Entrepreneurship - Chapters 12, 13, 14 - Unit 2
Contractors
exist to complete tasks that have a clear beginning, middle, and end
Cash Flow Management Is
having enough cash available to meet business need; being able to obtain cash quickly from a variety of sources; understanding how (and when) cash is used by your business; closely monitoring accounts receivable for late; providing motivation for customers to make prompt payments; taking advantage of prompt payment discount only when it is cheaper than borrowing
Accounting Equation
he statement that assets equal liabilities plus owner's equity; Assets = Liabilities + Owners' Equity
Pro Forma
indicates estimated or hypothetical information
Overtime
is usually much less expensive than hiring more full-time workers during times of increased business
Cash Flow Management Is Not
keeping large sums of cash on hand at all times; obtaining all cash from business operations; assuming that all sales and expenses happen instantly; trusting customers to pay when the bill comes due; providing lengthy credit terms without charging interest; allowing large sums to "sit" in non-interest-paying account
Student Interns
often provide high talent and strong motivation at a low cost to you
Subcontract
parts of your business that are not your core competency
SaaS
refers to an Internet based program that you would use in work or leisure; paid for by time frame, project, or some measure of usage; stands for Software as a Service
Computerized Systems
simplify the accounting process by providing automatic error checking, entry screens that look like the common business forms, and automatic production of financial statements and management reports
Rent Space/Equipment or Work from home
that is unused or underutilized by other ongoing businesses
MACRS Rate
the Modified Accelerated Cost Recovery System; lets taxpayers depreciate more of the cost earlier
Outsource
the production of your service or product
Managing Cash Flow
1. Cash can be obtained by selling the products and services of the business and collecting cash from customers; Called cash flow from operations 2. Cash can be obtained from investments the business has made, such as stocks, bonds, land, buildings, or equipment; called cash flow from investing 3. A business may obtain cash though financing
The Four C's of Borrowing
1. Character of the managers of the business 2. Capacity of the business to repay both principal and interest on time 3. Conditions of the industry and economy in which the business operates 4. Collateral that can be used to secure the loan.
Financing with Debt: Getting a Loan for Your Business
1. Direct loans of cash 2. Guaranteeing loans made by commercial banks 3. Reducing taxes by allowing interest to be deducted
Most Common Ways Employees Steal Cash
1. Larceny and embezzlement 2. Skimming 3. Phony disbursements
Customer Funding of Your Business
1. Matchmaker models (like Airbnb) 2. Pay-in-advance models (like Threadless.com) 3. Subscription models (like Netflix) 4. Scarcity-based models (like Groupon or Gilt) 5. Service-to-product models22 (like BaseCamp or SaaS like Office 365)
When Giving a Gift
1. Put your agreement into writing 2. If it is a gift, have the agreement specifically say so 3. If it is a loan, have the agreement specify the exact interest and payment terms 4. If it is an equity investment, consider nonvoting stock
Purposes of Money
1. To facilitate exchanges of unlike assets 2. To measure the value of things, both tangible 3. To keep track of wealth
Obvious Comparisons of Financial Management Tools
1. With your planned position and results (your master budget) 2. With prior years' position and results 3. With the position and results of other firms
Why Use Equity Capital
1. You will reduce your own exposure to financial loss 2. Your business will not have increased costs in the form of interest 3. Bringing outside investors into an existing business can often reenergize it by providing new ideas, procedures, and processes
Primary Causes of Cash Flow Problems
1. difficulty collecting money due from customers 2. seasonal variation in sales 3. unexpected decreases in sales
Master Budget
A budget which consists of sets of budgets that detail all projected receipts and spending for the budgeted period; also referred to as a comprehensive budget
Credit Reporting Agency
A business that collects, collates, and reports information concerning an entity's use of debt
Public Business
A business that has its stock bought and sold on an organized stock exchange, such as the New York Stock Exchange
Financial Flexibility
A business's ability to manage cash flows in such a manner that the company can respond appropriately to unexpected opportunities and needs
Cash Budget
A cash budget identifies when, how, and why cash is expected to come into the business, and when, how, and why it is expected to leave
