Business Finances & Financing - Training Transcript

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Business Finances & Financing

Training Transcript
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(Slide 1)

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Welcome
Welcome to Week 5, the half-way point of our Free Business Training webinar series! This is
your presenter, Sirra Ndow here with you again today, talking about a business’s bottom line,
the money

In Week Four, we talked about trade names or doing business as or DBA, trademarks, what
registering a business entails; the difference between licenses and permits, business insurance
and ended with a few suggestions on what to do and what not to do at this stage of business
start up.

(Slide 2)
Training Overview

Today we will talk about the money and I think that it is only appropriate that finances is the
midpoint of the training given that it the heart of any business.

(Slide 3)
Topics
Today we will be looking into:

Why it is important to be able to understanding and financial issues. We will also look into the
key financial concepts, measures and tools and end as usually with recommendations on best
practices and some pitfalls to avoid.

(Slide 4)
Understanding And Talking Numbers In Your Business


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The fact is that if your business is not making money or is not projected to make money, then
you are no longer running a business thus it is essential for you, as a business owner, to be
able to understand and communicate, with clarity, easy and confidence, your financial needs
as well as track and compare your competitors’ financial health to better manage your
business to get on the path to success, even if you plan on hiring someone to do the books for
you.

Ideally, one would take a course to learn about the basics of accounting before starting a
business. If sitting in a classroom is not a possibility or is not an appealing prospect to you,
there are numerous other ways to gain basic understanding of financial knowledge especially
on the Internet (online guides, how to article, blogs and videos etc.).

The basic areas that a small business owner must understand about are record keeping,
banking, payment processing, bookkeeping, money management, and taxes. Fortunately, the
job of business keeping records and tracking the money is much easier today with the help of
computerized or online financial tools and software – ranging from simple records and
bookkeeping to all-in-on solutions, free or paid.

Lack of understanding and not keeping track of your finances can cost you money and lost
opportunity or result in a lot of hassle, penalties and problems.

(Slide 5)
Key Financial Issues, Measures & Tools

The financial issues that a small business owner has to deal with are many and varied and may
appear daunting but if one takes the time to identify them and understand the requirements,
it can easily be managed.

These include:

 Personal Finances
 Start up Costs
 Pricing


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 Breakeven & Profitability
 Sales Forecasts
 Cash Flow Projections
 Financing Options
 Keeping Separate Business Records
 Financial Analysis & Management
 Taxes & Deductions
 Computerized & Online Tools

Let’s look at the basics of each of these.

(Slide 6)
Personal Finances

The majority of small business owners use their personal funds to start their businesses. There
are many reasons for this including lack of access to or expensive credit; not wanting to
burden themselves with debt right off the bat; and not willing to give up control of their
business to investors.

If you are investing your own money into your business, then a critical first step should be to
take inventory of your personal financial resources and health first. Taking stock of your
financial situations helps determine your net worth i.e. how much assets, liquid and salable,
you can access and use. It will also help you in figuring out if you have enough money to start
your business or if you will need to borrow or look for investors; how much reserve you have
and how much money you will need to draw each month to sustain your life and livelihood.

We mentioned during our first week of training that everything about owning and running a
small business revolves around YOU, the business owner so your personal financial situation
can and will greatly impact your business. Personal credit issues can especially have a big
impact on the cost of doing business fro you

(Slide 7)
Start up Costs


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Starting and running a business requires money, no matter how small or big the business
venture or whether you are going to be selling products or providing a service. Materials,
equipment and suppliers will need to be bought; communications systems need to be set up;
utilities need to be paid etc.

The first category business expense is the start up costs or the cost of doing business. These
are all the expenses you have before you start your business. Start-up costs are investments
you make in your business and calculating them is a comprehensive process that is not usually
an exact science. It involves estimations and assumptions to get a fair.

Start-up costs are calculated by using realistic estimates to prepare a detailed and
comprehensive list of all the cost/expense items needed for the business to start selling its
products or services. Start-up costs are divided into onetime expenses which include all the
one-off costs that are incurred at the start of business such as:

 general business costs – business registration, licensing, insurance premiums, bank and
merchant account set up fees, subscriptions, legal and professional services etc
 office furniture, fixtures and equipment costs - desks, chairs, printers, computers,
telephones, fax machines, copiers, shelves, filing cabinets, office suppliers etc
 product inventory & Packaging suppliers costs – initial product orders, packing and
shipping suppliers, samples, displays etc
 website design costs - domain registration, web design and development cost, content
development, e-commerce solutions, tailored software etc.
 marketing, advertising and branding – online and offline activities
 transportation Costs – Vehicle purchase, lease/ loan down payment, vehicle insurance,
registration
 special equipment costs – the cost of equipment that is specially made or modified for
the business and everything associated with it
 Miscellaneous Costs – you can calculate this as a percentage (10-20%) of the total start
up costs

The costs of doing business also include the recurring, monthly expenditures that are
necessary to make, sell or deliver your products and/or services and also keep the business


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running. They can be separated into the direct costs, the expenses directly related to making
each sale, and overhead costs are the costs you will have to keep your business going, whether
you make a sale or not.

