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Textbook: Entrepreneurship Ideas in Action 3rd Edition

Chapter 7: Finance, Protect, and Insure Your Business

   I.      Managing Business Finances page 155
           a. Read the article on page 155
           b. Answer questions under “What do You Know?” on page 155.
   II.     Putting Together a Financial Plan 7.1
           a. Goals
                    i. Calculate company start-up costs
                   ii. Create a cash flow statement, an income statement, a balance
                       sheet, and a personal financial statement.
   III.    Pro-Forma Financial Statements
           a. Pro-Forma Financial Statements are statements on future financial
   IV.     Start-Up Costs
           a. Start-Up Costs are one time only expenses that are paid to establish a
   V.      Common Start-Up Costs
           a. Equipment and supplies
           b. Furniture and fixtures
           c. Vehicles
           d. Remodeling
           e. Legal and accounting fees
           f. Licensing fees
   VI.     Cash Flow Statements (See page 158 in Book)
           a. A cash flow statement describes how much cash comes in and out of a
               business over a period of time.
   VII.    Forecast Revenues
           a. To forecast your revenue you should look at the demand for your product
               and past history.
   VIII.   Forecast Operating Expenses
           a. Operating expenses are expenses incurred by a business every month.
           b. Use past data to help you forecast revenues.
   IX.     Prepare the Cash Flow Statement
           a. For you business plan: you should have a monthly pro-forma cash flow
           b. Many businesses generate a best case and worst case cash flow statement.
   X.      Income Statement (See page 159 in Book)
           a. An income statement is a financial statement that indicates how much
               money a business earns or losses during a particular period of time
               (usually a year)
           b. Also known as a Profit and Loss Statement.
   XI.     Income Statement vs Cash Flow Statement
         a. A cash flow statement deals with actual cash coming in and going out of
            the business.
         b. Income statement shows revenue not yet received and expenses you have
            not yet paid. (It is a futuristic look at the financial stability of a business).
                 i. Income Statements include money you expect to receive
                        1. Items sold on Credit
                        2. Accounts Receivable
XII.     Income Statements
         a. Income statements take your revenue, money and credit given to the
            company from customers, for a given period and subtracts from the
            revenue your operating expenses.
                 i. What’s left of your revenue after your expenses is your income or
                    loss for that period.
XIII.    Balance Sheets (See page 161 in Book)
         a. A balance sheet is a snapshot of the company at a particular point in time.
XIV.     Balance Sheets and The Accounting Equation
         a. Assets = Owner’s Equity + Liabilities
         b. What you have = What you put down for the item + what is owed on the
XV.      Accounting Equation Example
         a. You purchased a car for $10,000 by putting $4,000 down and borrowing
            $6,000 from your great aunt Maydeen.
         b. $10,000 = $4,000 + $6,000
XVI.     Balance Sheet
         a. On one side of the balance sheet you have your Assets on the other side
            you have your Liabilities and Your Owner’s Equity.
         b. Note: Owner’s Equity is also known as Net Worth.
XVII.    Types of Assets
         a. There are many different categories of assets a company can have.
         b. Following are just a few of the more common.
XVIII.   Fixed Assets
         a. Fixed Assets – are assets the company will keep over many years.
         b. Examples: Buildings, trucks, machinery, equipment.
XIX.     Current Assets
         a. Current Assets - mostly “liquid” assets which are cash and assets than can
            be easily converted into cash.
         b. Examples are stocks, cd’s, etc….
XX.      Inventory
         a. Inventory is what you are selling or ultimately will sell to the customer.
XXI.     Supplies
         a. Supplies are assets that are used up in the operations of the business
XXII.    Accounts Receivable
         a. Accounts receivables are promises by customers to pay for goods or
            services. Basically it is money people owe you.
XXIII.   Uncollectable Accounts
      a. Uncollectable accounts are accounts receivables that you know you will
         not receive. Recently in the news as “Toxic Assets”
      b. You include uncollectable accounts in the assets side of the balance sheet
         to give a true picture of the situation.
XXIV. Depreciation
      a. Depreciation is the value that an asset looses over time from age or use.
      b. Example: a computer that is five years old is worth less than the day it was
         originally purchased.
XXV. Personal Financial Statement
      a. Banks usually want to see a financial statement of your own assets,
         liabilities, and equity when you are asking for a loan.
      b. Basically banks want to see how much you are “worth” and if there are
         any assets you have to help as collateral for a loan.
XXVI. Assessment 7.1 page 163
      a. Think Critically
              i. Questions 1, and 2.
      b. Make Connections
              i. Questions 3 and 4.
