Chapter 15
Capitalization and Financial Projections
Capitalization is the activity of obtaining all the capital assets necessary to operate a
business.
 The initial capitalization plan projects the future financial needs of the business
operation.
Capital Assets include all the equipment, inventory, and operating resources (including
cash) that the business owns and uses in its operation.
 The challenge for the new business owner is to determine where to obtain the
money for all the items needed to start the business. (The initial capitalization)
 Often there is a deficit between financial resources that are needed and the
financial resources on hand.
The Total Financial Package
 This starts with your personal financial objectives.
 How much income will you need for your personal living expenses?
 What is the minimum profit you consider adequate?
 Your financial objectives will direct your business plan.
 Net profit is the income left over after all expenses, including taxes are paid.
 When you cannot obtain the resources to meet the business’s objective you are
considered undercapitalized.
Initial Capital Needs
 Begin with sales projections.
 You will need a plan to help yourself achieve this objective.
Initial Inventory
1) Inventory turnover is the number of times a business sells the amount of
its base inventory every year.
2) The industry average can usually be found by consulting an industry trade
association or asking suppliers.
One Time Only Start-up Costs
1) Many costs are incurred only once by the business during the start-up
phase.
2) Once you calculate the inventory minimum, you need to determine what
kinds of equipment, fixtures, and leasehold improvements you will need.
3) Table 15-1, Page 325 provides a comprehensive list.
Monthly Operating Expenses
1) Calculate the average monthly cost of keeping the business operating.
2) It will take time to generate enough sales to cover operating expenses.
3) The general rule is to have three months of operating expenses in hand.
4) Table 15-2 Page 326 is an example of operating expenses.
FINANCIAL STATEMENTS
 Important control tools for entrepreneurs.
 When results do not match projections, these provide warning signs so you
can make adjustments.
 Pro Forma Financial Statement is a projected financial statement in the
business plan.
 Financial reports demonstrate the validity of a business idea.
Income Statements
 Shows the revenues or monies collected.
 Shows the money paid out in expenses.
 Shows the profits.
 Over a specified amount of time.
 Table 15-3 Page 327 for example.
Balance Sheets
 Shows the worth or value of a business.
 Projects the growth of a business in terms of capital over a period of time.
 Table 15-5 Page 328 for example.
 Assets are property and capital to which a business claims ownership.
 Liabilities show all the debts of the business.
 Net worth of a business subtracting all liabilities from the sum of all assets.
 Current Assets are cash and assets easily converted into cash. (Ex. Inventory and
cash receivables)
 Fixed Assets are capital purchases that take a longer time to convert into cash.
(Ex. Property, equipment, fixtures, etc.)
 Current liabilities are debts that are to be paid within 12 months of the date of
the balance sheet.
 Long Term Liabilities are debts that come due more than 12 months of the date
of the balance sheet.
Liquidity
 The ability of a business to meet its debt obligations as they come due.
 Current Ratio compares cash as well as any assets (short term) with debt.(short
term) See Page 329 for example.
 Acid Test Ratio is more restrictive because it eliminates inventory. See page 329
for example.
Cash Flow
 A break down of monthly financial activities.
 Allows you to prepare for potential problems. It could be sales decline, industry
fluctuations or seasonal issues.
 It will tell you what your cash position really is.
 This is essentially a cash budget.
 You should have a cash flow spreadsheet available at all times.
 You may make a profit on the items you sell, however if you do not have the cash
coming in you may go bankrupt.
Cash Flow Projections & Initial Capital Needs
 A cash flow projection will be used to help determine the initial capital reserve for
start-up operations.
 Enter zero in the opening cash on hand column of the cash flow spreadsheet.
 You carry the deficits forward until you reach a month in which a surplus occurs.
Financial Records
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Income & Expense Register
Accounts Payable Ledger to keep you current with debts you owe.
Accounts Receivable Ledger keeps track of who owes the business money.
Furniture, Fixture, and Equipment Ledger because certain assets are eligible for
depreciation deductions. It can also be used for insurance and a replacement
schedule.
Notes Payable Ledger keeps track of what is owed to your lenders.
Payroll records keep track of taxes owed.
Homework
1)
2)
3)
4)
5)
Ethics for Entrepreneurs
The Global Entrepreneur
Ship in a Bottle
A Case in Point
Read Chapter 16
Page 324
Page 335
Page 338-40
Page 342