Direct costs include items such as goods to prepare/manufacture the products you sell e.g
flour, sugar, oil, butter etc. if you are a baker, the time a consultant spends with a client,
packing and shipping supplier etc..

Overhead costs are expense items such as:

 General Office Expenses – Utilities, office space rent, loan interest and principle
payments etc.
 Communication expenses – Telephone, Internet connection, answering service etc.
 Marketing & Advertizing Expenses – Online and social media marketing, radio/TV ads,
email marketing etc
 Website maintenance costs – web hosting, website updates, SEO an online marketing,
software licenses etc.
 Salaries & Benefits – owner’s draw and/or staff salaries, professional development and
association fees and benefits
 Transportation Expenses – fuel, monthly car payments, insurance maintenance and
repairs etc
 Miscellaneous Expenses – Entertainment, travel, donations etc.

Some expense items can be both a the direct cost as well as a monthly overhead. The cost of
electricity in a bakery shop for example. Part of it will be needed on a daily basis to operate
lights, printers etc. When producing the baked goods, electricity will also be needed to operate
the baking equipment.

The more realistic your start up numbers are, the better and a little research can help with the
estimates. When calculating start-up costs, it is always better to over-estimate a little than
under-estimate. You do not want to fall short of cash in the middle of setting up shop can.

With these numbers in hand, you can now proceed to more accurately price your
goods/services so you can calculate your breakeven and profitability points.


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(Slide 8)
Pricing

The importance of pricing in the ultimate success of your business cannot be over-emphasized.
It actually can become a matter of life and death for your business. Pricing has to be just right,
a balance between a healthy profit margin and a price point that will not drive your customers
into your competitors’ arms.

Like calculating start up costs, pricing is also not an exact science. It can be down to a trial an
error process in the journey to finding the right price. That said, the more on point your start
up costs and monthly overhead expense estimates are, the shorter your trial and error period
will be. In addition, researching what your competitors are charging can also be very helpful
and may be a quicker and easier way to go about it.

Pricing decisions can be made using several strategies:

1. The Going Rate – charging what everyone else is charging for the same/similar product or
service. This approach however will not differentiate you from your competitors. You will
need to find a way to add value and stand out from the crowd.

2. Low End Pricing – undercut your competitors by charging the lowest price. This can raise
questions about the quality of the product or service you offer. Also, if your competitors
lower their prices, you will no longer have an advantage.

3. High End Pricing – Charging a premium price, above everyone else. This must also be
accompanied by added value and service that clients can appreciate and will be willing to
pay for it to be successful.

4. In-Between Pricing – charging a price that is neither the lowest nor the highest but
somewhere in-between. This can be a good way to test your pricing point but like the
Going Rate strategy, it does not offer much differentiation.

5. Introductory Pricing or Limited Time Offer – This strategy is a good and common one
amongst start ups. It can help your business get noticed and quickly gain a customer base.


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Introductory pricing can increase your breakeven point and thus extend the time it takes to
become profitable however. Limited time pricing can also be effective in marketing during
slow periods. Be sure to make it clear that prices are for a limited time and don’t forget to
change them.

Multiple pricing strategies can be employed at any one time and over the business’s lifetime
but whatever your approach, be ready and don’t hesitate to raise your lower your prices as
necessary and don’t be embarrassed about the change. It is after all business and not
personal.

(Slide 9)
Breakeven & Profitability

How much do you have to sell in order to have enough money to pay all of your expenses, pay
yourself and make a profit or how much revenue do you need to generate to match your
expenses? This is an important question that unfortunately, most small business owners don’t
have the necessary skills to figure out.

Calculating exactly what your monthly sales need to be in order to cover all you expenses and
cost is called calculating break-even point. This is done on a monthly basis to tell you the least
amount of revenue you need to generate each month to cover your costs.

When you sell a unit of product or service, a part of the revenue will be applied to paying your
direct costs, a part will go to cover the overhead and if there are any leftovers, that will be
your profit. If you do not have enough to cover the costs, then you will have a loss and if you
neither made a profit or suffered a loss, then you broke even.

Breakeven is calculated using the price per unit of sale, your direct costs and total monthly
overhead costs as follow:


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To find the monthly revenue, we will simply multiply the number of units at breakeven by unit
price.

