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1
Finance 101 for StartupsA crash course in financial management for startup
businesses (half day version)
Presented by: Matt Evans, Certified Mentor, DC SCORE
2
With SCORE, You Are Not Alone on Your Journey
For over 50 years, SCORE has served
as America’s premier source of free
business mentoring and education.
As a resource partner of the U.S.
Small Business Administration (SBA),
SCORE has helped more than 11
million entrepreneurs through
mentoring, workshops and educational
resources since 1964.
3
SCORE Can Help You Find the Way Ahead
• Free one-on-one business counseling
and mentoring
• Business advisory services
• Low cost local workshops
• Free templates and recorded
webinars
To meet with a mentor or learn more
about SCORE’s resources, visit
washingtondc.score.org
4
Workshop Roadmap Overview
Accounting
Financial Statements
Analyze the Financials
Start with Accounting
Generate the Financial
Statements
Apply Analytical Tools and
Techniques
You as the Business Owner should spend time measuring
and managing the business based on the numbers
5
Module 1
How Accounting Works
Overview of how the accounting process works at a detail
transaction level
6
• All transactions pass through your Check Book
• All transactions must be recorded
• Businesses have a wide range of transactions:
• Customers buy your products or services = Cash Inflows
• Vendors and Employees must be paid = Cash Outflows
Think in Terms of Your Check Book Module 1
Cash Inflows
(Deposits)
Cash Outflows
(Checks)
7
Most transactions are cash basis (pass through your cash account), but . . .
• Accrual Accounting recognizes revenues when earned before you collect
the cash – Accounts Receivable Account
• Accrual Accounting recognizes expenses when incurred before you make
payment – Accounts Payable Account
• Cash Basis – Only post transactions when they go in and out of your
Check Book
• Tracking – Make sure you can control and track the money you owe
others in the future and collect all money owed to you (customers pay
on time when due).
Accrual Accounting is Preferred Module 1
8
Simple Cash Basis Accounting Spreadsheet Module 1
Simple Spreadsheet for Cash Basis Accounting
Year:
Date Description Name Amount Category RefRevenues: (Cash Collected from Sales to Customers)
2/8/2018 Sold 18 bars soap at Eastern Market Various Walk By Traffic 54.00$ Sales Revenue
2/17/2018 Sold 20 bars soap to Rosa Ela Shop Rosa Ela Shop in College Prk 40.00$ Sales Revenue
2/22/2018 Sold 22 bars soap at Dupont Circle Various Walk By Traffic 66.00$ Sales Revenue
Feb-18 Online Orders of Soap - Etsy Various per Etsy 22.00$ Sales Revenue
TOTAL REVENUES 182.00$
Expenses: (Cash Paid for all business related expenses)1/6/2018 Soap Materials Sarah's Craft House (110.09)$ Materials Expense
1/15/2018 Booth Materials for Markets M-Displays Inc (75.00)$ Marketing Expense
1/22/2018 Promotion Flyers Office Max (36.55)$ Marketing Expense
2/6/2018 License Fee to County DC Dept of Cons / Reg Affairs (115.00)$ Legal Expenses
TOTAL EXPENSES (336.64)$
PROFIT OR (LOSS) (154.64)$
Setup and
maintain for
each calendar
year to comply
with filing your
tax return
Once you begin
earning profits,
you are liable for
paying estimated
taxes during the
calendar year
9
How the Accounting Model Works
1. Assets – Resources of the Business
2. Liabilities – Obligations
3. Equity – Investments by Owners
4. Revenues – Inflows from Sales
5. Expenses – Outflows for Costs
Balance Sheet
IncomeStatement
The Accounting Model can be summarized through two equations:
Assets = Liabilities + EquityRevenues – Expenses = Profit or (Loss)
KEY POINT: Businesses invest in assets two
ways: Liabilities and Equity. Assets exist for
one single reason: To Generate Revenues
10
Chart of Accounts
Cash Money in the bank
Accounts Receivable Amounts owed to the company for sales
Inventory Pants, Shirts, Hats, Shoes, Socks, Belts, etc.
Furniture and Fixtures Storefront assets such as tables, racks, chairs, etc.
