Chapters 1-3 Review
New Venture Development
You will know…
• 5 basic functions of a manager
• Difference between strategic plans and functional
plans
• 3 factors that must be addressed when establishing
goals
• Financial goals of a for-profit company
• 3-step process to take when using control
• How to compare and contrast different forms of
business ownership
• The basic components of SWOT analysis
• What goes into a business plan
5 functions of managing
1.
2.
3.
4.
5.
Planning
Organizing
Staffing
Directing
Controlling operations
Planning
• A systematic process that takes from a current
state to some future desired state
• Strategic planning is development of long-term
(> 1 year) plans for the business
• Functional planning relates to the different
functional areas that are driven by the strategic
plan
• Financial planning is determining monetary
requirements
• Goal setting forces you to identify measurable
objectives that are achievable and have timelines
Organizing
• Defining structures, responsibilities, and
lines of communication
• This comes from the functional plan:
–
–
–
–
Who will do what?
What skills they need?
When do we have to accomplish specific tasks?
How do we accomplish them?
Staffing
• Obtaining the most capable personnel to
implement the business plans
• Each functional plan involves people
assigned to specific jobs – you will have to
write the job requirements (education,
personal skills, training) and the job
description
Directing
• Providing proper guidance and direction to
others who will accomplish the
organizational mission
• Good managers and employers have good
long-term, loyal employees
• Directing in the financial arena is done
through the budgeting process
Controlling
A three-step process that involves:
1. Establishing a standard of measurement
2. Measuring actual performance against the
standard
3. Taking corrective action when actual
performance deviates from established
standard
Starting a business
• One of the first decisions is legal formation
(no “business” until owners establish it)
• Owner must determine how much money is
needed to start the business (owner’s equity,
outside financing)
• SWOT analysis
SWOT analysis
• Strengths, weaknesses, opportunities, and
threats
• Strengths: the core competencies of your
business – succeed because you do these
better than competitors
• Weaknesses: areas where your business
needs improvement (old equipment,
untrained workers, no $)
SWOT analysis
• Strengths, weaknesses, opportunities, and
threats
• Opportunities: factors that exist in the
business environment that will help the
business grow
• Threats: factors…that will impede the
business
SWOT analysis
• Note: opportunities and threats are also
shaped by your own strengths and
weaknesses
• “Given my superior ability to write apps for
iPhones, I can take advantage of the
growing base of iPhone owners who use
apps”
The business plan
• Tend to cover a common format to make it easier
for investors to read
• The executive summary is everything. It is the
first thing readers will see, but you should write it
last
• You must convince your audience in two pages or
less that they need to read the rest of your plan
• Autoshop example on wiki space
Stages of business growth
• Seed/start-up: the initial stage; the company has a
concept and is normally < 18 months old
• Early: less than 3 years old, product or service is
commercially available
• Expansion: older than 3 years old and has high
revenue growth, but may not show a profit
• Later: product or service is widely available;
generates revenue and has positive cash flow
Sources of financing
• Personal assets: savings, investments, credit cards,
home-equity loans
• Equity financing: company-retained earnings and
fixed assets of company as collateral
• Bank loans
• Angel investors: provide seed money for start-up
and early-stage companies
• Venture capitalists: provide financing at expansion
and later stages of business development
Differentiating types of costs
• Variable costs are directly related to the
volume of product flow – the cost you incur
for each sale of a unit of product
• Variable costs X # units sold = total
revenues
• Fixed costs are the operating costs
associated with running the business but not
directly related to revenues
Table 3-2 Jones Family, Personal Income Statement
The Tom Jones Family
Personal Income Statement
(Cash Flow Statement)
January 1, 2006 to December 31, 2006.
