Gathering Funding
Most businesses require some kind of startup capital. Have you considered how you will raise money for your entrepreneurial adventure?
In this session, we’ll share some funding options that you may want to consider. We’ll also explore some financial reports that you should be familiar with.
The Basics of Financial Statements
Many entrepreneurs find the financial aspects of their new business the most overwhelming part to deal with. It’s often wise to have the help of a professional accountant. However, you also need to understand the basic reports that you will be working with. Here is a quick overview.
The Income Statement
The income statement can also be called a profit and loss statement or operating statement. This is a summary of the income and expenses of a business during a certain period: monthly, quarterly, or annually. If the company has more income than expenses for a certain period it has net income (a profit). If the expenses exceed income, the company has a net loss.
Income can be broken into two broad categories: service income and sales income. The difference between the two lies in the need to consider inventory costs. Service income is derived from performing a service while sales income is derived from selling a product. In general, service companies have staff that perform a service for a customer, while sales companies have product that they sell.
With service income, the profit can be determined simply by deducting expenses associated with performing the service. With sales income, however, you must consider the cost of creating the product (raw materials, labor, overhead, etc.). This inventory cost is referred to as the cost of goods sold.
Income Statement Equation
The income statement equation typically looks like this:
- Revenue is what the business earned from the sale of goods and services during this period.
- Expenses are bills (phone and Internet bill, insurance, payroll, advertising, etc.) incurred during this period.
- Net income or loss is the net financial result of the business efforts during that period. It must be added to the Equity portion of the balance sheet, which we will discuss in a moment.
Some examples of the types of accounts that influence net income and are reported on the income statement include:
- Revenue
- Advertising expenses
- Repair expenses
- Utilities expenses
- Wage expenses
Sample Income Statement
| Acme Widgets Inc.Income StatementFor the Month Ended February 28, 20xx | ||
| REVENUE | ||
| Widget Sales | R20,000 | |
| Widget Installation | R1,500 | |
| Interest Income | R500 | |
| Total Revenue | R22,000 | |
| EXPENSES | ||
| Rent | R4,500 | |
| Utilities | R1,200 | |
| Advertising | R8,000 | |
| Wages | R5,000 | |
| Total Expenses | R18,700 | |
| NET INCOME (LOSS) | R3,300 | |
The Balance Sheet
The purpose of a balance sheet is to show what a company owns and owes as of a specific date. Income statements are prepared “for the period ending” and balance sheets are prepared “as at” a certain date.
The balance sheet summarizes what the business owns and compares it to what the business owes. It does so in a standard format to make it easy to see what kind of financial shape the business is in. If a business has more assets than liabilities, that’s a good sign. On the other hand, if a company has more liabilities than assets, it might be a sign of trouble.
Balance Sheet Equation
- Assets are anything that the business owns. Some examples: cash, office equipment, vehicles, tools, real estate, buildings, and land. Bills that are prepaid (such as monthly insurance premiums) are also considered an asset, as are accounts receivable (money that others owe to you).
- Liabilities are anything the business owes to others, including banks and suppliers. Money which a company owes as a result of its ongoing trading are generally called accounts payable.
- Equity is often a measure of what the business is worth. It is the combination of profits and money invested in or withdrawn from the company by its owners.
This is what people refer to as balancing the books: ensuring that this equation is always in balance.
- Accounts typically reported on the balance sheet include:
- Accounts receivable (money owed to the company but not collected)
- Cash
- Equipment
- Accounts and notes payable
- Prepaid items
- Unearned revenue
- Vehicles, land, and buildings, and their accumulated, individual depreciation (decrease in value)
The term consolidated balance sheet refers to the “consolidation,” or adding together, of individual balance sheets of various related companies into one balance sheet which shows the financial position of the entire group of companies.
Current vs. Fixed Assets
On a balance sheet, the assets of a business are generally broken down into two groups: current assets and fixed assets.
Current assets are generally considered to be anything that will be converted into cash within one year, such as cash, accounts receivable, and inventory. Current assets continually turn over through the company.
Fixed assets are more permanent in nature. This includes vehicles, equipment, machinery, land, and buildings. They represent an investment in items that are necessary to carry on its normal operations. Fixed assets can also revolve (to purchase new equipment or update technology, for example) but usually they revolve very slowly.
Liquidity measures how quickly a company can convert its assets into cash. An ample cash balance provides security that the company can meet its obligations. The easier the conversion is, the more liquid the asset. Here is a list of current assets in order from most to least liquid:
- Accounts receivable
- Inventory
- Fixed assets
Cash Flow Statement
This shows the flow of cash for an accounting period. This statement is a bridge between the cash accounting method and the accrual accounting method in that it analyzes what transactions impacted cash and what were accruals.
The cash flow statement is usually divided into three sections.
Operating
- Cash flow for day-to-day operations
- Examples: Customer revenue, tax payments, interest, supplies purchased
Investing
- Cash flow generated from or consumed by assets
- Examples: Sale of a vehicle or purchase of a building
Financing
- Cash flow in from selling stocks or bonds or borrowing
- Cash flow out from purchasing stock back, paying out dividends, and repaying borrowed money
Statement of Retained Earnings
This statement shows how much of the company’s profits were kept inside the company and not paid out in dividends.
Sample Statement of Retained Earnings
| Statement of Retained Earnings for Acme Widgets Inc.As At February 28, 20xx | |
| Opening retained earnings | 0 |
| Add net income for the period | R3,300 |
| Total Retained Earnings | R3,300 |
| Minus dividends paid | (300) |
| Retained earnings | R3,000 |