its total expenses equals its total revenue.
Business Development Programs: Programs, usually state or federal, that assist small businesses in variety of
ways by providing them with resources such as education, funding etc.
Capital: Money used by entrepreneurs and businesses to make products or provide services
Cash: Legal tender or coins that can be used in exchange goods, debt, or services. Sometimes also including
the value of assets that can be converted into cash immediately (bank accounts or marketable securities –
government bonds)
Equity: Stock
Expense: Expense or expenditure is an outflow of money to another person or group to pay for an item or
service
37
Definitions (continued)
Financial Institutions: Common types of financial institutions include banks, credit unions, stock brokerages,
asset management firms. They transfer money from investors to companies that need them.
Financial Operations: Any type of work that deals with money and finances
Financial Projections: Statements made about your financial needs in the future
Financial Stability: The avoidance of financial crisis
Incur: Acquiring or coming into something
Organic Growth: The process of business expansion due to increased output, sales, or both
Public Offering: Initial public offering (IPO) is when a company issues common stock or shares to the public for
the first time. They are often issued by smaller, younger companies seeking capital to expand.
38
Definitions (continued)
Quantitative: That is or may be estimated by quantity or can be measured
Sources of Capital: Where will money come from
Tax Liability: The amount of tax you owe
Venture Capitalists: A venture capitalist (also known as a VC) is a person or investment firm that
makes investments in early-stage, high-potential growth companies , and these venture capitalists
are expected to bring managerial and technical expertise as well as capital to their investments.
Year 0: The year you start up your business
39