UNIT 6: Business Finance

Lesson 1: Funding a Business

Vocabulary

Fund: is an amount of money. Usually, a fund has a specific purpose and is stored in one place, such as a bank account.

Debt funding: is when you get money by borrowing it and promising to pay it back later.

Debt capital: is the money you raise through debt funding.

Equity funding: is when you offer to share ownership with investors in exchange for money.

Equity capital: is the money you raise through equity funding.

Angel investors: are people who provide money to a business in exchange for debt or equity.

Angel networks: combine money from different investors.

Startup costs: are the costs of starting up a business and keeping it going until it can pay for itself.

Operating expenses: are the costs of running a business.

Cash reserve: is money your company has in the bank.

Cash flow: is the movement of money in and out of a business.

Forecasting: is predicting

Sources of Funding

• The entrepreneur usually invests both time and money into the business.

• Many entrepreneurs don't have enough money to fund the business completely on their own, so they usually find other sources of funding.

• Family and friends of the entrepreneur may be willing to fund the business by providing a loan or by giving money in exchange for equity.

• Individual investors the entrepreneur doesn't know personally may also be willing to invest in the company.

• Banks and other lending institutions are a common form of small business debt funding.

• They provide short-term and long-term loans, lines of credit, credit cards, and other debt options for small businesses.

Types of Costs

• Buying or renting a location can be a big cost. Some locations even require remodeling, decorating, or building in order to work for your business.

• If you are renting a location, you will probably have to pay a deposit in addition to your first month's rent.

• Some types of companies can be run from the home, which can save a lot in location costs. This works well for small online companies or for any company that doesn't require much space.

• Consider what you will have to pay in utilities for the company.

• Some common utilities for a small business include telephone, Internet, heating or air conditioning, electricity, water and sewer, and waste management services.

• If you are renting a space, your utilities will probably be higher than if you are working from your home.

• Determine how many employees your company will have, and when you plan to add more.

• This will depend on what type of company you are starting. You might need to start with a number of employees, or you may be able to start the company on your own.

• Many companies start with just one employee--the entrepreneur. You will probably want to pay yourself a salary. Figure out how much you will pay to yourself and to any other employees.

• Determine what materials you will need to produce your product or provide your service, where you will get them, and what they will cost.

• If your company buys and resells items, you will buy and store inventory, such as jewelry, souvenirs, or shoes.

• If your company produces a product, you will buy the materials needed to make the product.

• If your company provides a service, you will probably also need some supplies

• The equipment you need will depend on the type of business you are starting.

• When choosing a supplier of equipment, the supplier's maintenance and repair service of equipment is particularly important, especially if the equipment breaks down

• You may also need office supplies for the administrative, marketing, accounting, and other departments of your business.

• Most likely, you will want to spend part of your startup funds on marketing and promoting your business.

• To successfully market and advertise your product or service, you will probably spend some money on things like ads, press releases, signs, and trade shows.

• Your company will probably have some administrative costs, such as a business license, permits, insurance, taxes, and legal fees.

• Finance costs are easily overlooked, but if you get debt funding for your business, you will have to make payments to the lender, plus interest.

• Try to keep enough money in your reserve to pay your company's expenses for a certain length of time, in case you have an unexpected financial need or in case business slows down.

• Depending on the type of business you are in, you might want a three-month cash reserve, which is enough to cover three months' worth of expenses, or you might want even more.

• A cash reserve can help your company survive short-term problems. A line of credit is another helpful tool in dealing with short-term cash needs.

Lesson 2: Accounting

Vocabulary

Financial health: is how well the company is doing financially.

Revenue: is the money that flows into your company.

Revenue stream is a particular way of creating revenue.

Expenses: are financial costs being paid by the company.

Gross profit: is calculated by subtracting the cost of goods sold (supplies and labor) from the total revenue.

Net profit: is calculated by subtracting all expenses from the total revenue.

Assets: are things your company owns that are worth money.

Liquid assets are easily turned into cash.

Illiquid assets are assets that are difficult to turn into cash.

Accounts receivable: are amounts of money that are owed to the company by customers

Factoring: is when the company sells its accounts receivable to another company.

Factor: the company that buys the accounts

Liabilities: are amounts of money that the company owes.

Accounts payable: is another part of a company's liabilities.

Equity: is the value of the company's assets after all creditors are paid except for those with ownership interest in the company.

Cash flow: is the flow of money in and out of the company.

Accounting: is the recording, reporting, and analyzing of financial information.

Recording: means writing it down, either on paper or on a computer.

Receipt: is a record of a transaction that already happened.

Invoice: is a record of a product or service that was provided but not yet paid for.

Bookkeeping: the recording of financial transactions

Ledger: is the main book for recording transactions.

