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					SCORE                              ®
Counselors to America’s Small Business




                                         Managing Your
                                            Money
                                         Cash Flow Forecasting Begin with
                                                   Four Budgets
                                                 Sources of Equity
                                                  Sources of Debt
                                               Forecasting Cash Flow
                                                 Break-even Point
                                            Other Financial Statements
                                            Starting Your Business with
                                               Other People’s Money
                                         Most Common Problems With Loan
                                                     Requests
                Managing Your Money
          Numbers- The Language of Business
          Records- The Tools of Money Management
          Financial Analysis- The Key to
           Understanding Performance
          Cash- The Life Blood of Business
          Forecasting Cash Flows is a key to success
                   WHEN YOU’RE OUT OF CASH
01/05/09           YOU’RE OUT OF BUSINESS               2
             Basic Financial Statements
          Profit & Loss Statement (also called income statement)
          Balance Sheet
          Cash Flow Statement
           – This is the most important financial statement




01/05/09                                                            3
                 Profit & Loss Statement
                 Reflects performance over a period of time

           Gross Sales (Revenue)
           -   Cost of Goods Sold     Cost to buy or make the product sold

           Gross Profit                Variable expenses (costs which vary with sales
                                       Fixed (or period) expenses
           -   Operating expenses      Depreciation
                                       Selling expenses
           Operating Income            General & Administrative expenses

           -   Interest expense
           Net Income before taxes
           -   Income taxes
           Net Income (Profit)
01/05/09                                                                           4
                                     Balance Sheet
           Displays net worth of business at a given point in time

           Assets (what you own)                           Liabilities (what you owe)
           +    Cash                                       + Accounts Payable
                                                           + Accrued Taxes
           +    Accounts Receivable
                                                           + Short-term Notes Payable
           +    Inventory
                                                           + Current due on Long-term Debt
           Current Assets                                  Current Liabilities
           (convertible to cash within one year)           (Collectible within one year)

           +   Equipment                                   +     Long-term Notes Payable
                                                                 (Payable in longer than one year)
           +   Furniture & Fixtures                        Total Liabilities
           +   Property
           -   Depreciation                                +     Owners Investment
           Fixed Assets                                    +     Retained Earnings (income reinvested in the
                                                                 company)
           (longer than one year to convert to cash)
                                                           Net Worth (Equity of the company)


01/05/09   TOTAL ASSETS                                =   TOTAL LIABILITIES+NET WORTH                     5
                   Cash Flow Statement
           Equity Investments
           +DEBT
           = Total Cash available before business start up
           - Cash expenditures for Start-up
           = Cash available at the beginning of month 1
           + Cash received during each month from any source
           - Cash paid out during each month
           = Cash available at the end of one month and the
             beginning of the next month
01/05/09                                                      6
                       Cash Flow Forecast
                       Begin with 4 Basic Budgets
      1.    Personal Budget
             –   Make sure minimal personal needs are met

      2.    Start-up Budget                                    Typical Budget Period
             –   Cash required to begin your business          1st year: Month
             –   Sources of Funds: equity + debt               2nd year: Quarter
                                                               3rd year: Annual

      3.    Expense Budget
             –   Forecast of all expenses: Variable & Fixed

      4.    Sales Revenue / Gross Margin Budget
             –   Forecast of sales revenues and gross margin
             –   Comes from the marketing plan

           Add a fifth budget for those of you in Service Business – TIME BUDGET
01/05/09                                                                               7
                    Personal Budget
          Your income and expenses now and after
           the business starts
          Your bank balances over past few months
          Show how much money you must take out
           of the business to live on … this is your
           minimum owner’s draw




01/05/09                                               8
                        The Start-up Budget
                Non-repetitive - one time expenditures prior to opening your business


          Capital Items
           – Real estate including improvements; equipment, vehicle

          Initial inventory
          Other one-time Expenses
           –   Licenses and permits
           –   Professional fees
           –   Rent and Utility deposits
           –   Pre-start up advertising and promotion
           –   Contingency funds

          Working capital
           – Funds required to offset anticipated cash pull down until break-even
01/05/09                                                                                9
                     Initial Inventory
                      is a function of Sales Potential

          Sales                      = $1 million
          Cost mark up               = 100%
          Cost of Goods              = $500k
          Inventory turns            =5
                                      (from industry benchmark)

