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