1

Finance 101 for StartupsA crash course in financial management for startup

businesses (half day version)

Presented by: Matt Evans, Certified Mentor, DC SCORE

2

With SCORE, You Are Not Alone on Your Journey

For over 50 years, SCORE has served

as America’s premier source of free

business mentoring and education.

As a resource partner of the U.S.

Small Business Administration (SBA),

SCORE has helped more than 11

million entrepreneurs through

mentoring, workshops and educational

resources since 1964.

3

SCORE Can Help You Find the Way Ahead

• Free one-on-one business counseling

and mentoring

• Business advisory services

• Low cost local workshops

• Free templates and recorded

webinars

To meet with a mentor or learn more

about SCORE’s resources, visit

washingtondc.score.org

4

Workshop Roadmap Overview

Accounting

Financial Statements

Analyze the Financials

Start with Accounting

Generate the Financial

Statements

Apply Analytical Tools and

Techniques

You as the Business Owner should spend time measuring

and managing the business based on the numbers

5

Module 1

How Accounting Works

Overview of how the accounting process works at a detail

transaction level

6

• All transactions pass through your Check Book

• All transactions must be recorded

• Businesses have a wide range of transactions:

• Customers buy your products or services = Cash Inflows

• Vendors and Employees must be paid = Cash Outflows

Think in Terms of Your Check Book Module 1

Cash Inflows

(Deposits)

Cash Outflows

(Checks)

7

Most transactions are cash basis (pass through your cash account), but . . .

• Accrual Accounting recognizes revenues when earned before you collect

the cash – Accounts Receivable Account

• Accrual Accounting recognizes expenses when incurred before you make

payment – Accounts Payable Account

• Cash Basis – Only post transactions when they go in and out of your

Check Book

• Tracking – Make sure you can control and track the money you owe

others in the future and collect all money owed to you (customers pay

on time when due).

Accrual Accounting is Preferred Module 1

8

Simple Cash Basis Accounting Spreadsheet Module 1

Simple Spreadsheet for Cash Basis Accounting

Year:

Date Description Name Amount Category RefRevenues: (Cash Collected from Sales to Customers)

2/8/2018 Sold 18 bars soap at Eastern Market Various Walk By Traffic 54.00$ Sales Revenue

2/17/2018 Sold 20 bars soap to Rosa Ela Shop Rosa Ela Shop in College Prk 40.00$ Sales Revenue

2/22/2018 Sold 22 bars soap at Dupont Circle Various Walk By Traffic 66.00$ Sales Revenue

Feb-18 Online Orders of Soap - Etsy Various per Etsy 22.00$ Sales Revenue

TOTAL REVENUES 182.00$

Expenses: (Cash Paid for all business related expenses)1/6/2018 Soap Materials Sarah's Craft House (110.09)$ Materials Expense

1/15/2018 Booth Materials for Markets M-Displays Inc (75.00)$ Marketing Expense

1/22/2018 Promotion Flyers Office Max (36.55)$ Marketing Expense

2/6/2018 License Fee to County DC Dept of Cons / Reg Affairs (115.00)$ Legal Expenses

TOTAL EXPENSES (336.64)$

PROFIT OR (LOSS) (154.64)$

Setup and

maintain for

each calendar

year to comply

with filing your

tax return

Once you begin

earning profits,

you are liable for

paying estimated

taxes during the

calendar year

9

How the Accounting Model Works

1. Assets – Resources of the Business

2. Liabilities – Obligations

3. Equity – Investments by Owners

4. Revenues – Inflows from Sales

5. Expenses – Outflows for Costs

Balance Sheet

IncomeStatement

The Accounting Model can be summarized through two equations:

Assets = Liabilities + EquityRevenues – Expenses = Profit or (Loss)

KEY POINT: Businesses invest in assets two

ways: Liabilities and Equity. Assets exist for

one single reason: To Generate Revenues

10

Chart of Accounts

Cash Money in the bank

Accounts Receivable Amounts owed to the company for sales

Inventory Pants, Shirts, Hats, Shoes, Socks, Belts, etc.

Furniture and Fixtures Storefront assets such as tables, racks, chairs, etc.