XXVII. Obtain Financing For Your Business 7.2
      a. Goals
              i. Evaluate different types of bank loans.
             ii. Explain Small Business Administration loans.
            iii. Evaluate other sources that can provide capital.
XXVIII. Bank Loans
      a. Many businesses obtain financing through a bank.
      b. The amount of money borrowed is called Debt Capital.
      c. Debt Capital – is money loaned to a business with the understanding that
         the money will be repaid, with interest, in a certain period of time.
XXIX. Types of Bank Loans – Secured Loans
      a. Secured loans are backed by collateral.
      b. Collateral is property that the borrower forfeits if he or she defaults on the
XXX. Typed of Bank Loans – Unsecured Loans
      a. Unsecured loans are loans not guaranteed by property.
      b. Usually offered to banks most creditworthy customers. (Usually larger
         businesses or businesses that have been around for awhile.)
XXXI. Types of Secured Loans
      a. Line of credit – is an agreement by the bank to lend up to a certain amount
         of money whenever the borrower needs it.
      b. Short-term loan – is a loan that is repaid within a year.
      c. Long-term loan – is a loan that is payable over a period longer than a year.
XXXII. Reasons a Bank May Not Lend Money (See page 165 in book)
      a. The business is a start up.
      b. Lack of a solid business plan.
      c. Lack of adequate experience.
      d. Lack of confidence in the borrower.
      e. Inadequate investment in the business.
XXXIII. SBA Loan Assistance
      a. The SBA is a government agency whose purpose is to help small
      b. For small businesses that qualify the SBA will guarantee loans, up to 90%,
         which are made by commercial banks to small businesses.
      c. The SBA for qualified businesses will make loans to small businesses.
      d. Loans are asked to be used for working capital.
XXXIV. Requirements of SBA Loans
      a. Your business must be considered a small business.
      b. Your business must not be a leader in its field.
      c. Your business must comply with all federal employment laws.
      d. Your business cannot create or distribute ideas or opinions.
      e. You must have been unable to obtain financing from a commercial bank.
      f. You must invest a reasonable amount of your own money in the venture.
      g. You must provide adequate collateral.
XXXV. Applying for an SBA Loan
      a. You must provide a shortened version of what you are including in your
         business plan.
      b. See page 167 & 168 in textbook.
XXXVI. Other Sources of Loans (See page 168 in book)
      a. Small Business Investment Companies – are licensed by the SBA to make
         loans and invest capital with entrepreneurs.
      b. Minority Enterprise Small Business Investment Companies – are special
         kinds of SBICs that lend companies to minority businesses.
      c. Department of Housing and Urban Development (HUD) provides grants
         to cities to improve impoverished areas who in tern loan money to small
         businesses in these areas.
XXXVII. Other Sources of Loans Continued (See page 169 in book)
      a. The Economic Development Administration – operates similar to HUD
         however loans are made directly to individuals and not passed through
      b. State Governments – certain states will grand loans and tax breaks to
         industries they are trying to encourage or to areas they are trying to
      c. Local and Municipal Governments – like states will sometimes lend
         money to companies operating in industries or area they are trying to
XXXVIII. Equity Capital
      a. Equity Capital – is money invested in a business in return for a share in
         the business’s profits.
XXXIX. Personal Financing
      a. Many entrepreneurs use their personal savings to finance the start of their
      b. Using your own money shows other potential investors that you have faith
         and are committed to your business.
XL.    Friends and Family
       a. Some entrepreneurs borrow money from friends and family.
       b. Consider how borrowing money many impact your relationship with your
           friend of family member.
XLI. Venture Capitalists
       a. Venture Capitalists are individuals or companies that make a living
           investing in start-up companies.
       b. Venture capitalists are usually interested in companies which have
           potential to make hundreds of millions of dollars in a few short years.
       c. Most venture capitalists want part control over a company.
XLII. Assessment 7.2 page 170
       a. Think Critically
                 i. Questions 1, 2, and 3.
       b. Make Connections
                 i. Question 4.
XLIII. Protect Your Business 7.3
       a. Goals
                 i. Categorize Business Risks
                ii. Identify security precautions to protect you business from different
                    types of theft.
XLIV. Security Precautions
       a. Security Precautions are steps you take to protect yourself from risk.
       b. Security precautions are not just taken against theft, vandalism, etc…
       c. It is impossible to eliminate risk, therefore you must minimize it.
XLV. Human Risks
       a. Human Risks are risks caused by the actions of employees or customers.
       b. Examples: Theft, vandalism, bounced checks.
XLVI. Natural Risks
       a. Natural Risks are caused by acts of nature.
       b. Examples: storms, fires, floods, and earthquakes.