INCOME
Salaries
$
60,000
Interest Income
740
TOTAL INCOME
FIXED EXPENSES
Mortgage Payment
$ 9,600
Automobile Payment
5,040
Property Taxes
1,235
Insurance
4,500
Income Taxes
5,032
Savings & Investment
1,200
Personal Loan Payment
900
TOTAL FIXED EXPENSES
$
VARIABLE EXPENSES
Food
$ 5,485
Transportation
2,500
Utilities
1,800
Clothes & Personal
2,700
Recreation & Vacation
2,780
TOTAL VARIABLE EXPENSES
$
TOTAL EXPENSES
(Cash Balance at the end of the year)
$60,740
27,507
15,265
$ 42,772
$ 17,968
Income Statement Business
• Basic Format
–
–
–
–
–
–
–
Sales, revenues, income from doing business
Less cost of goods sold
Gross profit
Less operating expenses
Operating income
Less interest
Net income (explain)
Table 3-3 Income Statement for a Sole Proprietorship, Partnership, Limited
Liability Company, or Subchapter S-Corporation
The Tom Jones Company
Income Statement
January 1, 2006, through December 31, 2006
Gross Sales
$
350,642
Less: Returns and Allowances
2,366
Net Sales
$ 348,276
Cost of Goods Sold
124,276
Gross Profit
Operating Expenses:
Salaries Expense
Rent Expense
Property Taxes Expense
Depreciation Expense
Utilities Expense
Advertising Expense
Insurance Expense
Total Operating Expenses
$ 224,000
$
95,000
24,000
2,500
6,000
10,250
9,250
3,000
150,000
Operating Income
Other Expenses:
Interest Expense
Net Income*
$
74,000
$
64,000
10,000
*This line on an Income Statement for a Corporation appears as Net Income before
Income Taxes see Table 3-3a
Statement of Cash Flows
• Statement of cash flows shows how the company’s
working capital flows into and out of the business
during the year.
• Statement of cash flows includes:
– Cash flows from operating activities is the difference
between all of the cash received by the business and all
of the cash paid out by the business in conducting its
day-to-day operations.
– Cash Flows from Investing Activities:
• Acquisition or sale of Plant Assets
– Cash Flows from Financing Activities:
• Proceeds from issuance or sale of stock (preferred & common),
bonds. Purchase of stock or the payment of long-term debt.
Statement of Cash Flows
(continued)
– Examples of operating cash flow
• Receipts: All cash received from sales, changes in
accounts receivable, changes in inventory.
– NOTE: An increase in accounts receivable or inventory
represents a negative cash flow. A reduction in receivables
or inventory is a positive cash flow.
• Payments: All payments made by the company to all
accounts (suppliers, employees, rent, utilities, etc.).
– Net increase (decrease) in cash plus the cash
balance, previous year equals cash balance,
current year.
Table 3-8 Statement of Cash Flows
The Tom Jones Corporation
Statement of Cash Flows
For the Year Ended December 31, 2006
Increase (Decrease) in Cash and Cash Equivalents
(Amounts in thousands)
Cash flows from operating activities
Net Income
Types of activities
•Operating
•Investing
•Financing
Adjustments to reconcile net income to net cash
provided by operating activies
Depreciation Expense
Increase in Accounts Receivable
Increase in Inventory
Increase in Accounts Payable
Increase in Notes Payable
Increase in Taxes Payable
Cash flows from financing activities:
Proceeds from issuance of preferred stock
Proceeds from issuance of common stock
Proceeds from Mortgage Payable
Payment of long-term debt
Net cash inflow from financing activities
Net increase in cash
Cash balance, December 31, 2005
Cash balance, December 31, 2006
Corporation
53,000
$
49,000
6,000
(17,000)
(17,000)
8,500
1,500
14,000
Net Cash provided by Operating Activities
Cash flows from investing activities:
Acquisition of plant assets
Net cash outflow from investing activities
$
(4,000)
(150,000)
(150,000)
50,000
60,000
45,000
(5,000)
$
150,000
$
49,000
3,000
52,000
$
Balance Sheet
(Statement of Financial Position)
• Total assets
– Current assets
• Cash, accounts receivable, inventory, treasuries
• Anything in your possession that can be reasonably be
expected to turn into cash in 90 days
– Fixed assets
• Land
• Building & equipment (less accumulated depreciation)
• Net building & equipment
Balance Sheet
(Statement of Financial Position)
• Total liabilities
– Current liabilities
• Accounts payable, notes payable, taxes payable
– Long-term liabilities (debt)
• Total equity
–
–
–
–
Preferred stock
Common stock par value
Paid-in capital in excess of par (common)
Retained earnings
Balance Sheet
• Basic Accounting Equation
Individual
Total Assets  Total Liabilitie s  Net Worth
Sole Proprietorship
Total Assets  Total Liabilitie s  Owner ' s Equity
Partnership
Total Assets  Total Liabilities  Partner' s Equity
Corporation
Total Assets  Total Liabilities  Stockholder ' s Equity
Table 3-4 Statement of Financial Position (Balance Sheet)
Family
The Tom Jones Family
Statement of Financial Position
As of December 31, 2006
Assets
Cash and Cash Equivalents
Cash and Checking Account
Savings Account
$
1,900
4,000
Total Cash and Cash Equivalents
Invested Assets
Stocks and Bonds
Life Insurance Cash Value
Total Assets
Total Liabilities
Net Worth
Total Liabilities and Net Worth
$
43,500
$
407,000
310,000
45,000
52,000
Total Use Assets
Liabilities and Net Worth
Liabilities
Homeowner's Insurance
Credit Card Balance
Automobile Note Balance
Home Mortgage Balance
5,900
38,000
5,500
Total Invested Assets
Use Assets
Residence
Automobiles
Furniture, clothing, jewelry, etc.
