Managing Your Money:
Financial Statements & Business Financing
Session 8
Date:
Due:	Section III: Part C
Section V: Parts A, B, C
Class Opener (10 min.)
Articles of interest, best / worst news, brainteaser, etc.
Instructor Topics (60 min.)
(35 min.)	1.	Overview of Financial Statements
Balance Sheet
Income Statement
Statement of Owner’s Equity
Annual Cash Flow Statement
Ratio Analysis
(10 min.)	2.	Financing Your Business
Types of Financing
Money Sources
(15 min.)	3.	Preparing to Seek Financing
Guest Speaker (30 min.)
Small-business banker, or local entrepreneur who has secured several sources of financing
Break (20 min.)
Refreshments
Networking activity
Work Period (60 min.)
Homework Review—Session 7
Workbook Preview—Session 8
Assignment for Session 9
WORKBOOK	Complete the worksheets in Workbook Session 8. WRITE	After completing the Session 8 worksheets, follow the instructions on the Writing Your Business Plan page at the end of the worksheets to complete Section V. Financial Plan: A. Capital Requirements (Loans, Grants and Self-Financing) and D. Financial Statements. TEXT	Read Chapters 24 through 27 (Dealmaking and Contract Management, Managing Resources, Financial Management, and Project Management).
Additional Instructor Notes
Session 8
Overview of Financial Statements
NOTE: Although current business owners in your class may claim to understand financial statements, their actual grasp of the topic may be shaky. Students should feel that this class is a safe space to ask questions about financial statements without fear of embarrassment. Be encouraging. Assure them that there are no foolish questions. The only thing that’s foolish is refusing to learn something you need to know!
Ask the question: Who uses financial information? People will probably say bankers, financial institutions, the IRS, etc. But the most important user is you, the business owner.
Financial statements are a means of standardizing financial information. For outside users like lenders and investors, this makes it easier to compare it with data from other, similar businesses.
For business owners, standardizing financial data makes it easier to get feedback about business decisions, check performance against internal and external benchmarks, and identify planning opportunities and needs.
Use OHD 8-1 to introduce the financial statements you’ll focus on in this session. Make sure to emphasize the difference between historical statements and projected statements!
From a managerial standpoint, the Monthly Cash Flow Statement is perhaps the most important to the actual running of the business. This is why banks ask for the Projected Cash Flow Statement to be included with other financial statements.
Our focus is on managerial accounting, so our sessions emphasize not just what lending institutions require, but also what data the owner needs to make smart financial business decisions as they plan for growth. As we learned in the previous session, the key to useful financial data is clear, accurate and complete accounting and recordkeeping.
Emphasize that financial statements are not infallible. Each statement has specific purposes and limitations. And of course, a financial statement is only as accurate as the information that goes into it. (Garbage in, garbage out!)
Explain that financial statements are prepared using the historical cost principle, meaning that the amounts recorded are those at the time the transaction occurred.
Example: Suppose you buy a piece of property that costs $20,000. In 10 years, it may have a market value of $40,000. But the historical cost principle says you should use the original cost of $20,000. Why? Because fair market value can vary over time, but cost remains constant.
Ask the questions: In this example, which amount is more relevant to decision-making today, cost or fair market value? Which amount will be included in your financial statements?
This illustrates the limitations of the system and demonstrates that the true value of a business is not always reflected in the financial statements.
Balance Sheet
The Balance Sheet is a good introduction to the creation and purpose of financial statements. You need to know what you own and owe before moving forward with a new business idea!
Have students revisit their Personal Financial Statement Worksheet from WORKBOOK SESSION 1. Explain that this statement is actually a balance sheet showing assets, liabilities, and net worth. Note that the main difference between this statement and a business’s balance sheet is that the personal financial statement asks for market value information, which changes the terminology from owner’s equity to net worth.
Use OHD 8-2 to show a sample balance sheet. Explain each numbered category, and discuss the balance sheet formula: Assets = Liabilities + Owner’s Equity. Show how the formula works using the numbers in OHD 8-2. Point out that everything owned (assets) is either owned by creditors or by owners, which is why the formula works.