Accounts Payable Amounts that must be paid to vendors / suppliers
Loans Payable Amounts due to banks
Long Term Debt Amounts due to investors or bank against long term assets
Owners Capital Account Amount invested by the owner of the business
Retained Earnings Profits held by the business for reinvesting
Sales Revenue Amount of revenues from selling products / services
Cost of Goods Sold Cost of inventory that has been sold
Administrative Expense Cost of office support personnel
Selling and Marketing
Expense
Advertising, Sales Commissions, Trade Show Displays, etc.
Utility Expense Gas, Water & Electric expenses
The Chart of
Accounts is the
back-bone for
capturing all
transactions –
some software
programs may
refer to it as a
“Category”
You MUST
classify all
transactions;
otherwise you
have no basis for
reporting.
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Most Transactions Go Thru Cash
1-6-2014 Purchase office supplies
1-1-2014 Beginning Balance
Account Title: Cash
1-16-2014 Run Bi Weekly Payroll
1-12-2014 Deposit payment from customer
1-26-2014 Pay Monthly Electric Bill
1-22-2014 Insurance Premium Paid
$ 4,220.55
$ 142.20
1-31-2014 Ending Balance
$ 3,600.00
$ 2,640.00
$ 265.00
$ 516.30
$ 4,257.05
Debit (Left) Credit (Right)
Let’s walk through some entries . . .
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Accounting is Dual (Two Sides)
Five groups of accounts make up the
Accounting Model. If you want to
increase or decrease the account
balance, you either Debit (left side) or
Credit (right side) the account when you
post an entry.
This can be very confusing – this is why
you might want to enlist an Accountant
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Summarize the Accounting Process
Accounting
System
Financial
Statements
End of Period
Accrual Entries
Transactions
(Mostly Cash Basis)
Post to General
Ledger Accounts
Balance
Sheet
Income
Statement
Economic Activity of the
Business
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Recap Some Important Points
1. Most transactions pass through the Cash Account. Make sure you post all transactions that go through your Business Bank Account.
2. You must classify all transactions according to how you want to report financial results. Chart of Accounts
3. Accounts capture transactions. There are five major groups of accounts: Assets, Liabilities, Equity, Revenues, and Expenses
4. The five groups of accounts is the basis for presenting the financial statements of a business: Balance Sheet and Income Statement.
5. Financial Statements are prepared as of a cut off date (such as March 31st) presenting the balances as of this date.
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Comprehensive Exercise
Let’s go through a startup business and see how accounting transactions get posted over time
Three phases take place over time when starting a business:1. Fund the Business – Financing Transactions2. Acquire the Right Mix of Assets to Generate Revenues –
Investment Transactions3. Generate Revenues and Expenses – Operating Transactions
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Popular Accounting Software Programs
Quick Books > https://quickbooks.intuit.com/Fresh Books > https://www.freshbooks.com/Wave > https://www.waveapps.com/Billy > https://billyapp.com/Zip Books > https://zipbooks.com/Express Accounts > https://www.nchsoftware.com/accounting/index.htmlKashFlow > https://www.kashflow.com/GoDaddy Accounting > https://www.godaddy.com/email/online-bookkeepingClear Books > https://www.clearbooks.co.uk/Less Accounting > https://lessaccounting.com/Zoho Books > https://www.zoho.com/us/books/Xero > https://www.xero.com/us/
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Module 2
Financial Statements
Read and understand three financial statements
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Three Financial Statements Module 2
• Financial condition of a company at a given point in time
• Consists of three components: Assets, Liabilities and Owners Equity
• Profit or Loss of a company over a period of time
• The critical indicator of company performance!
• Consists of two components: Revenues and Expenses
• Sources and uses of cash over a period of time
• Consists of three activities: Operating, Investing, and Financing
Income
Statement
Statement of Cash Flow
Balance
Sheet
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Balance Sheet Module 2
Assets and Liabilities
are divided into two
groups: Current and
Long-Term
The Balance Sheet is
prepared as of a cut-
off date usually on a
calendar year basis
(January 1 thru
December 31)
20
Important Points – Balance Sheet Module 2
1. Current Assets – Does not generate a return for the business. Goal is to turn this
over and run it through cash.
