Managing the Venture’s Financial

Resources
 2 ways to raise capital:

• Debt Financing
– Secured financing of a new
venture that involves a
payback of the funds plus a
fee (interest for the use of
the money).

• Equity Financing
– Involves the sale
(exchange) of some of the
ownership interest in the
venture in return for an
unsecured investment in
the firm.
 There are 3 major financial statements (issued quarterly
and/ or annually):

A. Cash Flow
Statement

B. Balance Sheet;

C. Profit and Loss

Statement / Income
Statement
 A. CASH FLOW
= is the net amount of cash and cash-
equivalents moving into and out of a
business.

(+) Positive cash flow (cash inflow exceeds cash

outflow) indicates that a company's liquid
assets are increasing, enabling it to settle
debts, reinvest in its business, return money to
shareholders, pay expenses and provide a
buffer against future financial challenges.
(-) Negative cash flow indicates that a company's
liquid assets are decreasing.

Net cash flow is distinguished from net income,

which includes accounts receivable and other
items for which payment has not actually been
received. 

Cash flow is used to assess the quality of a

company's income, that is, how liquid it is,
which can indicate whether the company is
positioned to remain solvent.
Cash Flow Management
= is the process of monitoring, analyzing, and
adjusting your business's cash flow!

 80% of business fail is due to poor management

of cash flow. 
 If your business constantly spends more
than it earns you have a cash flow problem!

For small businesses, the most important aspect of

cash flow management is avoiding extended
cash shortages, caused by having a too great
gap between cash inflows and outflows.
 Cash Flow Planning
There are many online cash-flow
= allowsyou to know if management tools/ apps, like:
and when you will
face a cash flow • Free Cash-Flow Projection
Templates (exp.: Google Docs offers
shortage/ crunch and templates which can be shared and
act accordingly in edited with other members of your
Google Apps account);
order to keep the
business solvent! • QuickBooks’ Cash Flow Forecast
Report (exp.: Intuit's QuickBooks);

• As a business owner • Budget's Online Expense Tracking

you need to perform and Planning Tools;
a cash flow 4. Pulse's Cash-Flow Modeling
analysis, on a regular Software;
basis.
5. Master PlanGuru.
 Cash Flow Categories:
• Operational Cash Flow refers
to cash received or spent as a
result of a company’s business
activity.

• Investment Cash Flow refer to

cash received or spent through
investing activities (buying and
or selling assets).

• Financing Cash Flow refers to

cash received trough debt or
paid out as debt repayments.
 Cash Flow problems can be generated by:
Endogenous factors:
• Poor overall management and fin. mg. resulting in mismatches between cash inflows and
outflows;
• Expenses are too high relative to sales volume; question every expense, especially:
staffing, capital expenditures (e.g. equipment and plant) and office costs;
• Low price strategy (especially at the beginnings) with low gross profit margins;
• Over-sized inventories, resulting in blocked funds;
• Improper offer structure;
• Undergoing rapid expansion, that generally involves higher costs for: new employees; rent
for additional space; advertising; capital investment for new facilities, equipment, etc.
increased levels of inventory;

Exogenous factors:
• Customer payment delays results in poor collection on receivables and extended credit to
other businesses; invoicing is normally done on 30 or 60 day terms and it is not uncommon
for customers to delay payment.
• Delays in money transfers from the banking system;
• Unofficial payments not included in the accounts;
• High taxes (payable prior to cashing some effective amounts);
• Sales are too low.
 How to avoid Cash Flow Crisis:
• Carefully monitor your cash flow to stay one
step ahead of any potential issues and
develop a strategy for dealing with a crisis
before it happens;

• When cutting costs, make sure you do this

carefully and start with the unessential
costs. Cutting employee pay should be the
last thing to do…;

• Try to increase collections. Send invoices

out quickly and find ways to encourage
customers to pay faster;

• Seek extensions on the timeframe of your

payments to vendors and lenders;

• If you need to borrow more money consider

the consequences and plan carefully how
you will make timely repayments.
 B. The Balance Sheet

= is a statement of the

financial position of a
business which states the
assets, liabilities, and
owners' equity at a
particular point in time.

All accounts are categorized

as an asset, a liability or
equity. The relationship
between them is expressed
in the equation:

Assets = Liabilities + Equity.

 Assets:

1. Fixed Assets
• Intangible assets
• Tangible assets
• Financial assets
2. Current assets
• Stocks/ inventory
• Receivables
• Financial investment on short term
• Petty cash and bank accounts
3. Prepaid Expenses
 Assets
The faster the business could make an asset liquid (convert it to cash), the
higher the asset should be on the balance sheet.
CASH - means the money you currently have on hand; it represents the
bank or checking account balance for the business; a cash equivalent is
an asset that is liquid and can be converted to cash immediately.

ACCOUNTS RECEIVABLE - how much money people are supposed to

pay you, but that you have not actually received yet; usually, this money
is sales on credit, often from “B2B” sales, where your business has
invoiced a customer.

CURRENT ASSETS - are those that can be converted to cash within one
year; Cash, accounts receivable, and inventory are all current assets;

LONG-TERM ASSETS - referred to as “fixed assets”, include things that

will have a long standing value, such as land or equipment.