          Inventory required         = $100k


01/05/09                                                          10
               Financing Start up Costs
                         Sources of Equity
          Your own savings
          Borrowing against collateral
           – Home equity loan / refinance
           – Borrow from pension funds

          Informal borrowing from family and friends
          Credit cards
          Equity from Partners or Investors

01/05/09                                                11
                    Financing Start up Costs
                               Sources of Debt
              Your bank
               –   Personal loan
               –   Business loan*
               –   Community Express loan*
               –   Line of credit
              Other financial institutions
               – 504 Certified Development Company*
               – SBA-licensed Small Business Investment Companies
                 (SBIC)
               – Houston Business Development, Inc.
               – Accion Texas

                        * SBA guarantees these loans up to 85%
01/05/09                                                            12
               Financing Start up Costs
                     Other Sources of Debt
          Credit from suppliers (trade credit)
          Loan against inventory (Floor planning)
          Equipment vendor financing (Lease instead of Buy)


          Factors (cash advance against accounts receivable)



01/05/09                                                        13
                     The Expense Budget
          Variable expenses (costs which vary with sales)
           – Delivery, credit cards, material, utilities, sometimes labor

          Fixed expenses
           – Payroll, rent, supplies, owner’s draw, Debt repayment




01/05/09                                                                    14
                  Sales Revenue Budget
          Forecast sales volume
           – Industry data including competitive analysis
           – Historical experience or industry benchmarks
           – Seasonality if appropriate

          Forecast margin
           – Difference between sales price of an item and gross cost of making
             or purchasing that item
           – Includes materials (or merchandize), delivery and other variable
             costs

          Disaggregate by products and services
          List key assumptions

01/05/09                                                                          15
                            Revenue/Margin Budget
                                         (from Marketing Section)
           Month                        1   2   3   4    5   6   7   8   9     10   11   12   YEAR


           Number of units you
               expect to sell
           Average sales price

           Average cost of sale

           Gross margin
           = price - cost

           Gross Profit
           =Sales units x gross margin




                                             Build one table per product line




01/05/09                                                                                              16
                  CASH FLOW FORECAST
              (,000$,s)                                   Start up
            1 BEGINNING CASH
              (Cash on hand - beginning of month)
           Sources of Cash
            2 Cash Input at Start up
              Cash from You                                 35
              Cash from financial lenders                   65
                                      Start up Cash Input 100
            3 Sales Revenue
            4 Cash Injection (Loan / Other)
                         Total Cash Available (1+2+3+4)          100
           Uses of Cash
              Start Up Costs
                Capital & Real Estate (including improvements)   65
                Auto/truck                                       15
            5                  Start up (ex. inventory)          80
               Merchandise Purchases                              5
            7 Fixed Expenses
            8 Loan repayment
           10 OWNERS DRAW
                                      Total Cash Paid Out        85
               Net Cash Flow                                     15
               ENDING CASH
               (Cash on hand - end of month)
                                                                 15
01/05/09                                                               17
                  CASH FLOW FORECAST
              (,000$,s)                                          Start up   Month 1   Month 2   Month 3
            1 BEGINNING CASH
                                                                             15         4        (0)
              (Cash on hand - beginning of month)
           Sources of Cash
            2 Cash Input at Start up
              Cash from You                                        35
              Cash from financial lenders                          65
                                      Start up Cash Input         100
            3 Sales Revenue                                                 100       120       134
            4 Cash Injection (Loan / Other)
                         Total Cash Available (1+2+3+4)          100        115       124       134
           Uses of Cash
              Start Up Costs
                Capital & Real Estate (including improvements)     65
                Auto/truck                                         15
            5                  Start up (ex. inventory)            80
               Merchandise Purchases                                5        67        80        90
            7 Fixed Expenses                                                 12        12        12
            8 Loan repayment                                                 20        20        20
           10 OWNERS DRAW                                                    12        12        12
                                      Total Cash Paid Out         85        111       124       134
               Net Cash Flow                                      15         (11)      (4)        0
               ENDING CASH
               (Cash on hand - end of month)
                                                                 15           4        (0)       (0)

01/05/09                                                                                                  18
                             Break-Even Analysis
   $




            Cash Fixed Costs
              Operating
           losses added to
            start-up costs