Accounts Payable Amounts that must be paid to vendors / suppliers

Loans Payable Amounts due to banks

Long Term Debt Amounts due to investors or bank against long term assets

Owners Capital Account Amount invested by the owner of the business

Retained Earnings Profits held by the business for reinvesting

Sales Revenue Amount of revenues from selling products / services

Cost of Goods Sold Cost of inventory that has been sold

Administrative Expense Cost of office support personnel

Selling and Marketing

Expense

Advertising, Sales Commissions, Trade Show Displays, etc.

Utility Expense Gas, Water & Electric expenses

The Chart of

Accounts is the

back-bone for

capturing all

transactions –

some software

programs may

refer to it as a

“Category”

You MUST

classify all

transactions;

otherwise you

have no basis for

reporting.

11

Most Transactions Go Thru Cash

1-6-2014 Purchase office supplies

1-1-2014 Beginning Balance

Account Title: Cash

1-16-2014 Run Bi Weekly Payroll

1-12-2014 Deposit payment from customer

1-26-2014 Pay Monthly Electric Bill

1-22-2014 Insurance Premium Paid

$ 4,220.55

$ 142.20

1-31-2014 Ending Balance

$ 3,600.00

$ 2,640.00

$ 265.00

$ 516.30

$ 4,257.05

Debit (Left) Credit (Right)

Let’s walk through some entries . . .

12

Accounting is Dual (Two Sides)

Five groups of accounts make up the

Accounting Model. If you want to

increase or decrease the account

balance, you either Debit (left side) or

Credit (right side) the account when you

post an entry.

This can be very confusing – this is why

you might want to enlist an Accountant

13

Summarize the Accounting Process

Accounting

System

Financial

Statements

End of Period

Accrual Entries

Transactions

(Mostly Cash Basis)

Post to General

Ledger Accounts

Balance

Sheet

Income

Statement

Economic Activity of the

Business

14

Recap Some Important Points

1. Most transactions pass through the Cash Account. Make sure you post all transactions that go through your Business Bank Account.

2. You must classify all transactions according to how you want to report financial results. Chart of Accounts

3. Accounts capture transactions. There are five major groups of accounts: Assets, Liabilities, Equity, Revenues, and Expenses

4. The five groups of accounts is the basis for presenting the financial statements of a business: Balance Sheet and Income Statement.

5. Financial Statements are prepared as of a cut off date (such as March 31st) presenting the balances as of this date.

15

Comprehensive Exercise

Let’s go through a startup business and see how accounting transactions get posted over time

Three phases take place over time when starting a business:1. Fund the Business – Financing Transactions2. Acquire the Right Mix of Assets to Generate Revenues –

Investment Transactions3. Generate Revenues and Expenses – Operating Transactions

16

Popular Accounting Software Programs

Quick Books > https://quickbooks.intuit.com/Fresh Books > https://www.freshbooks.com/Wave > https://www.waveapps.com/Billy > https://billyapp.com/Zip Books > https://zipbooks.com/Express Accounts > https://www.nchsoftware.com/accounting/index.htmlKashFlow > https://www.kashflow.com/GoDaddy Accounting > https://www.godaddy.com/email/online-bookkeepingClear Books > https://www.clearbooks.co.uk/Less Accounting > https://lessaccounting.com/Zoho Books > https://www.zoho.com/us/books/Xero > https://www.xero.com/us/

17

Module 2

Financial Statements

Read and understand three financial statements

18

Three Financial Statements Module 2

• Financial condition of a company at a given point in time

• Consists of three components: Assets, Liabilities and Owners Equity

• Profit or Loss of a company over a period of time

• The critical indicator of company performance!

• Consists of two components: Revenues and Expenses

• Sources and uses of cash over a period of time

• Consists of three activities: Operating, Investing, and Financing

Income

Statement

Statement of Cash Flow

Balance

Sheet

19

Balance Sheet Module 2

Assets and Liabilities

are divided into two

groups: Current and

Long-Term

The Balance Sheet is

prepared as of a cut-

off date usually on a

calendar year basis

(January 1 thru

December 31)

20

Important Points – Balance Sheet Module 2

1. Current Assets – Does not generate a return for the business. Goal is to turn this

over and run it through cash.

