Financial Statements & BUSINESS FINANCING
We started the financial discussion by asking the question, “Who uses financial information?” From a managerial standpoint, your use of financial information has been the focus. Now, we turn the discussion to outside users of financial information, including lenders, investors and governmental agencies. Financial statements are the standard means of presenting financial data to users like these.
This session introduces the Balance Sheet, Income Statement and Statement of Owner’s Equity. These statements are prepared with financial data gathered over your accounting year. Projected financial statements use financial information developed from your projections and assumptions, and explain how your business will perform if those projections become reality.
This section also briefly explores the use of industry benchmarks and financial ratios to understand and analyze financial statement data.
Balance Sheet Worksheet
The balance sheet is a snapshot of your business’s financial condition on a particular day. It lists your business assets (what your business owns at cost) and liabilities (what your business owes). The owner’s equity in these assets is the difference between the dollar value of the assets and the associated liabilities.
You are going to prepare a balance sheet as of the end of your last fiscal year, or the startup date of your business. You will be filling in the left-hand (Current) Balance Sheet on the following page. You should include all assets and liabilities as of the appropriate date. Later, you will return to the right-hand side of this sheet and prepare a projected balance sheet for a date one year in the future.
Step 1	Fill in the amounts for each of your Current Assets and calculate your Total Current Assets.
If you are an existing business, use historical information as of the end of your last fiscal year. If you are starting a new business, use the numbers that apply as of your startup date.
Step 2	Fill in the amounts for each of your Fixed Assets (Land, Buildings, Equipment, and Other), less accumulated depreciation, and calculate your Total Fixed Assets.
Step 3	Calculate your Total Assets (Total Current Assets + Total Fixed Assets).
Step 4	Fill in the amounts for each current and long-term liability, and calculate the required totals.
Step 5	Calculate Owner’s Equity (Total Assets - Total Liabilities).
Step 6	Check your math. Total Liabilities + Owner’s Equity must equal Total Assets.
Note: When you return to this worksheet to complete the one-year projection, you will repeat steps 1 through 6.
Balance Sheet Worksheet
CURRENT |  | PROJECTED
Date prepared: |  | Date prepared:
ASSETS |  | ASSETS
Current Assets |  | Current Assets
Cash | $ | Cash | $
Accounts Receivable |  | Accounts Receivable
Inventory |  | Inventory
Other Current Assets |  | Other Current Assets
Total Current Assets |  | Total Current Assets
Fixed Assets |  | Fixed Assets
Land | $ | Land | $
Buildings (less accum. depr.) |  | Buildings (less accum. depr.)
Equipment (less accum. depr.) |  | Equipment (less accum. depr.)
Other fixed assets (less accum. depr.) |  | Other fixed assets (less accum. depr.)
Total Fixed Assets |  | Total Fixed Assets
(A) TOTAL ASSETS |  | (A) TOTAL ASSETS
LIABILITIES |  | LIABILITIES
Current Liabilities |  | Current Liabilities
Accounts Payable | $ | Accounts Payable | $
Other Current Liabilities |  | Other Current Liabilities
Total Current Liabilities |  | Total Current Liabilities
Long-Term Liabilities |  | Long-Term Liabilities
Debt | $ | Debt | $
Other Long-Term Liabilities |  | Other Long-Term Liabilities
Total Long-Term Liabilities |  | Total Long-Term Liabilities
(B) TOTAL LIABILITIES |  | (B) TOTAL LIABILITIES
(A - B) OWNER’S EQUITY | $ | (A - B) OWNER’S EQUITY | $
Check your math! Does Total Liabilities + Owner’s Equity = Total Assets?
Monthly Projected Income Statement Worksheet
You are now ready to assemble the data for your projected income statement. This statement will calculate your net profit or net loss (before income taxes) for each month.
Step 1	Fill in your sales forecast for each month.
You already estimated these figures on the Sales Forecast Worksheet in Session 7.
Step 2	Fill in your Cost Of Product Units Sold for each month.
You already estimated these figures on the Cost of Product Units Sold Worksheet in Session 7.
Step 3	Calculate Gross Margin for each month (Sales - Cost of Product Units Sold = Gross Margin).
Step 4	Fill in total labor-related operating expenses (salaries, plus mandatory and optional benefits).
