CAPITALIZATION AND FINANCIAL PLANNING

The obstacle that prevents many entrepreneurs

from starting a business is initial capitalization.
Capital assets include equipment, inventory, and
operating resources that the business owns and
uses in operation of its activities.
Putting together a financial plan
The first step in determining the funds you need
for capitalization is to determine how much
income you will need.
Entrep. should write an objective statement
declaring how much profit needs to be gained by
the business.
The amount of profit needed will dictate the
amount of capital necessary to achieve the
objective.
Many entrep. fail in that they do not develop a
realistic plan of investment to earn the needed
profits. When they do this the entrep. is
considered to be undercapitalized.

Computing initial capital needs

1. Research to determine how much of a
markup
you will make on your product or service .
2. Determine how much of a profit you will need
to cover all personal expenses.
3. Multiply the projected sales X markup to
determine how much of a profit you will
make.
To estimate the amount of inventory you need,
you must know the turnover rate per year. If
your inventory turnover is 5 you must divide the
projected sales by 5.
One-time-only costs
Many costs happen only once when you start
your business i.e. cash registers, display
shelves, utility, and rent deposits.
Monthly Operating Expenses
Estimate the monthly operating costs that will
keep your business running smoothly i.e. rent,
employees salaries, insurance premiums.
Multiply these costs by 3. This way you will only

have to worry about increasing sales during your

first 3 months of operation.
Pro Forma Financial Statements
Pro forma financial statements are used to
demonstrate the validity of a business idea.
Income Statements
Realistic profits and revenues must be shown
over a specific period of time to support the
reason for starting a business.
An income statement must show the expected
revenue (sales) for a year and list the costs and
expenses for operating the business.
What is left over is the profit for the entrepr.
running the business.
Pro forma Income Statements should also list
projected revenues for the 2nd and 3rd year in
business. Market population, or popularity of the
business or industry growth can make growth
projections.
Balance Sheets A pro forma balance sheet
projects the growth of a business with respect

to how much capital value the business will have

at a particular date. In a business plan, the
entrepr. should have a balance sheet for the
opening date of business and a projected one for
the end of the year.
The balance sheet has two sidesassets and
liabilities. The asset side shows all property and
capital that the business owns. The liability side
shows all the debts of the business. Adding all
the values of the assets and subtracting the
liabilities determine the net worth of the
business. The result is the owners equity or the
net worth of a business.
Assets are listed in order of their liquidation.
Assets that can easily be converted into cash
are listed first. Those that would take a longer
time to liquidate are listed last.
Liabilities are listed in order of their payoff date.
Liabilities that can be paid off within 12 months
are listed first. Long-term liabilities are listed
last.

THE ACCOUNTING EQUATION!!!!!

assets = liabilities + owner equity

GOAL: Keep current assets greater than current

liabilities.
Planning Cash Flow
Entrepr. need to break the year into a month-bymonth projection to analyze cash flow problems.
Cash flow changes according to sales and
payment patterns due to the seasonal or
industry fluctuations.
Cash flow statements are needed because:
1. goods are purchased with cash and
sometimes remain in inventory.
2. Customers buy on credit and do not pay the
entire balance for 2 or 3 months.
On paper businesses may seem more cash-rich
than they really are.
It is important for entrepr. to be aware of what
impact the seasons have on cash flow. Some
months have an excess of cash coming in, and
some months have too little cash coming in to
meet obligations.

Entrepr. must properly plan the best allocation of

money in the different cycles of their business.

MAINTAINING FINANCIAL RECORDS

Many businesses hire accountants to prepare
reports for the government.
Basic Parts of an Accounting System
1. Sales journalChronological list of revenues
received each day from business activities.
It shows the amount of cash received, sales
taxes collected, and customers charged
2. Disbursement Journal (cash payments
journal) Shows date and amount of payments
made by check.
3. Accounts Payable LedgerListing by
creditors names of all bills the business
needs to pay.
4. Accounts Receivable LedgerLists the
customers that owe the business money for
goods or services bought on credit.
5. Furniture, Fixture, Equipment Ledger
Purchases of current or long-term assets.
6. Notes Payable LedgerMoney borrowed for
business activity, shows from whom it was
borrowed, the date it was borrowed, the
interest rate, and when it is due.

USING A BOOKKEEPING SYSTEM

Entrepreneurs who keep their basic
recordkeeping devices up to date will have a
good bookkeeping system.
A basic calculation is used to find net profit
Sales Cost of Goods Sold (purchases)
Operating Expenses = Net Income
Other parts of the bookkeeping system include
payroll summary sheets for each employee.
These sheets show up-to-date totals on how
much each employee has been paid during the
calendar year.
Payroll records are essential for keeping track of
taxes owed to the government by employees and
employers.
Learning basic bookkeeping is essential for
those who wish to open a business.