Interest
A charge for the use of money, usually figured as a percentage of the principal
Expense
A decrease in owners' equity caused by consuming your product or service
Growth Trap
A financial crisis that is caused by a business growing faster than it can be financed
Budget
A financial plan for the future, based on a single level of operations; a quantitative expression of the use of resources necessary to achieve a business's strategic goals
Financial Accounting
A formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, banks, and regulators
Corporation
A legal "artificial" entity that is formed by filing specific documents with a state government
Limited Liability Company (LLC)
A legal form of business organization that is created by filing required documentation with a state government; Have a choice, under federal tax law, of being taxed as either corporations or partnerships
Debt
A legal obligation to pay money in the future
Tax Abatement
A legal reduction in taxes by a government
Cost-Volume-Profit Analysis
A managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales (volume) to maximize profits; Variable, fixed costs
Liquidity
A measure of how quickly a company can raise money through internal sources by converting assets to cash
Financial Leverage
A measure of the amount of debt relative to total investment
Timing Purchases
A method of controlling the timing of cash outflows that is invisible to suppliers and vendors
Overdraft
A negative balance in a depositor's bank account
Discounts for Prompt Payment
A reduction in sales price provided to credit customers for paying outstanding amounts in a timely manner
Charge Back
A reduction in the bank account of a merchant by a credit card company
Cash Disbursements Budget
A schedule of the amounts and timings of payments of cash out of a business
Cash Receipts Budget
A schedule of the amounts and timings of the receipt of cash into a business
Cost of Goods Sold Budget
A schedule that shows the predicted cost of product actually sold during the accounting period
Nonsufficient Funds
A situation that occurs when a check is returned to a depositor because the writer of the check did not have a bank available balance equal to or greater than the amount of the check
Cash Flow Statement
A statement of the sources and uses of cash in a business for a specific period of time
Balance Sheet
A statement of what a business owns (assets), what it owes to others (liabilities), and how much value the owners have invested in it (equity)
Income Statement
A statement that lists revenues and expenses and shows the amount of profit a business makes for a specified period of time
Angel Investor
A wealthy individual who invests in companies in relatively early stages of development
Managerial Accounting
Accounting methods that are specifically intended to be used by managers for planning, directing, and controlling a business
Setting Up an Accounting System
Accounts Payable; Payroll; Fixed asset; Inventory; Credit card sales; Accounts receivable; Insurance register; Investments; Leasehold
Operating Activities
Activities involved in producing and selling goods and services
Financing Activities
Activities through which cash is obtained from and paid to lenders, owners, and investors
Payables
Amounts owed to vendors for merchandise or services purchased on credit (see receivables)
Receivables
Amounts that are owed to a business for merchandise that was sold on credit (see payables)
Tax Accounting
An accounting approach based on specific accounting requirements set by governmental taxing agencies
Activity-Based Cost Estimates
An accounting method which assigns costs based on the different types of work a business does in order to sell a particular product or service
Reconciling
An accounting process that identifies the causes of all differences between book and bank balances
Clearinghouse
An entity that processes checks and electronic fund transfers for banks and other financial organizations
Revenue
An increase in owners equity caused by selling your product or service
Foundation
An institution to which private wealth is contributed and from which private wealth is distributed for public purposes
Community Development Organization
An organization authorized by the SBA to make insured loans to small businesses that are expected to increase economic activity within a specific geographic area
Accelerator
An organization that supports startup technology businesses by providing inexpensive office space, a variety of support services, and resources; Most are associated with universities
Short-Term Debt
Any debt that must be paid in less than one year from the date of the financial statement on which it is reported
Bearer
Any person or business entity who possesses a security
Internal (cost) Factors
Aspects of or choices within the business which could cause the business's costs to change