For example, if:

Unit price = $60
Direct Cost per unit = $40
Total Monthly overhead costs = $1000

Then:

Total monthly revenue will be:

This means that anything over $3000 per month will be your profit and if you fall short of that,
you will be making a loss.

If you offer multiple products and or services, you will need to calculate the breakeven point
for each single product or service you which means you need to calculate the direct cost for
product or service.

This step can no doubt be daunting and time consuming but the information it gives you is
invaluable in running a successful business.

(Slide 10)
Sales Forecast


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The Sales forecast is the projections of your anticipated sales. It's a self-assessment tool that is
created by estimating how much you will sell of each kind of product or service. The sales
forecast is the lifeblood of a business and the foundation for your business financial planning.
If accurately projected, you can plan for the future.

Sales forecasting can be a tricky process because there are so many different factors that can
affect sales - economic conditions, seasonal changes, changing trends and fashions, increased
competition, and other factors. Fortunately, one does not need an advanced degree or
complicated mathematical formulas to create a sales forecast, especially with computerized
software and tools around.

To create your forecast, you will need your list of products and services, your break-even
calculations, your marketing plan, and the research results for your market, industry and
economic environment. You will need to list the assumptions you make which can include the
seasons in your industry that affect sales of specific products or services, or sales generally;
months when you may not breakeven and the strategies you are going to use to improve
sales; products or services linked to another product or service etc. These pieces of
information will help you make realistic, educated guesstimates about future short-term or
long-term sales.

For start up, the sales forecast is very important, especially if a loan or venture capital is
needed to get capital. No matter how enthusiastic a lender or investor gets, they would still
need to see numbers to make sure that your business will be variable and this information is
shown by the sales forecast.

The hardest part of the sales forecast is maintaining the detailed and accurate financial
records needed to make the calculations but the calculation itself is actually pretty simple. For
a new business with zero sales history however, this can be tough. The standard method for
calculating a sales forecast without existing sales history is to base your predictions on the
performance of similar businesses that sell similar products or services to the same customer
demographic as yours and have the same geographic location. This would be a good time to
visit or call your competitor and talk to sales staff and customers and draw up a profile of your
target customer.

(Slide 11)


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Cash Flow Projections

“Happiness is a positive cash flow” is a title from the Home-Based Business for Dummies book
that I think is a funny but quite accurate description that any successful business owner that
understand the importance of managing the flow of cash into and out of their business will
agree with.

The cash flow projection is the management of the stream of incoming cash (revenue) flowing
into your business, and the stream of outgoing cash (expenses) flowing out of your business on
a daily business. The net of incoming revenue minus outgoing expense is your cash flow and it
is not the same as your profits.

Cash flow projection is a very important business management tool for any business, no
matter what stage they are at and if not managed properly, it can kill your business, even if
you have the best products in the market with record profitability

Unfortunately, this tool is something that small business owners tend to neglect which can be
detrimental to the business they worked so hard to set up. Good cash flow management is
not about bringing in more cash or lowering your expenses. It is about timing the flow of
money.

Taking time to prepare a cash flow projection can help you identify cash shortages early and
do something about it before issues come up. Some things that can be done to improve cash
flow are:

- invoicing your clients more frequently
- require payment upon receipt or shorter credit period
- processing payroll less frequently e.g. bi-monthly instead of weekly
- requesting changes due dates on the bills you have to pay etc.

(Slide 12)
Financing Options


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The key financial issues we’ve explored so far gives us pretty much all the information we need
to choose the best strategy for getting the (starting and operating) capital we would need to
start and run our new business.

The main ways to fund a small business include:

 Personal Investment - Going back to our personal financial situation assessment, we will
know if we have the funds from our own personal coffers to fund our business venture or if
we need to look somewhere else for the full or part of our capital needs. This is one of the
most common way small businesses the world over are funded. Personal investment offer
the most freedom in how you run your business
 Loans – These can be either from a commercial bank or in some countries, from the
government. Loans can come with conditions; usually need collateral and repayment plans
that may not be too favorable. Bear in mind also that non-repayment can have more
severe consequences such as losing your home if you used that as collateral.
 Borrowing from family and/or friends – this can be a good way to quickly get the funds you
need for your startup, with less conditions. However, mixing family/friendship with money
can cause problems in these relationships
 Private Investors can come up with the money you need but this usually asks for
percentage of the business profits and a voice in voice in how you run the business.

Other ways of getting funds include using credit cards, bartering with other businesses,
arranging credit terms with suppliers and leasing or renting major operating equipment.
Financing options can be any one or a combination of these options.

