Entrepreneurship Ch 9 PPT Cash Flow.ppt

1. Entrepreneurship
Chapter 9
Cash Flow and Taxes

2. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
2
The Income Statement does not
Show How Much Cash You Have
 There is often a time lag between making a
sale & getting paid.
 You can make a lot of sales & still be low on
cash.
 The income statement includes non-cash
expenses, such as depreciation.
Use a cash flow statement to make sure you
always know how much cash you have on hand.

3. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Rules to Keep Cash Flowing
 Collect cash as soon as possible.
 Pay your bills by the due date, not earlier.
 Check your available cash daily.
 Lease instead of buying equipment when
practical.
 Avoid buying inventory (stock) that you do
not need.

4. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Cash Flow May Be Cyclical
 For many businesses, the amount of cash flowing
into the business ebbs & flow throughout the year.
 If this is true for your business, include a
seasonality scenario in your business plan.
Examples:
A flower store may have more cash around Mother’s Day &
Valentine’s Day & less cash during the summer.
A college bookstore will have more cash once school starts &
less when it has to buy inventory before the school year begins.

5. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Cash Flow Statements
have 3 Sections
1. Cash inflows (or receipts)
—operation (money used to run the business)
—investment (money invested in the business)
—financing (debt & equity used to finance the
business)
2. Cash outflows (or disbursements)
3. Net change in cash flow (positive or negative)
Cash Flow = Receipts – Disbursements

6. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Cash Flow
Statement

7. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Forecasting Cash Flow
 Prepare monthly cash flow projections
(estimates) to make sure there is
enough money coming in to pay bills.
 Project cash receipts from all possible
sources
 Checks, credit card orders, & cash
 Subtract expenses to be paid during
the forecast time period.

8. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Risking Your Cash on Inventory
 Inventory creates risk because it may not
be sold at a profit.
 Storage Costs: it costs money to store
inventory
 Pilferage: theft of inventory by employees
or customers can be costly
Make sure you can sell inventory at a price that
covers COGS, storage, and pilferage . . . and still
earn a profit.

9. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Other Cash Flow Concerns
 Credit Squeeze: when customers
want products & funds are needed to
pay vendors but are not available
 Burn Rate: initial deficits in operations
need to be covered by financing.
Burn Rate = # of Months Before Cash Runs Out =
Cash on Hand/Negative Cash Outflow per Month

10. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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The Time Value of Money
 Future Value of Money = amount it will
accrue (gain) over time through investment
 Present Value of Money = amount an
investment is worth discounted back to the
present
 Inflation
 Risk
 Opportunity

11. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
11
Self-Employment Tax
 Employees have federal Social Security tax taken out
of their pay by employers.
 Self-employed people must pay their own self-
employment tax into the Social Security system.
 If you earn over a minimal amount per year from self
employment, you must pay self-employment tax to
Social Security.
 Use tax form Schedule SE

12. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Income & Sales Taxes
 Entrepreneurs also pay income tax to federal & state
governments.
 Income & self-employment tax returns must be mailed to
the Internal Revenue Service annually.
 If you sell products/services to the public in most states,
you must collect state sales tax & submit the tax you
have collected quarterly.

13. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
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Each Legal Structure has Tax Pros & Cons
 Sole Proprietorship—all profits reported as personal
income by owner.
 Partnership—profits & losses shared by partners &
reported on their individual tax returns.
 Corporation—profits are taxed depending upon the
type of corporation. When owners receive share of
profits, they must report them on their individual tax
returns & pay tax on them.

14. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Maintain Good Records
 The IRS may audit (check) your financial
records at any time.
 Keep records accurately & retain all records,
receipts & invoices for at least 6 years.
 Use a professional tax preparer or have one
review all returns that you prepare.

15. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Working Capital
Working Capital =
Current Assets – Current Liabilities
 Cash company can use to grow
 How much cash a company will have left over if it
uses its cash to pay all its short-term debts.
 A company with positive WC will outperform a
company with negative WC, as it can use cash to
develop products, advertise, and the like.