ACCUMULATED DEPRECIATION - reduces the value of assets over time.

TOTAL LONG-TERM ASSETS - term is sometimes used to describe long

term assets + depreciation on a balance sheet.
Liabilities

The sooner something needs to be paid, the higher up that line item goes.

ACCOUNTS PAYABLE= money that your business owes, the other side of the coin to
“accounts receivable; it is comprised of the regular bills that your business is
expected to pay;

SHORT-TERM DEBT - is debt that you have to pay back within a year (usually any short-
term loans). This can also be referred to on a balance sheet as a line item called
current liabilities or short-term loans.

TOTAL CURRENT LIABILITIES - the above numbers added together are considered the
current liabilities of a business, meaning that the business is responsible for paying
them within one year.

LONG-TERM DEBT - are the financial obligations that it takes more than a year to pay
back; this is often a hefty number, and it doesn’t include interest.

TOTAL LIABILITIES - Everything listed above that you have to pay out or back compiled
together.
Equity

PAID-IN CAPITAL = money paid into the company as investments; this

is actual money paid into the company as equity investments by
owners.

RETAINED EARNINGS - earnings (or losses) that have been

reinvested into the company, not paid out as dividends to the
owners. When retained earnings are negative, the company has
accumulated losses.
NET EARNINGS – the higher it is, the more profitable your company is.
This line item can also be called income or net profit.

TOTAL OWNER’S EQUITY - Equity means business ownership, also

called capital. Equity can be calculated as the difference between
assets and liabilities. This can also be referred to as “shareholder’s
equity” or “stockholder’s equity.”

TOTAL LIABILITIES AND EQUITY - this is that final equation I

mentioned at the beginning of this post, assets = liabilities + equity.
 Yearly Balance Sheet’s Structure

• Current assets • Current/short-term liabilities

– Cash – Credit cards payable
– Petty cash – Accounts payable
– Inventory – Interest payable
– Pre-paid expenses – Accrued wages
• Fixed assets – Income tax
– Leasehold • Long-term liabilities
– Property & land – Loans
– Renovations/improvements
– Furniture & fit out • Total liabilities (Add up all short-term and
– Vehicles long-term liabilities)
– Equipment/tools
– Computer equipment
• Stockholders’ equity
Total assets (Add up all)
Total Liabilities and equity

By subtracting liabilities from assets, you can

determine your company’s net worth at any
given point in time
Net assets = Total assets - Total liabilities
 C. Profit & Loss Statement (P&L)/ Income Statement

= shows business performance over a specific period of time, recording

incomings and outgoings and sales income generated, including
estimates of work in progress but not yet invoiced.

P&L indicates how the revenues (money received from the sale of products
and services before expenses are taken out, also known as the “top
line”) are transformed into the net income (the result after all revenues
and expenses have been accounted for, also known as “net profit” or
the “bottom line”).

Income statements should help investors and creditors determine the past
financial performance of the enterprise, predict future performance, and
assess the capability of generating future cash flows through report of
the income and expenses.

It is important to compare income statements from different accounting

periods, as the changes in revenues, operating costs, research and
development spending and net earnings over time are more meaningful
than the numbers themselves.
 Profit and Loss Statement’ Structure:

• Sales
– Total sales
– Cost of goods sold
– Gross profit/ net sales (Calculate total sales minus cost of goods sold minus any other expenses related to
the production of a good or service)
• Expenses
– Accountant fees
– Advertising & marketing
– Bank fees & charges
– Bank interest
– Credit card fees
– Utilities (electricity, gas, water)
– Telephone
– Lease/loan payments
– Rent & rates
– Motor vehicle expenses
– Repairs & maintenance
– Stationery & printing
– Insurance
– Superannuation
– Income tax
– Wages (including PAYG)
• Total expenses (Total all of your expenses above)
• Net profit (Calculate Gross profit/net sales minus Total expenses)
 The Romanian version of P&L Statement includes 3 explicit types of
incomes, expenses and profits/ loss:

a. Operating (Operating
Section) incomes/ expenses and
profits/ loss;

b. Financial (Non-
operating Section) incomes,
expenses and profits/ loss;

c. Extraordinary (Irregular/
Discontinued
Operations) incomes, expenses
and profits/ loss:
Working Capital (WC)
is calculated as:

Working Capital = Current Assets - Current

Liabilities

The working capital ratio =

Current Assets/Current Liabilities

It indicates whether a company has enough

short term assets to cover its short term
debt.
Anything < 1 indicates negative WC (working
capital). While anything > 2 means that
the company is not investing excess
assets. A ratio between 1.2 and 2.0 is ,
usually considered sufficient.  Also known
as "net working capital".

It is a measure of both a company's efficiency

and its short-term financial health.
Working Capital:
In Romania, the major financial statements are:

- the Balance Sheet;

- the Income Statement;

- the Cash Flow Statement;

- the Statement of Stockholders´ Equity (reports changes in

stockholders´ equity accounts during the year);

- the Statement of Retained Earnings (reflects the beginning

balance, additions to, deductions from, and the ending balance of
the retained earnings account);

- the Notes to the Financial Statements (explain some of the items

presented in the main body of the statements).