Entrepreneurial Financials

Entrepreneurial Finance:

Date: January 15, 14

1. Keep a journal of personal expenses.
2. Pro forma financial statement development

• The difference between Manufacturing and a Serving business from financial statement is looking at Cost of Goods Sold and it is also Capital Intensive.

• Next class no reading but working on financials.

• Personal Financial Statement is required when you go to the bank for getting loan for your business.
• Balance is sheet is your stuff you have and what you owe and income statement is all about your activity.
• Retained earing goes to balance sheet, because balance sheet is what you have and your stuff.
• Two types of expenses fixed and variables.

Income Statement Format

• Gross Revenues- and minus cost of Goods Sold = gross profit.
• Cost of Goods sold includes cost of material and direct labor. And overhead costs.
• Returns and Allowance: It is about defective products.
• Important: The price is paid for business based on revenue (number of users) or some may on gross profit). Operating Expenses is not important because one can have different expenses.
• Gross Profit= Rev-Cost
• Operating Income= Gross profit – operating expenses.
• If you are LLC or Sole proprietorship your operating income is your net income but if you are a corporate then you have to pay taxes or people call this double taxation and then your will get net income.
• Marginal Tax rate: It is like you don’t pay tax on 50%, but you pay taxes on certain percentage above 55% and then certain percentage on 60%. It is the way, Afghanistan salaries are.
• When a company starts, it only issues common shareholder and later on other come in and wants some advantage and those can be offered preferred shares and the cost of those shares may or may not be the same as common shares.
• GAAP: The whole point of the GAAP is what your business is doing and does it make sense.  In a sense all small business does transaction in cash.
• Cash vs. Accrual Accounting: If you do 5m in gross sales, you have to do accrual, if you gross is 1million and public company, you have to do the accrual based on GAAP standard.

January 20. Balance Sheet:

A balance sheet is used to show your net worth, which is asset minus your liabilities.

Depreciation: To record accurate value of an asset and it will help with taxation.

There are three time of depreciation: 1. Straight-line method – dividing the asset over its lifetime, 2. MARCS or scheduled based system- schedule is given by IRS based on type of asset, 3. Double declining system.

CIMITYM: Cash is always important than your mother- small business.

Next Class: Read a case –

January 27, 14:

Direct is cash accounting and Indirect is for accrual accounting.

• An account Receivable can be negative, when there is a change from one period to another period.
• You get the net income and then you start to go back to income statement to remove things, which were not in cash.
• In start up, the net income can be negative because the money you receive will be less than your expenses.
• In big companies, the account receivable and account payable and Inventory will grow, because their customer grows.
• Investing activities are usually negative, because you buy property, plant and equipment for your product.
• Big picture: Is cash flow positive or negative, and if negative or losing money, how they make it up.  
• Inventory are usually inflated and usually there are stuff that are defective or not of use but that is listed as asset. Inventory can’t be depreciated.
• Cash flow from Operating Activities: Sales-return+change (+/- AC R) – COGS+Change (+/-AP). Note: Sales comes from income statement and change in account receivable from balance sheet.

Example:

Amount       Line                        Description

+ 350, 642   Gross Revenue                

-       2,366    Return on Revenue

-     40,000   AC Receivable                The AC went up by 40,000 and previous period 0

_____________

308,276      Total money come in

- 124,276   COGS

+  10,000  AC Payable                 It means that AC went up by 10000, & previous 0

_____________

114276      Total paid out