                                              Time (months)
                              Break-even
                                Point
01/05/09                                                  19
                             Break-Even Analysis
                Over-estimating Income
   $                                                 Sales are
                                                      below
                                                     forecast




            Cash Fixed Costs
              Operating
           losses added to
            start-up costs


                                                Time (months)
                                   Break-even
                                     Point
01/05/09                                                         20
                             Break-Even Analysis
                Under-estimating Expenses
   $                                                        Sales are
                                                             below
                                                            forecast

           Expenses are higher than forecast



            Cash Fixed Costs
              Operating
           losses added to
            start-up costs


                                                    Time (months)
                                               Break-even
                                                 Point
01/05/09                                                                21
                  Break-Even Analysis
      SALES & EXPENSE FORECAST
                     Jan Feb      Mar     Apr    May    Jun     Jul   Aug
      Revenue         10   20      30      40     50     60     70     80
      Expenses       (60) (60)    (60)    (60)   (60)   (60)   (60)   (60)
      Cash flow      (50) (40)    (30)    (20)   (10)    0      10     20
      Cash in
      bank      150  100   60     30      10      0     0      10     30

      ACTUAL SALES & EXPENSES: If sales   grow slower than expected…
      Revenue         5    10     15       20     30    40     50   60
      Expenses       (60) (60) (60)       (60) (60) (60) (60) (60)
      Cash flow      (55) (50) (45)       (40) (30) (20) (10)        0
      Cash in
      bank      250  195 145 100          60     30     10     0       0

01/05/09                                                                     22
                  Break-Even Analysis
      SALES & EXPENSE FORECAST
                     Jan Feb       Mar    Apr    May    Jun     Jul   Aug
      Revenue         10   20       30     40     50     60     70     80
      Expenses       (60) (60)     (60)   (60)   (60)   (60)   (60)   (60)
      Cash Flow      (50) (40)     (30)   (20)   (10)    0      10     20
      Cash in
      bank      150  100   60       30    10      0     0      10     30

      ACTUAL SALES & EXPENSE: If sales grow slower than expected…
      Revenue         5    10     15      20    30     40    50        60
      Expenses       (60) (60) (60) (60) (60) (60) (60)               (60)
      Cash Flow      (55) (50) (45) (40) (30) (20) (10)                0
      Cash in
      bank      250  195 145 100         60     30    10     0         0

01/05/09                                                                     23
       Manage Cash on Regular Basis
                     Owner Keeps Control of All Cash

          Open separate bank account for your
           business ASAP
          Deposit all receipts “in tact”
          Use a “petty cash fund”
          Separate sales tax receipts on your books
          Hang on to cash as long as possible
          Reconcile your bank account at least monthly
01/05/09                                               24
                      Keep Good Records
               So you can Analyze Your business

          Measure performance
           – against industry (ratio analysis)
           – today vs. yesterday vs. same day last year (trend analysis)
           – How did I do vs. how did I say I would do (actual vs forecast)

          Recognize red flags; use as diagnostic tool
          Determine cash needs
          Control inventory
          Take advantage of cash discounts

01/05/09                                                                      25
                     Measure Performance
                                     Financial Ratios
          Measure of Comparative performance
          Helps identify potential problems
          Types of Financial Ratios
           – Profitability Ratios
                Measure the efficiency of the business and the owner’s return on investment

           – Liquidity Ratios
                Measure the ability of the business to meet its financial obligations

           – Leverage Ratios
                Measure the business risk arising from the debt structure of the business



01/05/09                                                                                       26
              Three fundamentals of
             sound cash management
      1.   Have adequate cash and a reserve fund at
           the start of the business
      2.   Manage cash on a daily basis (or on certain
           days of each week)
      3.   Prepare and maintain a cash forecast for at
           least six months into the future


             CASH is Your Most Important Asset

01/05/09                                                 27
                Take Home Messages
          When you’re out of cash you’re out of
           business
          Budget, budget, budget!
          Keep good records
          Analyze your cash flow and business
           performance regularly
          More inventory turns means more cash!