$
$ 456,400
975
4,500
22,400
138,000
$ 165,875
290,525
$ 456,400
Balance sheet – “Partners’
equity”
Table 3-6 Balance Sheet, Partnership
Tom Jones and Partners
Partners' Equity
Tom Jones
Larry Smith
Kathy Moore
Total Partner's Equity
Total Liabilities and Partners' Equity
$
18,650
83,925
83,925
$ 186,500
$ 421,000
Assets
•Current assets
•Fixed assets
Liabilities and SE Equity
•Current liabilities
•Long-term liabilities
Shareholders’ equity
•Preferred stock
•Common stock
•Retained earnings
Corporation
Table 3-7 Balance Sheet (Statement of Financial Position), Corporation
The Tom Jones Corporation
Balance Sheet
As of December 31, 2006
Assets
Current Assets
Checking Account
$
2,000
Certificates of Deposit
50,000
Accounts Receivable
40,000
Inventory
35,000
Total Current Assets
Fixes Assets
Land
Buildings
Less: Accumulated Depreciation
Equipment
Less: Accumulated Depreciation
$ 127,000
$
$ 250,000
50,000
$ 50,000
6,000
50,000
200,000
44,000
Total Fixed Assets
$ 294,000
Total Assets
$ 421,000
Liabilities and Stockholder's Equity
Current Liabilities
Accounts Payable--Trade
Notes Payable--Bank
Taxes Payable
Total Current Liabilities
Long-Term Liabilities
Building Mortgage
Equipment Loan
$
16,500
5,000
14,000
$
$ 180,000
30,000
Total Long-Term Liabilities
Total Liabilities
Stockholders' Equity
Preferred Stock, $5 par (10,000 Shares)
Common Stock, $0.10 par (100,000 Shares)
Paid-in Capital in Excess of Par--Common
Total Paid-in Capital
Retained Earnings
Total Stockholders' Equity
Total Liabilities and Stockholder's Equity
35,500
$ 210,000
$ 245,500
$
50,000
10,000
50,000
$ 110,000
65,500
$ 175,500
$ 421,000
What’s
accumulated
depreciation?
Table 3-7a Balance Sheet (Statement of Financial Position), Corporation
The Tom Jones Corporation
Balance Sheet
As of December 31, 2005
Assets
Current Assets
Checking Account
$
3,000
Certificates of Deposit
Accounts Receivable
23,000
Inventory
18,000
Total Current Assets
Fixes Assets
Land
Buildings
Less: Accumulated Depreciation
Equipment
Less: Accumulated Depreciation
$
$
$ 100,000
45,000
$ 50,000
5,000
44,000
50,000
55,000
45,000
Total Fixed Assets
$ 150,000
Total Assets
$ 194,000
Liabilities and Owner's Equity
Current Liabilities
Accounts Payable--Trade
Notes Payable--Bank
Taxes Payable
Total Current Liabilities
Long-Term Liabilities
Building Mortgage
Equipment Loan
$
8,000
3,500
$
$ 135,000
35,000
Total Long-Term Liabilities
Total Liabilities
Owner's Equity
11,500
$ 170,000
$ 181,500
$
12,500
Total Liabilities and Stockholder's Equity
Corporation
12,500
$ 194,000
Depreciation
• The wearing out of a business asset during its
useful life
• The IRS establishes schedules that businesses use
to determine the appropriate method of
depreciation
• Land never depreciates, but equipment does,
usually over 10-year period
• Break down depreciation schedules for each piece
of equipment
• When a fixed asset is sold or disposed of, both its
cost and accumulated depreciation go off the
balance sheet
Accumulated depreciation on the
balance sheet
Assets
Current assets
$
Fixed assets
Land
Buildings
Less: Accumulated depreciation
Equipment
Less: Accumulated depreciation
125,000
$250,000
$250,000
50,000
$50,000
$5,000
$200,000
$45,000
$495,000
$ 620,000
Pro forma financials
1. Do revenues worksheet and costs worksheet
2. These assumptions feed into your income
statement
3. Use the revenues and expenses from your
income statement for your statement of cash
flows
4. Use the new cash-on-hand value to adjust the
balance sheet
Pez Phone Financials