FINANCIAL KNOW-HOW

START-UP COSTS

START-UP COSTS

• Utility hook-ups
• Initial equipment purchases
• Land/Building/Site Purchase/Rennovations
• Advertising the opening
• Pre-opening salaries & training

SOURCES OF FINANCING (PERSONAL)

• Personal savings/Credit card
• Family/friends
• Loans/Second mortgage
• Sweat equity/Bootstrapping
• Bartering with vendors

SOURCES OF FINANCING (BUSINESS)

• Customers
• Suppliers/Vendors
• Seller financing
• Employees
• Joint ventures/Partners

LENDING PROGRAMS

• Commercial loans
• Lines of credit
• Guaranteed loans (SBA)

ANGEL INVESTORS

• Often high net worth individual
• Typically local, experienced entrepreneurs
• May prefer to invest in groups
• May want to be involved, but out after ROI
• Less likely to seek controlling interest

VENTURE CAPITALISTS

• Finance new/growing companies
• Add value through boards, contacts, funding
• Take risks, expect rewards
• Longer life with the business

FINANCIAL MANAGEMENT TOOLS

Balance Sheet
Income Statement
Cash Flow Statement
Ratio Analysis

BALANCE SHEET

BALANCE SHEET

• Think of it as a photo showing what you look like
• Shows assets, liabilities, owner's equity
• ASSET: things of value
• LIABILITY: debts owed by the business
• OWNER'S EQUITY: owner's net worth

Value of what you own (assets)
- debts you owe (liabilities)
= net worth (owner's equity)

INCOME STATEMENT

INCOME STATEMENT

• Think of it as a video showing your life
• Usually reported monthly and throughout the year
• REVENUE: money made from normal business activities
• EXPENSES: what things cost
• Gross Profit: pre-tax Net Income: post-tax

CASH FLOW

CASH FLOW

• Doesn't mean you have stacks of money
• Refers to using something other than credit to pay

CASH IS USED FOR:

• Operating expenses (salaries, utilities)
• Inventory
• Equipment
• Expansion

Cash Flow varies over time

Cash pays the entrepreneur

INCOMES

• Cash on hand
• Cash sales
• Accounts receivable
• Loans received
• Investor cash

EXPENSES

• Purchased inventory
• Operating expenses
• Accounts payable
• Repay loans
• Taxes

FINANCE FLOW

IMPROVING CASH FLOW

• Leasing vs Buying
• Hire labor by contract (for specific jobs)
• Exchange products/services instead of paying

RATIOS

WHY DO WE DO THIS?

• Evaluation
• Comparison
• Projections
• Look at "current" and "trend"

Profit ratios
Liquidity ratios
Leverage ratios

PROFITABILITY RATIOS

Gross Profit Margin (GPM)
Gross profit / sales


Return on Sales (RS)
Net income before taxes / Sales

LIQUIDITY RATIOS

Current Ratio (CR)
Current assets/Current liabilities
*should be at least 2, bigger is better

Quick Ratio (QR)
Current assets - (inv - current liab)
*should be at least 1, bigger is better

LEVERAGE RATIOS

Debt Ratio (DR)
Total liabilities / Total assets

IN CONCLUSION...

• Be creative in developing the financial package
• Seek as many unique means as possible to limit risk