          Bug SCORE for free counseling
01/05/09                                           28
SCORE                              ®
Counselors to America’s Small Business




                              Starting & Growing
                              Your Business with
                             Other People’s Money
           The First Tough Truth   




01/05/09                               30
     What Do The Lenders Look For?
          You … 5 C’s of credit:
           –   Character.…...Credit score, etc.
           –   Collateral…….Assets
           –   Capacity..……Ability to pay the debt
           –   Conditions..…Economic conditions of area and industry
           –   Capital…..…..The amount you will invest

          Purpose of the loan
          Your Experience
          Your Business Plan

01/05/09                                                               31
                 Build Your Reputation
          Find an unmet need and get started
          Learn your business, if you haven’t already
          Learn how to manage money
          Establish your credit rating
          Gather some seed money from people who
           know and believe in you (like yourself)
          Prepare a business plan
01/05/09                                                 32
           Learn to Manage Your Money
          Have a realistic, economical personal
           budget and stick to it
          Keep good current records … whether you
           like to or not!
          Keep business and personal funds
           separate.
          Prepare a financial plan for your business.


01/05/09                                                 33
               Build Your Credit Rating
          Buy things on credit and pay the bill on time.
           (35%)
          Don’t use most of the credit lenders are
           willing to give you. (30%)
          The longer you do this the better. (15%)
          Use different types of credit. (10%)
          Once started, don’t make many new credit
           applications in a short time. (10%)
01/05/09                                                34
           You Can Easily Check Your
                 Credit Status
                        One free report from
                         each agency each
                         year at
                     annualcreditreport.com
                        Get a credit score
                         estimate for $6.95.



01/05/09                                        35
             With Business Reputation
           Financing Becomes Available
          Community Express; HBD Fast Track
           Loans; Accion of Texas
          Trade credit – supplier, equipment vendor
          SBA 7(a) loan guarantee program (up to
           $1.5 million) through commercial banks
          HBD Direct and Tandem Loans
          Community development lenders
          Small business investment companies
01/05/09                                               36
              Working With Your Lender
          It is never too early to start
          A small bank might be best … relationship
           trumps interest rate
          A good credit rating is a big plus
          Describe your personal financial status
           – Share your Personal Budget
           – Provide all tax returns for past 3 years
           – List any lawsuits, bankruptcies
          Describe your financial needs
           – Specify Amount and length of loan
           – Display sources and uses of funds – be complete and specific
          Share your business plan
           – Include financial statements
           – Show how you will pay back the loan        Be open - Tell
01/05/09
           – Show why you will succeed                    it like it is     37
           Most Common Problems With
                 Loan Requests
          Inadequate equity for the type of business
          Inadequate collateral
          Inadequate debt coverage in repayment
           plan (which includes personal spending)
          Management ability
          Poor owner credit score
          Careless assumptions used in plan
01/05/09                                                38
SCORE                              ®
Counselors to America’s Small Business




                                 Congratulations
                                       &
                                   Thank You!

                                     Keep in touch.
                                         www.scorehouston.org
BACK UP
                    Accounting Methods
          Single Entry - Cash Basis
           – Very simple - (like household accounting)
           – Recognize income when received
           – Recognize expenses when paid

          Double Entry - Accrual Basis
           –   More complex - - need an accountant
           –   More financial reports generated
           –   Software is more difficult to use
           –   Recognize income when earned
           –   Recognize expenses when incurred


01/05/09                                                 41
                                 An Example
          Start up costs                        Start up financing
           –   Fixtures                  65       – Equity             35
           –   Pick up truck             15       – Debt               65
           –   Inventory                  5            Total          100
           –   Cash on hand              15
                   Total                100



           Fixed Asset Life = 5 years              Debt Term = 5 years
           Annual Depreciation = 16                Interest = 11%
                                                   Annual Interest = 7
                                                   Principal payment = 13


01/05/09                                                                    42
                                         Example                             (continued)



          1st year operations:
           – Revenue                                   100 … but collect 97
           – Cost of sale                               67 … but pay 65 and then build                       3 of inv.
             Materials; Direct Labor; Delivery, etc.