2. Long Term Assets – Generates a return, drives our revenues and is important to

growth of the business

3. Liabilities in Relation to Equity – The more liabilities we have and the less equity

we have, the higher the risk of the business – inability to meet our obligations

KEY POINT: We will learn how to use ratios to assess

these important points in Module 3

21

Income Statement Module 2

Gross Profit or Gross

Margin divided by Total

Sales = Gross Margin

Percent

You need to be at 35%

or 40% minimum to

earn a profit

KEY POINT:

22

Statement of Cash Flow Module 2

• Cash received from customers

• Payments made to vendors and employees

• Tax payments, rent payments, utilities, etc.

• Invest in Real Estate

• Sell Off Equipment

• Secure Long Term Financing (Loan)

• Distribute Income to Owners

23

Format – Statement of Cash Flow Module 2

24

Example – Statement of Cash Flow Module 2

KEY POINT: Must get to positive Operating

Cash Flow (Stage 3)

Stage 1 – Fund the Business

Stage 2 – Make the necessary

investments to generate revenues

Stage 3 – Sell to Customers and

generate Revenues above

Expenses

25

Exercise 1 – Generate Financial Statements Module 2

Close out the accounting period and generate the Balance Sheet per the balances that are outstanding in the various general ledger accounts

Two handouts – Financial Statement Template and Account Activity for the Period

26

Extra Tips - Taxation Module 2

1. Profits are subject to taxation2. Most businesses are pass through entities (such as LLC) – Profits pass through to the

Owners who get taxed on the Profits3. Three forms of taxation on Profits to the Owner(s):

1. State Income Tax (personal tax rate)2. Federal Income Tax (personal tax rate)3. Self Employment Tax (12.4% social security + 2.9% medicare)

Due Dates for 2019 Estimated Quarterly Tax Payments:

Q1: Monday, April 15, 2019 (January – March)Q2: Monday, June 17, 2019 (April – May)Q3: Monday, September 16, 2019 (June – August)Q4: Wednesday, January 15, 2020 (September – December)

27

Additional Links Module 2

My Own Online Short Courses:

https://exinfm.com/training/

Accounting in One Hour > http://inanhour.com/

Learn Accounting Online > https://www.accountingcoach.com/

Accounting Library >

http://www.businessbookmall.com/Accounting%20Internet%20Library.htm

Simple Accounting Studies > http://www.simplestudies.com/

Financial Tutorial > http://www.almaris.com/fact/fact-contents.htm

Principles of Accounting Online > https://www.principlesofaccounting.com/

Understanding Financial Statements > http://bizzer.com/images/Financial/index.html

Take the Fundability Quiz > https://www.businessloans.com/fundability/

How Contributions and Distributions Work for an LLC >

https://www.thebalancesmb.com/llc-member-capital-contributions-398638

28

Take a Break

29

Module 3

Analyzing the Financials

Apply analytical techniques to better understand the financial

statements

30

Financial Terminology Module 3

Cash Flow – The amount of cash receipts and disbursements that flows in and out of the business over time. We want more cash coming in then cash going out.

Debt – Liabilities such as Loans, Mortgages, Bonds, and Commercial Paper (large public corporations). High debt levels equates to high risk.

Equity – The amount of funds invested by owners of the business + profits that are retained by the business for future growth.

Liquidity – The ability of a company to convert assets into cash for meeting short-term obligations. It is important to have sufficient liquidity to meet your short term obligations.

Leverage – How a company finances its assets; debt vs. equity

Earnings = Net Income = Profits – The residual income remaining after all expenses.

Rate of Return – How much return does the investment generate for the business; residual income after all costs. It is important for long term assets to generate positive returns.

Turn Over – The ability of a company to turn over and convert an asset into something else, such as sales or cash. It is important to turn over current assets into cash.

Working Capital – The funds available to the business within the current operating cycle, expressed as current assets in excess of current liabilities.

31

Important Concept - Turnover Module 3

Accounts

Receivable (Send a bill to the customer)

Cash

Inventory -Appliances

Sale on Credit

Eventually everything will flow through your cash account!