Generally accepted accounting principles (GAAP): is the set of standards commonly used for accounting in the U.S.

Cash basis accounting: records income when cash is received, and it records expenses when cash is paid out.

Accrual basis accounting: is the standard accounting type defined by GAAP.

Fixed assets: are physical items such as real estate or equipment.'

Accounting Software

• There are computer software programs designed specifically for accounting, such as QuickBooks®, Peachtree®, and many others. Software programs designed for accounting are called accounting software.

• The software is set up to help you with accounting and can perform many calculations automatically.

• You enter in your financial information, and the computer stores that information for you. It also helps with analyzing and reporting that information.

• Because accounting software can perform calculations automatically, it is unlikely to make mistakes.

• This avoids any human made mathematical errors that might happen if the data were stored and analyzed on paper.

• Accounting software won't help you avoid errors caused by entering information incorrectly, so it's still important to be accurate.

• Accounting software can be helpful in arranging and analyzing data into financial reports. You'll learn more about financial reports later.

• If you keep your accounting records on paper and create reports by hand, they will be more complicated to make, and not as easy to share with other people.

• Information stored on a computer is easier to share with other people in other places. The data can be shared over the Internet.

• More than one person can be entering data into the same system at the same time.

• Reports produced through accounting software are also easier to share, because it's easy to share with people through e-mail instead of being limited to printed copies

• Keeping financial records on a computer is usually safer than keeping them on paper. If a paper accounting journal is lost or damaged, there might not be an easy way to recreate it.

• If a computer accounting journal is lost through computer failure, that information can be recovered, as long as you have a good system for backing up your data regularly.

• It's important to back up data by saving it onto other storage devices, such as CDs, DVDs, zip drives, or other data storage devices.

• It can be a little trickier to make sure your data is protected if you store it on a computer. If your data is all stored in a printed notebook, you can probably lock the notebook up to make sure it doesn't get taken by someone without authorization.

• On a computer, you'll need to put protections and passwords in place so that people can't access the data unless they are authorized.

Lesson 3: Bookkeeping and Reporting

Vocabulary:

Single-entry bookkeeping: is when a company records one item in its ledger for each transaction that is made.

Double-entry bookkeeping: is more complicated to learn than single- entry bookkeeping, but it is the standard type of bookkeeping used by many companies.

Debits: are transactions that bring money and other assets (things that are worth money) into the company.

Credits: are transactions that take money out of the company, in the form of things like expenses, debt (liabilities), and equity.

Accounting equation: Assets = Liabilities + Owner Equity.

Chart of accounts: The list of account types and numeric codes the company decides to use

Income statement: is a document that shows the company's revenue and expenses during a specific time period, such as a year, month, or quarter (three months).

Balance sheet: shows your company's finances on a specific date in time.

Statement of owners' equity: focuses just on the owner equity.

Cash flow statement: tracks the flow of cash in and out of the company. It focuses on cash instead of income.

Operating activities: are revenues and expenses involved in running the business.

Investing activities: are cash transactions related to the company's financial investments.

Financing activities: are transactions that bring cash in or out based on borrowing and lending.

Lesson 4: Risk Management

Human risks: are risks created by people.

Natural risks: are risks caused by nature.

Economic risks: are risks caused by the economy.

Pure risk: is a risk of something negative happening.

Speculative risk: is a risk that has the possibility of profit or loss.

Insurance: is a type of risk protection that a person or company can purchase from an insurance company, also called an insurance provider.

Insurance premium: is the amount that the person or company must pay the insurance company in order to get insurance.

Insurance coverage: is the amount that the insurance company is willing to pay.

Insurance plan: is the agreement you have with the insurance company that includes all the details of your coverage.

Insurable risks: are risks that insurance companies are willing to provide insurance for.

Uninsurable risks: are risks that insurance companies are not willing to provide insurance for.

Risk management: is the attempt to protect against risk by identifying and minimizing it.

Controllable risks: are risks that a small business can control internally, such as its choice of employees, internal organization, policies, and procedures.

Uncontrollable risks: are risks that the business can't control, such as external economic factors, natural disasters, and so on.

OSHA (Occupational Safety and Health Administration): is a U.S. government agency that creates and enforces standards for workplace health and safety. These standards are called health and safety regulations.

Health and safety regulations: are rules for employers and employees to follow in order to keep their workplace healthy and safe.

Quality control: is when you make procedures to control the quality of your product or service.

Contract: is a written agreement that can be legally enforced.

Opportunity cost: of an investment is equal to the value of the next most valuable opportunity.

Sunk costs: are expenses you spent money on in the past that are unrecoverable, meaning you can't get that money back.

Marginal cost: is the opportunity cost to the company of producing each additional unit of a product.

Marginal benefit: is the amount that people are willing to pay for each additional unit of a product or service.