You estimated these figures on the Employee Salaries/Wage & Benefits Worksheets in Session 3, so copy them here. Be sure to verify that your assumptions are still valid.
Step 5	Fill in your total nonlabor operating expenses.
You estimated these figures on your earlier worksheets and used them on your Cash Flow Projection Worksheets (Outside Services, Insurance, Advertising, Occupancy Expenses and Miscellaneous Expenses).
Step 6	Calculate the expense labeled “Interest–New Debt” (i.e., interest expense on new debt).
Check the current lending rate for commercial loans, so you use a realistic interest rate.
Step 7	Enter the Depreciation numbers from your Fixed Assets Worksheet in Session 7, using the Total Fixed Assets monthly depreciation figures.
Step 8	Enter the interest on existing debt.
Again, you have this information on your prior worksheets.
Step 9	Calculate yearly totals for all categories (add across the rows).
Step 10	Calculate Total Operating Expenses for each month (add down the columns).
Step 11	Calculate Net Operating Profit for each month (Gross Margin - Total Operating Expenses = Net Operating Profit). Also, calculate the yearly total. Determine the amount of other gains or losses, and then calculate Net Profit or Net Loss before income taxes.
Step 12	For a sole proprietorship or partnership, enter the amount of Owner Withdrawals from your Cash Flow Projection Worksheets.
MONTHLY PROJECTED INCOME STATEMENT WORKSHEET
| 1   Jan | 2   Feb | 3  Mar | 4  Apr | 5  May | 6   Jun | 7   Jul | 8  Aug | 9  Sep | 10  Oct | 11   Nov | 12   Dec | Yearly Total
Sales
Cost of Product Units Sold
Gross Margin
Operating Expenses
Salaries/Wages & Benefits
Non-Labor Expenses:      Outside Services
Insurance
Advertising
Occupancy Expenses
Misc. Expenses
Depreciation
Interest - Old Debt
Interest - New Debt
Total Operating Expenses
Net Operating Profit
Other Gains/Losses
Net Profit (or Loss) Before Income Taxes
Owner Withdrawals (Sole Proprietorships and Partnerships)
Projected Balance Sheet
Your Projected Balance Sheet will present a picture of your business’s financial condition at the end of your projected first year. You will be able to see how your decisions have affected your business assets (what your business now owns at cost), your associated liabilities (what your business owes), and your equity in the assets.
Go back to the Balance Sheet Worksheet. You will be filling in the right-hand side (labeled Projected). Fill in the “Prepared as of” date to reflect the end of the period for which you will prepare the projections. Abbreviated instructions for filling out the balance sheet are repeated below. You will use the numbers from the projected worksheets you have prepared to this point.
Step 1	Fill in the amounts for each of your Current Assets, and calculate your Total Current Assets.
Step 2	Fill in the amounts for each of your Fixed Assets (Land, Buildings, Equipment, and Other) less accumulated depreciation, and calculate your Total Fixed Assets.
Step 3	Calculate your Total Assets (Total Current Assets + Total Fixed Assets).
Step 4	Fill in the amounts for each liability, and calculate the required totals.
Step 5	Calculate Owner’s Equity (Total Assets - Total Liabilities).
Step 6	Check the amount of Total Liabilities + Owner’s Equity. This amount must equal the amount for Total Assets.
Step 7	Calculate the liquidity ratios shown below, and determine the amount of working capital your business has as of the date of your Projected Balance Sheet.
Liquidity Ratios
Lenders are particularly interested in your business’s short-term ability to pay current and unexpected debts. This is referred to as liquidity.
Liquidity ratios measure your business’s ability to meet short-term debt. Your industry research will tell you what the benchmarks are for these ratios, as will your banker.
Working Capital: Current Assets - Current Liabilities = ________ Target Minimum: ________
Current Ratio: Current Assets ÷ Current Liabilities = ________ Benchmark: _____
Quick Ratio: (Current Assets - Inventory) ÷ Current Liabilities = ________	Benchmark: _____
Statement of Owner’s Equity Worksheet
The Statement of Owner’s Equity is a bridge between the Income Statement and the Balance Sheet. The Income Statement details the income-producing activities of your business and determines your net income. This net income is produced for the benefit of the owners, so the Statement of Owner’s Equity adds it to amounts already owned by the owners. The newly adjusted amount of owner’s equity appears on the Balance Sheet as a single line item.
