Entrepreneurship

1. Entrepreneurship Chapter 9 Cash Flow and Taxes

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. 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. 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. 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. Cash Flow Statement

7. 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. 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. 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. 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. 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. 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. Each Legal Structure Has Tax Pros & Cons • Sole Proprietorship—all profits are reported as personal income by owner. • Partnership—profits & losses are shared by partners & reported on their individual tax returns. • Corporation—profits are taxed depending on the type of corporation. When owners receive share of profits, they must report them on their individual tax returns & pay tax on them.

14. 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. 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.