KEY POINT: Any asset that is “current” needs to turnover – the shorter the

cycle the better which in turn reduces

the need to finance the current operations of the business. Try and

collect the money at the Point of Sale – No Need to Collect Money

32

Three Analytical Techniques Module 3

Ratio Analysis• Divide one number by another number• Easy to benchmark and understand performance

Horizontal Analysis• Track Trends over Time• Key Trends include Sales Revenues, Net Income, Debt Levels

Vertical Analysis• Track Relationships (between accounts) over Time• Monitor proportion of debt and equity to assets – too much debt equates to higher

risk• Monitor proportion of non-operating expenses to operating expenses – most of your

costs should be operating with minimal non-operating expenses

33

Four Types of Ratios Module 3

Liquidity Ability to meet short-term obligations of

the business

Leverage Degree to which assets are financed by

debt

Asset Management Management’s ability to manage

assets

Profitability Degree of profitability generated

KEY POINT: The Balance Sheet and the Income Statement are used to calculate ratios

34

Liquidity Ratios Module 3

Current Ratio =

Quick Ratio =

Current Assets

Current Liabilities

Current Assets - Inventory

Current Liabilities

KEY POINT: Measures your ability to meet short-term obligations. Must be well

above 1.0 and above 2.0 to get a bank loan.

35

Example of Current and Quick Ratios Module 3

$ 9,714,796 / $ 7,333,157

= 1.32

($ 9,714,796 – 2,724,783

– 2,982,049) / $ 7,333,157

= .95

36

Ratios - Manage Current Assets Module 3

Accounts Receivable Turnover

Sales

Accounts

Receivable

Days Held in Accounts Receivable

A / R Turnover

365 Days

Inventory Turnover

Cost of Goods Sold

InventoryDays Held in Inventory

365 Days

Inventory Turnover

37

Examples – Asset Management Ratios Module 3

Revenues

Sales Revenues $ 620,000

Investment Revenues 115,000

Total Revenues 735,000

Expenses

Cost of Goods Sold 380,000

Assets

Cash $ 5,600

Accounts Receivable 12,400

Inventory 39,000

Total Current Assets 57,000

Inventory Turnover

$ 380,000 / $ 39,000 = 9.7

How often does Inventory turn over during the year?

Number of Days Held in Inventory

365 / 9.7 = 37 days

How many days does it take to convert Inventory into Accounts Receivable?

38

Measuring Risk – Debt vs. Equity Module 3

Debt to Equity

Debt to Assets

Total Liabilities

Owners Equity

Total Liabilities

Total Assets

Greater than 100% means company is using more debt than equity – more risk to the company

Greater than 50% means the company is using more debt than equity – more risk to the company

KEY POINT: The more liabilities (debt) you take on in relation to your own

investment (equity), the more riskier the business

39

Examples of Leverage (Risk) Ratios Module 3

Proportion of Debt (Total Liabilities) to Equity in Funding the Business:

Debt / Equity or $ 1,000 / $ 500 = 2(you have 2 times more debt vs. equity)

Proportion of Debt used to finance the assets of the business:

Debt / Assets = $ 1,000 / $ 1,500 = .67% of financing of assets is in the form of debt (.33% is equity – owner)

40

Know Your Margins Module 3

Profit Margin

Net Income

Sales

Operating Margin Sales

Operating Income

Return on Assets

Net Income

Total Assets (1)

Gross Margin

Gross Profit

Sales

(1) Average balances for the year are often used

KEY POINT: You DO NOT have a business unless you have sufficient margins –

you cannot realize a profit without a Gross Margin above 35%

41

Examples of Margin Ratio Calculations Module 3

Gross Margin = $ 98,841 / $ 524,359 = 19%

Operating Margin = $ 26,765 / $ 524,359 = 5%

Profit Margin = $ 20,166 / $ 524,359 = 4%

In this example, it will be hard for the

business owner to make a solid profit to

invest back into the business or draw

money to cover personal expenses.