(Slide 13)
Keeping Business Records


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Keeping business records is commonly ignored, especially at startup and by Sole Proprietors
but it is an important part of managing business finances and the business in general, no
matter what stage a business is at.

Keeping business record start with separating personal and business finances and it can be
legally required - if your business is registered as a limited liability company for example. It
also makes extracting information to produce sales and expense reports and complete tax
forms easier. Establishing a business bank account can also enable you to have checks printed
with your business and a merchant credit card if you help you project a more professional
image.

Record keeping is tedious and can be a lot of work but is the first step in creating all the
business and financial operating and management tools that are key for any business.

It is also necessary to help you keep track of vital information such as:
 who owes you money, how much they owe you, and when the money is due to you
 who you owe money to, how much you owe
 when you must pay the bills
 how much you paid for inventory and how old your inventory is
 purchases you have ordered but not yet received
 sales orders you have taken but not yet filled
 how much money you have in the bank
 whether or not the checks you have written have cleared your bank account
 what your equipment, furniture, and fixtures are worth, as well as when and where you
purchased them
 any warranties or maintenance agreements you have
 client information and agreements, such as contracts
 agreements you have with other people, such as your rent or lease
 agreement, loan documents, credit card terms, etc.

Fortunately, computerized tools and software such as automated filing systems and
accounting software packages exist to help up easily and quickly keep track of our
transactions.

(Slide 14)


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Financial Analysis & Management

To be truly successful, a business owner will need to pay close attention to the financial details
of their company. With careful analysis and proper management and controls in place, the
business can be taken to where they envision it to be.

Financial analysis and management focuses on the three major financial statements and day-
to-day bookkeeping. These can either be handled entirely by you, the business owner or a
hired accountant and/or bookkeeper. You can approach it as a combination of the two – do
the daily bookkeeping yourself and hire a professional to prepare financial statements and
taxes.

Either way, most business owners find this aspect of the business overwhelming but the
availability of easy to use accounting software such as Quickbooks, Quicken and Sage
Acconting makes the work a lot easier, quicker and more accurate.

The three major and most popular financial statements are the Profit and Loss Statement (also
known as the "statement of profit and loss", an "income statement" or an "income and
expense statement"), The Balance Sheet and Cash Flow Projections. They each tell a different
story about the state of your finances and have a different role to play in your financial
analysis and ultimately, business management. We have already talked about the Cash Flow
Projection so we will focus on the other two.

The Profit and Loss Statement summarizes the revenues, costs and expenses incurred during
a specific period of time - usually a fiscal quarter or year. These records provide information
that tells a business owner whether or not a profit has been earned. It includes income,
expenses, and the difference between income and expenses, which is either profit or loss.

A Profit and Loss Statement reflects how a business was operated within a specific period of
time, such as a month or a year.

The Balance Sheet is expressed by the mathematical formula:

Assets = Liabilities + Owner’s Equity (or Capital)


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with the assets always on the left or top and the liabilities and capital on the right or bottom. It
reflects the value of a business on a specified date, taking into consideration everything that
has happened from its first day of operations to that date. If the balance sheet does not add
up, then the numbers are not right. The Balance Sheet accounts for some of the numbers such
as accounts payable and receivable that is not addressed by the Profit and Loss Statement.

Other aspects of financial management include establishing payment terms, processing
returns, refunds and cancellations and debt collection

(Slide 15)
Taxes & Deductions

Unless you are a tax professional or a certified public accountant, you will find taxes and
deductions complex and confusing, especially at the beginning of your business. Sadly, this
cannot be used as an excuse if you fail to pay your taxes or you do it wrong. Penalties and fines
will still come your way and this is why the first thing most business owners do is hire a
professional to take care of this.

Which taxes to pay? How much you have to pay? When to pay them? Which forms to use?
What deductions you can take? What to do if you can’t afford to pay your taxes? What about
sales tax? etc. are all questions are best answered under the advisement of a professional at
the very least. Even then, it will still be advisable to gain some knowledge and understanding
of the basic requirements

(Slide 16)
What To Do / What Not To Do

Do Don’t
 gain basic knowledge of accounting to  avoid or neglect your accounting and


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be able to understand and bookkeeping
communicate your financial situation  expect to use ignorance as an excuse
and needs when it comes to paying your taxes
 consult and/or retain a professional  overlook your cash flow projections
accountant or tax expert  try to do it all by yourself just to save on
 separate you personal from business fees
records  confuse profitability with cash flow
 prepare financial statements regularly
 Take stock of your personal financial
situation

(Slide 17)
This completes our session today. Once again thank you all for being here and we hope you
found this session helpful. Please join us again next week when we will be talking about the all
important location, location, location. As always, please help us improve this training by giving
your feedback in the survey at the end of this training.

Have a great weekend!


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