2. Long Term Assets – Generates a return, drives our revenues and is important to
growth of the business
3. Liabilities in Relation to Equity – The more liabilities we have and the less equity
we have, the higher the risk of the business – inability to meet our obligations
KEY POINT: We will learn how to use ratios to assess
these important points in Module 3
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Income Statement Module 2
Gross Profit or Gross
Margin divided by Total
Sales = Gross Margin
Percent
You need to be at 35%
or 40% minimum to
earn a profit
KEY POINT:
22
Statement of Cash Flow Module 2
• Cash received from customers
• Payments made to vendors and employees
• Tax payments, rent payments, utilities, etc.
• Invest in Real Estate
• Sell Off Equipment
• Secure Long Term Financing (Loan)
• Distribute Income to Owners
23
Format – Statement of Cash Flow Module 2
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Example – Statement of Cash Flow Module 2
KEY POINT: Must get to positive Operating
Cash Flow (Stage 3)
Stage 1 – Fund the Business
Stage 2 – Make the necessary
investments to generate revenues
Stage 3 – Sell to Customers and
generate Revenues above
Expenses
25
Exercise 1 – Generate Financial Statements Module 2
Close out the accounting period and generate the Balance Sheet per the balances that are outstanding in the various general ledger accounts
Two handouts – Financial Statement Template and Account Activity for the Period
26
Extra Tips - Taxation Module 2
1. Profits are subject to taxation2. Most businesses are pass through entities (such as LLC) – Profits pass through to the
Owners who get taxed on the Profits3. Three forms of taxation on Profits to the Owner(s):
1. State Income Tax (personal tax rate)2. Federal Income Tax (personal tax rate)3. Self Employment Tax (12.4% social security + 2.9% medicare)
Due Dates for 2019 Estimated Quarterly Tax Payments:
Q1: Monday, April 15, 2019 (January – March)Q2: Monday, June 17, 2019 (April – May)Q3: Monday, September 16, 2019 (June – August)Q4: Wednesday, January 15, 2020 (September – December)
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Additional Links Module 2
My Own Online Short Courses:
https://exinfm.com/training/
Accounting in One Hour > http://inanhour.com/
Learn Accounting Online > https://www.accountingcoach.com/
Accounting Library >
http://www.businessbookmall.com/Accounting%20Internet%20Library.htm
Simple Accounting Studies > http://www.simplestudies.com/
Financial Tutorial > http://www.almaris.com/fact/fact-contents.htm
Principles of Accounting Online > https://www.principlesofaccounting.com/
Understanding Financial Statements > http://bizzer.com/images/Financial/index.html
Take the Fundability Quiz > https://www.businessloans.com/fundability/
How Contributions and Distributions Work for an LLC >
https://www.thebalancesmb.com/llc-member-capital-contributions-398638
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Take a Break
29
Module 3
Analyzing the Financials
Apply analytical techniques to better understand the financial
statements
30
Financial Terminology Module 3
Cash Flow – The amount of cash receipts and disbursements that flows in and out of the business over time. We want more cash coming in then cash going out.
Debt – Liabilities such as Loans, Mortgages, Bonds, and Commercial Paper (large public corporations). High debt levels equates to high risk.
Equity – The amount of funds invested by owners of the business + profits that are retained by the business for future growth.
Liquidity – The ability of a company to convert assets into cash for meeting short-term obligations. It is important to have sufficient liquidity to meet your short term obligations.
Leverage – How a company finances its assets; debt vs. equity
Earnings = Net Income = Profits – The residual income remaining after all expenses.
Rate of Return – How much return does the investment generate for the business; residual income after all costs. It is important for long term assets to generate positive returns.
Turn Over – The ability of a company to turn over and convert an asset into something else, such as sales or cash. It is important to turn over current assets into cash.
Working Capital – The funds available to the business within the current operating cycle, expressed as current assets in excess of current liabilities.
31
Important Concept - Turnover Module 3
Accounts
Receivable (Send a bill to the customer)
Cash
Inventory -Appliances
Sale on Credit
Eventually everything will flow through your cash account!