The appearance of the Statement of Owner’s Equity depends on the form of ownership of your business. Unincorporated businesses, sole proprietorships and partnerships use the first format shown below. Incorporated businesses, corporations and limited liability companies use the second format.
Step 1	Determine which format is appropriate for your business.
Step 2	Refer to your Projected Balance Sheet Worksheet, Cash Flow Projection Worksheet and Projected Income Statement Worksheet. Fill in all the amounts except the final line.
Step 3	Calculate the amount for the final line (Ending Owner’s Equity or Ending Retained Earnings).
Statement of Owner’s Equity Worksheet
Your Unincorporated Business Statement of Owner's Equity For the Year Ended ________
Beginning Owner's Equity
+ New investment by owner(s)
+ Net income of business
- Owner Withdrawals
= Ending Owner’s Equity
Your Incorporated Business, Inc. Statement of Owner's Equity For the Year Ended ________
Beginning Retained Earnings
+ Net Income
- Dividends
= End Retained Earnings
Sources and Uses of Financing WorksheetS
There are two primary types of financing. Debt financing means you borrow money and then pay it back with interest. Equity financing means you trade partial ownership in your business for money. Funding sources might include your own savings, a family member, friends, financial institutions, private lenders, suppliers or leasing companies.
Having completed the Session 7 worksheets, you should know how much financing you need to cover your growth or startup and operating costs. First, check your sales forecast for accuracy. Then, look at your growth or startup expenses and cash flow projections. If you don’t have enough cash to cover expenses, you have decisions to make. If your business doesn’t generate sufficient cash to cover your projected cash requirements, you have more decisions to make. For example, do you have personal savings to invest in your business? If so, is this an investment that you and your family are willing to make? Will you need to seek outside funding instead of—or in addition to—your personal savings?
Step 1	How much money do you need to borrow—or to invest yourself—to cover startup or growth expenses and operate for your first year? How much financing will you need, and for how long? Will you seek debt or equity financing? List potential sources for each.
Debt Financing
Amount sought $ _________________
How long do you need this financing? _________________
How much debt can you afford per month? _________________
Potential sources
Terms
Availability
Advantages
Disadvantages
Documents needed
Equity Financing
Amount sought: $ _________________
How long do you need this financing? _________________
How much control of your business are you willing to give up?	 _________________
Potential sources
Terms
Availability
Advantages
Disadvantages
Documents needed
Step 2	List your chosen sources of startup capital in the Sources of Financing column of the Sources and Uses Worksheet on the following page.
List the amount each source will contribute to your venture, and then total all funds in the Amount column.
Step 3	Show how you will use this capital.
Review the Growth or Startup Expenses Worksheet from Session 7, and break down your use of capital by the expense categories that make sense for your business (e.g., facilities, equipment, working capital, promotions, etc.).
Sources and Uses Statement Worksheet
Sources of Financing | Amount
TOTAL SOURCES OF FINANCING
Uses of Financing | Amount
TOTAL USES OF FINANCING

Worksheets Assignment for Session 9
Complete and review all the worksheets in this session before writing the corresponding section of your business plan.
Writing Your Business Plan
Use the information from this session to write the sections of the business plan listed below. Start with the headings and subheadings just as they’re shown here. Then, follow the instructions under each subheading to write that section of your business plan. Section V. Financial Plan A. Capital Requirements Loans, Grants and Self-Financing Review Step 1 on the Sources and Uses of Financing Worksheet. Write a paragraph explaining how you intend to finance your business. Explain how much money you’ll need to borrow—or to invest—to cover startup expenses, fixed asset purchases and operating costs. Explain how much of the total funds will come from owner investment and how much from borrowed funds. Also, explain how long you’ll need any borrowed funds and how you intend to pay it back. This section should bring into focus all the financial information you’ve gathered up to this point. D. Financial Statements Sources and Uses Statement Make a copy of your Sources and Uses Statement Worksheet and include it here. Personal Financial Statement Review the Personal Financial Statement that you prepared in Session 1, and update it if necessary. Income Statement Make a copy of the Monthly Projected Income Statement from this workbook session and include it here. Balance Sheet Make a copy of the Current and Projected Balance Sheets and Statement of Owner’s Equity to include in this section. Also, write a brief statement drawing some conclusions about what these statements are telling you as the financial manager of your business.