           – Fixed costs                                12
             Craft Supplies & Artists; Shop & Truck Rental; Advertising, Utilities, Insurance, Legal, Accounting


           – Owner’s draw                               12
             Minimum amount needed to live on




01/05/09                                                                                                                 43
                   Cash Flows - Year 0
                                                Checkbook
           Cash Balance - Beginning of the Year     0
           Add: Cash Receipts
             Owner's Equity Contribution            35
             Loan from Bank                         65
                            Total Cash Received    100
           Less: Cash Disbursements
             Fixtures                               65
             Pick up truck                          15
             Inventory                              5
                      Total Cash Disbursements      85

           Cash Balance - End of Year             15
01/05/09                                                    44
                    Cash Flows - Year 1
                                                Checkbook
           Cash Balance - Beginning of the Year     15
           Add: Cash Receipts
             Sales Income                           97
                            Total Cash Received     97
           Less: Cash Disbursements
             Cost of sale                           68
             Fixed costs                            12
             Owner's draw                           12
             Interest Expense                       7
             Loan Repayment                         13
                           Total Cash Disbursed    112
                                  Net Cash Flow   (15)
           Cash at the end of Year 1               0
01/05/09                                                    45
                  Beginning Balance Sheet
                          ASSETS                           LIABILITIES AND EQUITY
                                          0th Yr.                                    0th Yr.
           Current Assets                           Current Liabilities
             Cash                           15        Accounts Payable                 0
             Accounts Receivable             0        Taxes Payable                    0
             Inventory                       5        Bank Debt Pay. in 1 Year         13
                Total Current Assets        20        Total Current Liabilities        13

           Property and Equipment                   Note Payable to Bank               52
             Store Fixtures                 65
             Pick-up Truck                  15           Total Liabilities             65
             Less: Depreciation              0
                Net Property and Equip.     80      Owner's Equity
                                                      Original Investment              35
                                                      Earnings Retained in Busness     0
                                                       Total Owner's Equity            35

           TOTAL ASSETS                    100      TOTAL LIABIL. & EQUITY            100
01/05/09                                                                                    46
                    Income Statement
                                                                   Year 1
           Sales Revenue                                            100
           Cost Of Sales (Variable Costs)
              Materials; Direct Lab or; Delivery, etc.              67
                                                 Gross Profit       33
                                           G.P. As % Of Sales      33%
           Fixed Expenses                                           12
            Craft Supplies & Artists; Shop & Truck Rental;
            Advertising, Utilities, Insurance, Legal, Accounting
           Owner's Draw (Minimum)                                   12
           Depreciation                                             16
           Interest Expense                                         7
                          Total Fixed Expenses                      47

           Net Income - Pretax                                      (14)
01/05/09                                                                    47
                      Ending Balance Sheet
           ASSETS                                            LIABILITIES AND EQUITY
                                       0th Yr. Year 1                            0th Yr. Year 1
           Current Assets                               Current Liabilities
             Cash                       15      0         Accounts Payable       0        1
             Accounts Receivable        0       3         Taxes Payable          0        1
             Inventory                  5       8                               13
                                                          Bank Debt Pay. in 1 Year        13
                Total Current Assets    20      11        Total Current Liab.   13        15

           Property and Equipment                       Note Payable to Bank      52      39
             Store Fixtures         65           65
             Pick-up Truck          15           15          Total Liabilities    65      54
             Less: Depreciation     0           (16)
            Net Property and Equip. 80           64     Owner's Equity
                                                          Original Investment     35      35
                                                          Retained Earnings       0      (14)
                                                                 Total Equity     35      21
           TOTAL ASSETS                 100     75      TOTAL LIAB & EQUITY       100     75
01/05/09                                                                                          48
                 Cash Flow Statement
                                                     1st Year
           Sources of Cash
           Cash - Beginning Of The Year               15
            Net Income For Year                       (14)
            Add: Depreciation                         16
            Incr: Accounts Payable                     2
                             Total Sources Of Cash     19
           Uses Of Cash
           Incr. Accounts Receivable                   3
           Increase Inventories                        3
           Purchase New Equipment                      0
           Repay Part Of Bank Loan                     13
                                Total Uses Of Cash     19

           Cash - End Of Year                          0
01/05/09                                                        49
                 Income vs. Check Book
                                                Income Checkbook
           Cash Balance - Beginning of the Year            15
           Add: Cash Receipts
            Sales Income                          100      97
                        Revenue / Cash Received 100        97
           Less: Cash Disbursements
            Cost of sale                           67      68
            Fixed costs                            12      12  24
            Owner's draw                           12      12
            Depreciation                           16
            Interest Expense                        7      7   20
            Loan Repayment                          0      13
                      Expenses / Cash Disbursed 114       112

             Net Income (Pretax) / Net Cash Flow   (14)   (15)
           Cash at the end of Year 1                       0
01/05/09                                                            50

				
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