KEY POINT: Any asset that is “current” needs to turnover – the shorter the
cycle the better which in turn reduces
the need to finance the current operations of the business. Try and
collect the money at the Point of Sale – No Need to Collect Money
32
Three Analytical Techniques Module 3
Ratio Analysis• Divide one number by another number• Easy to benchmark and understand performance
Horizontal Analysis• Track Trends over Time• Key Trends include Sales Revenues, Net Income, Debt Levels
Vertical Analysis• Track Relationships (between accounts) over Time• Monitor proportion of debt and equity to assets – too much debt equates to higher
risk• Monitor proportion of non-operating expenses to operating expenses – most of your
costs should be operating with minimal non-operating expenses
33
Four Types of Ratios Module 3
Liquidity Ability to meet short-term obligations of
the business
Leverage Degree to which assets are financed by
debt
Asset Management Management’s ability to manage
assets
Profitability Degree of profitability generated
KEY POINT: The Balance Sheet and the Income Statement are used to calculate ratios
34
Liquidity Ratios Module 3
Current Ratio =
Quick Ratio =
Current Assets
Current Liabilities
Current Assets - Inventory
Current Liabilities
KEY POINT: Measures your ability to meet short-term obligations. Must be well
above 1.0 and above 2.0 to get a bank loan.
35
Example of Current and Quick Ratios Module 3
$ 9,714,796 / $ 7,333,157
= 1.32
($ 9,714,796 – 2,724,783
– 2,982,049) / $ 7,333,157
= .95
36
Ratios - Manage Current Assets Module 3
Accounts Receivable Turnover
Sales
Accounts
Receivable
Days Held in Accounts Receivable
A / R Turnover
365 Days
Inventory Turnover
Cost of Goods Sold
InventoryDays Held in Inventory
365 Days
Inventory Turnover
37
Examples – Asset Management Ratios Module 3
Revenues
Sales Revenues $ 620,000
Investment Revenues 115,000
Total Revenues 735,000
Expenses
Cost of Goods Sold 380,000
Assets
Cash $ 5,600
Accounts Receivable 12,400
Inventory 39,000
Total Current Assets 57,000
Inventory Turnover
$ 380,000 / $ 39,000 = 9.7
How often does Inventory turn over during the year?
Number of Days Held in Inventory
365 / 9.7 = 37 days
How many days does it take to convert Inventory into Accounts Receivable?
38
Measuring Risk – Debt vs. Equity Module 3
Debt to Equity
Debt to Assets
Total Liabilities
Owners Equity
Total Liabilities
Total Assets
Greater than 100% means company is using more debt than equity – more risk to the company
Greater than 50% means the company is using more debt than equity – more risk to the company
KEY POINT: The more liabilities (debt) you take on in relation to your own
investment (equity), the more riskier the business
39
Examples of Leverage (Risk) Ratios Module 3
Proportion of Debt (Total Liabilities) to Equity in Funding the Business:
Debt / Equity or $ 1,000 / $ 500 = 2(you have 2 times more debt vs. equity)
Proportion of Debt used to finance the assets of the business:
Debt / Assets = $ 1,000 / $ 1,500 = .67% of financing of assets is in the form of debt (.33% is equity – owner)
40
Know Your Margins Module 3
Profit Margin
Net Income
Sales
Operating Margin Sales
Operating Income
Return on Assets
Net Income
Total Assets (1)
Gross Margin
Gross Profit
Sales
(1) Average balances for the year are often used
KEY POINT: You DO NOT have a business unless you have sufficient margins –
you cannot realize a profit without a Gross Margin above 35%
41
Examples of Margin Ratio Calculations Module 3
Gross Margin = $ 98,841 / $ 524,359 = 19%
Operating Margin = $ 26,765 / $ 524,359 = 5%
Profit Margin = $ 20,166 / $ 524,359 = 4%
In this example, it will be hard for the
business owner to make a solid profit to
invest back into the business or draw
money to cover personal expenses.