42

Horizontal Analysis – Look at Trends Module 3

2004 2005 2006

Sales Revenues $ 120,000 $ 135,000 $ 146,000

Operating Expenses $ 68,000 $ 73,000 $ 78,000

Net Income $ 22,000 $ 26,000 $ 29,000

KEY POINT: Show

your trends lines

visually – much

easier to see what

direction you are

moving financially

43

Vertical Analysis – Income Statement Module 3

%

Revenues Breakdown

Sales Revenues 4,000.00$ 100%

Total Revenues 4,000.00

ExpensesCost of Goods Sold 1,320.00 33%

Office Supply Expense 680.90 17%

Depreciation Expense 458.33 11%

Interest Expense 278.96 7%

Tax Expense 312.50 8%

Total Expenses 3,050.69 76%

Net Income 949.31$ 24%

Easy to

understand

your cost

breakdown

44

Vertical Analysis – Balance Sheet Module 3

Assets %

Current Assets Breakdown

Cash 32,714.60$ 32%

Accounts Receivable -$ 0%

Inventory 9,680.00$ 9%

Total Current Assets 42,394.60 41%

Long Term Assets

Furniture & Fixtures 6,104.50 6%

Warehouse Facility 55,000.00$

Less Accumulated Depreciaiton 458.33$

Net Warehouse Facility 54,541.67 53%

Total Long Term Assets 60,646.17 59%

Total Assets 103,040.77 100%

Minimize and Turnover

Generate a Return

45

Benchmark Your Performance Module 3

RMA (Risk Management Association) Annual Statement Studies – Financial Ratios

2017 Almanac of Business and Industrial Financial Ratios, 48th Edition

1. Know your NAICS Code: 448110 = Men’s Clothing Retail448120 = Women’s Clothing Retail448140 = Family Clothing Retail448150 = Clothing Accessories448210 = Shoes Retail448310 = Jewelry Retail

2. Know your size by total assets and total sales

1. Know your Industry Code: 315215 = Clothing Manufacturing448115 = Clothing Retail Store

2. Know your size by total assets and total sales

http://www.bizstats.com/

https://www.sba.gov/tools/sizeup

Two useful links:

46

Exercise 2 – Let’s Calculate Some Ratios Module 3

Calculate two ratios per the Balance Sheet on this slide:

Current Ratio = Current Assets / Current Liabilities

Debt / Equity Ratio = Total Liabilities / Total Equity

47

Exercise 2 – Benchmark our Ratios

Now let’s benchmark our calculations – refer to handout:1. NAICS Code = 4481202. Size of Business = Under $ 500,000 in Assets

Ratio Your Company(prior slide)

Industry Average

Current Ratio

Debt to Equity

Module 3

48

Exercise 2 – More Benchmarking Module 3

Now let’s benchmark against the other source:1. Industry – We make clothing (Apparel Manufacturer)2. Size of Business = Under $ 500,000 in Assets

Type of RatioYour

CompanyIndustry Average

Current Ratio (current assets of $ 66,000 / current liabilities of $ 14,000)

4.7

Asset Turnover (Sales of $ 180,000 / Total Assets of $ 120,000)

1.5

Return on Assets (Net Income of $ 16,000 / $ 120,000)

13%

49

Wrap Up and Summarize

50

Key Points to Being Financially Smart

1. Must have an accounting process to create financial statements2. Review financial statements at least quarterly – tax payments3. Current Assets must turnover and go through Cash quickly!4. Most businesses need a Gross Margin of 40% or higher5. Three techniques to analyze financial statements:

1. Ratios – One number in relation to another number per the financials

2. Horizontal – Trends over Time3. Vertical – Percentage breakdown of financials that can be

benchmarked

51

A Few Useful Links

Finance and Accounting Seminars > https://www.seminarinformation.com/search.cfm?tp=7Teach Me Finance > http://www.teachmefinance.com/Finance World > http://web.utk.edu/~jwachowi/wacho_world.htmlStudy Finance > http://www.studyfinance.com/Principles of Finance > http://educ.jmu.edu//%7Edrakepp/principles/

52

Contact Information

Matt Evans, SCORE Mentor

Email: matt.evans@scorevolunteer.org

Appointments: https://score-silver-spring-library.as.me/schedule.php

53