XLVII. Economic Risks
       a. Economic Risks occur because of changes in business conditions.
       b. Examples: Increase in competition, inflation, recessions, and government
XLVIII. Shoplifting
       a. Ways to prevent shoplifting.
                 i. Instruct your employees to watch for customers who appear
                ii. Hire security guards or off-duty police officers to patrol your store.
               iii. Post signs indicating that you prosecute shoplifters.
               iv. Ask customers to leave their bags behind the counter.
                v. Install electronic monitoring devices: cameras, electronic
                    merchandise tags, point of entry sensors.
XLIX. Employee Theft
       a. Many businesses suffer from employee theft.
       b. Sometimes employee theft can devastate a company financially.
L.     Ways to Prevent Employee Theft
       a. Prevent dishonest employees from joining you company; screen them.
       b. Install surveillance systems.
       c. Establish a tough company policy regarding employee theft.
       d. Be on the lookout. (Have checks and balances in place).
LI.    Robbery
       a. Ways to help minimize loss in the case of robbery.
                i. Make sure all doors and entrances are secure.
               ii. Use burglar alarms and security systems.
              iii. Keep a minimum amount of cash in the cash registers.
              iv. Surveillance cameras.
LII. Credit Card Fraud
       a. If a purchase is made on a stolen credit card, the business may not be able
          to recover the money.
       b. Obviously use an electronic credit card authorizer.
LIII. Bounced Checks
       a. Bounced checks are bad checks written when the account has insufficient
       b. You can implement a policy of accepting checks drawn on in-state banks
       c. Ask for the signer of the check to supply identification (at least Photo id.)
       d. Some places decide not to accept checks at all.
LIV. Assessment 7.3 page 175
       a. Think Critically
                i. Questions 1, 2, 3, 4 and 5.
LV. Insure Your Business 7.4
       a. Goals
                i. Determine the different types of insurance you may need for your
               ii. Evaluate what types of insurance businesses need to purchase.
LVI. Classification of Risks
       a. Businesses face different types of risks.
       b. Risks are classified by the result of the risk, control of the risk, and
          insurability of the risk.
LVII. Result of the Risk
       a. Pure risks prevent the chance for loss but not opportunity for gain.
                i. Example of a pure risk would be damage to a vehicle.
       b. Speculative risks offer you the chance for gain as well as the chance for
                i. Example of a speculative risk is investing in the stock market.
LVIII. Control of the Risk
       a. Controllable risks can be reduced or possibly even avoided by actions you
                i. Examples of controllable risks: shoplifting, employee theft.
       b. Uncontrollable risks are risks that actions have no effect on.
                i. Examples of uncontrollable risks: floods, recessions, etc…
LIX.   Insurability of a Risk
       a. A risk is insurable if it is a pure risk faced by a large number of people and
           the amount of loss can be predicted.
       b. A risk is uninsurable if there is a risk that a loss cannot be predicted.
LX. Common Types of Business Insurance
       a. Property
       b. Casualty Insurance
       c. Life Insurance
       d. Worker’s Compensation
LXI. Property Insurance
       a. Property Insurance insures all business property against normal risks,
           including fire, robbery, and storm damage.
       b. Property Insurance usually does not cover floods and earthquakes – you
           must purchase this type of insurance separate.
LXII. Casualty Insurance
       a. Casualty Insurance protects a business against lawsuits.
LXIII. Life Insurance
       a. Life Insurance is the insurance that is paid in the event that the policy
           holder dies.
       b. Business owners usually purchase life insurance to insure that that his or
           her heirs have enough money to contribute to the business.
LXIV. Worker’s Compensation
       a. Worker’s Compensation consists of payments to workers who are injured
           on the job.
       b. Worker’s compensation covers medical expenses incurred in the event of a
           work related injury, and income benefits to workers unable to work due to
           work related injuries.
LXV. Other types of Business Insurance
       a. Depending on the type of business it is in businesses may need to purchase
           other types of insurance.
       b. Flood, business interruption, crime, and renter’s insurance.
LXVI. Choosing an Insurance Agent
       a. Insurance may be sold by agents who represent many types of different
           insurance companies; or an agent who only handles one insurance
       b. Obviously compare prices and packages.
LXVII. Determine What Coverage You Need
       a. Make a list of what you own and what types of risks you would want to
           insure against.
       b. Calculate how much you will need, figure out what it would cost to
           replace that item, including covering any debts against the item.
                i. If you have trouble calculation the cost of the item, insurance
                   companies have appraisers to help you figure out the replacement
LXVIII. Assessment 7.4 page 179
       a. Think Critically
i. Questions 1 and 2.

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