External (cost) Factors
Aspects of the world outside the business which could cause the business's costs to change
Cash Equivalents
Assets that may be quickly converted to cash
Factoring Receivables
Borrowing money secured by a firm's accounts receivable
Deposits and Progress Payments
Cash payments received before product is completed or delivered
Minimize Overhead Costs
Cloud computing; Virtual storefronts; Business incubators; Business office co-ops; Co-working spaces
Comprehensive Budget
Comprehensive budgets, also often referred to as master budgets, are sets of budgets that detail allprojected receipts and spending for the budget period
Tax Credits
Direct reductions in the amount of taxes that must be paid, dependent upon meeting some legal criteria
Word of Mouth
Discounts, Local signage, Facebook, Cooperative advertising
Crowdfunding for Equity
Document your business; Make a business plan; Create a compelling story; Create a professional-looking video; Develop a list of potential investors
Reasons Bootstrapping is So Common
External equity capital is not available for most small business start-ups; Banks do not loan to start-up businesses; Owners often do not want to share ownership; Owners usually want to be their own bosses; Owners typically do not want to be responsible to others for losses of the business
Equity Capital from the Owner's View
Financing with equity is (1) expensive and (2) guaranteed to create problems of control and decision making; Suppose you sell half your business to raise capital. You have just sold half of all your future profits, half of all your future growth, half of all your future wealth
Financial Statements
Formal summaries of the content of an accounting system's records of transactions
Grants
Gifts of money made to a business for a specific purpose
Long Term
In accounting, long term refers to an asset that will still have value to the business more than one year from now or a liability that will still be owed more than one year from now
Account
In terms of accounting practice, an account is a chronological list of all additions to and subtractions from a single type of asset (e.g., cash, receivables, loans outstanding)
Five Common Financial Statements
Income statement; Statement of retained earnings; Statement of owner's equity; Balance sheet; Cash flow statement
Liabilities
Legal obligations to give up things of value in the future
Unsecured Debt
Loans that do not allow a lender to seize specific assets in the event of nonpayment
Secured Debt
Loans that provide the lender with the legal right to seize specific assets in the event of nonpayment; Most automobile loans are secured debt and if you don't make your payments, your car will be repossessed
Debt Capital
Money borrowed for the purpose of investment in a business
Equity Capital
Money contributed to the businesses in return for part ownership of the business
Outside Equity
Money from selling part of your business to people who are not and will not be involved in the management of the business
Demand Deposits
Money held in checking and savings accounts
Cash
Money that is immediately available to be spent
Commercial Paper
Notes issued by credit-worthy corporations
Why Do Accounting
Only two reasons to do accounting: 1. To produce information that is useful to you for managing your business 2. To meet legal or contractual requirements
Equity Capital from the Investor's View
Owners and investors want to make money > Lenders expect a return on this money; To get money from other people, you've got to show them that your business probably can make gains for them; Growth potential is a primary concern for equity investors
Dividends
Payments of profits to the owners of corporations
Trade Discounts
Percentage discounts from gross invoice amounts provided to encourage prompt payment
Cash Flow Management
Planning and tracking the amounts and timing of money to be received and paid during thebusiness cycle
Publicity
Press releases, Public speaking, Donate your product or service
Small Business Investment Companies
Private businesses that are authorized to make SBA insured loans to start-ups and small businesses
Why Accounting Matters to Small Business (C12)
Proves what your business did financially; Shows how much your business is worth; Banks, creditors, development agencies, and investors require it; Provides easy-to-understand plans for business operations; You can't know how your business is doing without it
Depreciation
Regular and systematic reduction in income that transfers asset value to expense over time
Uses of Financial Accounting
Reporting to Outsiders; Record Keeping; Taxation; Control of Receivables; Analysis of Business Operations
Noncore Projects
Revenue-producing tasks and activities related to, but not part of, the primary strategy of a business
Noncash Incentives