42
Horizontal Analysis – Look at Trends Module 3
2004 2005 2006
Sales Revenues $ 120,000 $ 135,000 $ 146,000
Operating Expenses $ 68,000 $ 73,000 $ 78,000
Net Income $ 22,000 $ 26,000 $ 29,000
KEY POINT: Show
your trends lines
visually – much
easier to see what
direction you are
moving financially
43
Vertical Analysis – Income Statement Module 3
%
Revenues Breakdown
Sales Revenues 4,000.00$ 100%
Total Revenues 4,000.00
ExpensesCost of Goods Sold 1,320.00 33%
Office Supply Expense 680.90 17%
Depreciation Expense 458.33 11%
Interest Expense 278.96 7%
Tax Expense 312.50 8%
Total Expenses 3,050.69 76%
Net Income 949.31$ 24%
Easy to
understand
your cost
breakdown
44
Vertical Analysis – Balance Sheet Module 3
Assets %
Current Assets Breakdown
Cash 32,714.60$ 32%
Accounts Receivable -$ 0%
Inventory 9,680.00$ 9%
Total Current Assets 42,394.60 41%
Long Term Assets
Furniture & Fixtures 6,104.50 6%
Warehouse Facility 55,000.00$
Less Accumulated Depreciaiton 458.33$
Net Warehouse Facility 54,541.67 53%
Total Long Term Assets 60,646.17 59%
Total Assets 103,040.77 100%
Minimize and Turnover
Generate a Return
45
Benchmark Your Performance Module 3
RMA (Risk Management Association) Annual Statement Studies – Financial Ratios
2017 Almanac of Business and Industrial Financial Ratios, 48th Edition
1. Know your NAICS Code: 448110 = Men’s Clothing Retail448120 = Women’s Clothing Retail448140 = Family Clothing Retail448150 = Clothing Accessories448210 = Shoes Retail448310 = Jewelry Retail
2. Know your size by total assets and total sales
1. Know your Industry Code: 315215 = Clothing Manufacturing448115 = Clothing Retail Store
2. Know your size by total assets and total sales
http://www.bizstats.com/
https://www.sba.gov/tools/sizeup
Two useful links:
46
Exercise 2 – Let’s Calculate Some Ratios Module 3
Calculate two ratios per the Balance Sheet on this slide:
Current Ratio = Current Assets / Current Liabilities
Debt / Equity Ratio = Total Liabilities / Total Equity
47
Exercise 2 – Benchmark our Ratios
Now let’s benchmark our calculations – refer to handout:1. NAICS Code = 4481202. Size of Business = Under $ 500,000 in Assets
Ratio Your Company(prior slide)
Industry Average
Current Ratio
Debt to Equity
Module 3
48
Exercise 2 – More Benchmarking Module 3
Now let’s benchmark against the other source:1. Industry – We make clothing (Apparel Manufacturer)2. Size of Business = Under $ 500,000 in Assets
Type of RatioYour
CompanyIndustry Average
Current Ratio (current assets of $ 66,000 / current liabilities of $ 14,000)
4.7
Asset Turnover (Sales of $ 180,000 / Total Assets of $ 120,000)
1.5
Return on Assets (Net Income of $ 16,000 / $ 120,000)
13%
49
Wrap Up and Summarize
50
Key Points to Being Financially Smart
1. Must have an accounting process to create financial statements2. Review financial statements at least quarterly – tax payments3. Current Assets must turnover and go through Cash quickly!4. Most businesses need a Gross Margin of 40% or higher5. Three techniques to analyze financial statements:
1. Ratios – One number in relation to another number per the financials
2. Horizontal – Trends over Time3. Vertical – Percentage breakdown of financials that can be
benchmarked
51
A Few Useful Links
Finance and Accounting Seminars > https://www.seminarinformation.com/search.cfm?tp=7Teach Me Finance > http://www.teachmefinance.com/Finance World > http://web.utk.edu/~jwachowi/wacho_world.htmlStudy Finance > http://www.studyfinance.com/Principles of Finance > http://educ.jmu.edu//%7Edrakepp/principles/
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Contact Information
Matt Evans, SCORE Mentor
Email: [email protected]
Appointments: https://score-silver-spring-library.as.me/schedule.php
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