Rewards that do not require payment of cash, such as stock options, compensating time off, or added vacation days
Microlender
SBA-approved partners who offer SBA-guaranteed microloans to eligible small businesses; Require much less paperwork than regular SBA or bank loans, and are for amounts under $50,000
Collateral
Something of value given or pledged as security for payment of a loan; May consist of financial instruments, such as stocks, bonds, and negotiable paper, or of physical goods, such as trucks, machinery, land, or buildings
Asset
Something the business owns that is expected to have economic value in the future
Marketable Securities
Stocks and bonds that are traded on an open market
Financial Strength
The ability of a business to survive adverse financial events
Going Concern Concept
The accounting concept that a business is expected to continue in existence for the foreseeable future
Permanent Accounts
The accounts of assets, liabilities, and owners' equity, excluding accounts for revenues and expenses
Currency
The bills and coins printed by governments to represent money
Business Entity Concept
The concept that a business has an existence separate from that of its owners
Articulate
The concept that information flows from the income statement through the statements of retained earnings and owners' equity to the balance sheet
Variance
The difference between an actual and budgeted revenue or cost
Owners' Equity
The difference between assets and liabilities of a business
Weighted Average Cost of Capital (WACC)
The expected average future cost of funds
Economy of Scale
The idea that it is cheaper (per item) to make many of an item than few
Risk
The level of probability that an investment will not produce expected gains
Sources of Financing for Small Businesses (C14)
The number one source is from the owners (or potential owners) themselves; The other major sources include family and friends, credit cards, trade credit, banks, and other commercial lenders
Gain on Investment
The percentage amount that the payout of an investment differs from original cost; Calculated as: (payout − investment + dividends)/ investment
Cost of Capital
The percentage cost of obtaining future funds
Breakeven Point
The point at which total costs equal gross revenue
Consignment
The practice of accepting goods for resale, without taking ownership of them and without being responsible to pay prior to their being sold
Barter
The practice of trading goods and services without the use of money
Variance Analysis
The process of determining the effect of price and quantity changes on revenues and expenses
Investing Activities
The purchase and sale of land, buildings, equipment, and securities
Optimum Capital Structure
The ratio of debt to equity that provides the maximum level of profits
Generally Accepted Accounting Principle (GAAP)
The standardized rules for accounting procedures set out by the Financial Accounting Standards Board and used in all audits and submissions of accountingreports to the government
Retained Earnings
The sum of all profits and losses, less all dividends paid since the beginning of the business
Company Book Balance
The sum of cash inflows and cash outflows recorded in the firm's accounting records
Bank Ledger Balance
The sum of deposits and withdrawals recorded in a bank's accounting records
Bank Available Balance
The sum of money that has actually been received and paid out of a depositor's account
Cash-To-Cash Cycle (Operating Cycle)
The time that is required for a business to acquire resources, convert them into product, sell the product, and receive cash from the sale
Variable Costs
Those costs that change with each unit produced, for example, raw materials
Fixed Costs
Those costs that remain constant regardless of quantity of output, for example, rent
Diversify
To invest in multiple investments of differing risk profiles for the purpose of reducing overall investment risk
Decision Making
To make good decisions we need :1. Good information 2. Efficient ways to condense information so it is understandable 3. Methods to help compare alternatives
Partnership
Two or more people cooperating to conduct a business enterprise
Fair Credit Reporting Act
U.S. federal legislation specifying consumers' rights vis à vis credit reporting agencies
Bootstrapping
Using low-cost or free techniques to minimize your cost of doing business
Gaming the Payment Process
Using methods to appear to be paying bills on time, when in fact payment is being delayed or avoided
Gift
Valuable assets or services donated to the business without any obligation to repay or give up any ownership interest
Money (C13)
a medium of exchange accepted by the community or what people buy things with and sell things for; provides a standard for measuring value, so that the worth of different goods and services can be compared; A store of value that can be saved for later purchases