Have students turn to the Balance Sheet Worksheet on page 8-144 of the WORKBOOK. Point out that the balance sheet is a snapshot of the business on a given day. If possible, show the financial statements of a familiar business that owns something valuable that does not show up on the Balance Sheet (e.g., Nike’s “Swoosh” trademark or the formula for Coca-Cola). Emphasize that the balance sheet does not tell how much a business is really worth.
Projected balance sheet
Have students look at the Projected Balance Sheet. Explain that they should complete this after completing the Projected Income Statement. That way, it will reflect their business’s financial condition at the end of the projected first year. This will help them to see how their decisions affect business assets, liabilities and equity.
During the Work Period, you will have students look at the Projected Balance Sheet and see how their liquidity ratios will be affected as a result of the first projected year. You may want to preview that discussion here.
Ask the question: What will lenders be looking for in your Projected Balance Sheet?
Income Statement
Again, the income statement summarizes income-producing business activities over a specific period and shows the resulting net income or loss.
Projected monthly income statement
From a managerial perspective, this statement shows you the result of your projected income-producing activities, based on your budgets and assumptions.
What do the numbers mean?
Revenues and expenses are cash flows that result in assets and liabilities. The balance sheet shows assets and liabilities, while the income statement shows revenues and expenses. Remind students that the income statement is a historical record of a business over a given period.
Use OHD 8-3 to show a sample income statement. Explain each numbered category, and discuss the income statement formula: Net income = Revenue - Expenses.
Take care to explain the difference between the numbers here and the numbers on the cash flow projection. Key points include:
Sales. Discuss cash vs. accrual basis as it relates to the difference between this statement and the cash flow projections.
Cost of Goods Sold. In a historical statement, Cost of Goods Sold represents Beginning Inventory + Purchases - Ending Inventory. In a projected statement, Cost of Projected Product Units Sold is projected from anticipated sales volume. (Remind service businesses that this is a product entry only.)
Gross Profit. Is this really profit? Is this money available to pay for operating expenses? Is this cash? Discuss.
Operating Expenses. Are these cash expenses? Or are they accrued expenses? Discuss.
Depreciation. Explain non-cash items as another difference between the cash flow projection and income statement. Here, depreciation is visible.
Income Taxes. Note that taxes are deducted to calculate net income.
Net Income. Is this cash on hand? Discuss.
Using income statement information
Review your discussion from Session 7 regarding tools for analyzing financial information, including ratio analysis and benchmarks.
Vertical and horizontal analysis
Use OHD 8-4 to explain vertical analysis. For the income statement, discuss how tracking COGS, Gross Profit, Operating Expenses, and Net Income as a percentage of Net Sales helps you monitor profitability.
Ask the question: If your COGS percentage rises significantly, what does this signal? What managerial steps would you take?
Use OHD 8-5 to illustrate horizontal analysis. Discuss the need for additional analytical tools. Example: Sales may be increasing from a horizontal analysis perspective, but without vertical analysis you don’t know how much they’re increasing relative to sales increases.
The income statement and income taxes
NOTE: This is a crucial topic that could easily take up the entire session! Decide how much time you want to devote to this topic and how much detailed information you want to present.
At a minimum, explain the connection between the income statement and business taxation. Note the impact of cash vs. accrual accounting on taxable income. Point out how crucial timing is to net income in the accounting period for which an income statement is prepared.
Effective management in this area starts with the accounting and bookkeeping functions discussed in Session 7, which give you the necessary information for decisions relating to the timing of income and expenses within a given period.
Statement of Owner’s Equity
Explain that this statement is the bridge between the income statement and the balance sheet. It details the change in ownership as a result of income-producing activities of the business.
Ask the question: Does a positive equity balance mean that the business has cash to pay the owners? Discuss.
Use OHD 8-6 to show how the statement format differs based on the business’s legal structure.
Annual Cash Flow Statement
Although most small businesses leave this statement to an accountant, it’s a fairly easy one for to understand. Use OHD 8-7 to explain the numbered statement categories.
The summary shows the net increase or decrease in cash for the year, the beginning cash balance, and the resulting ending cash balance. It summarizes (for the accounting period) where cash came from, where it went, and how it affected the prior cash balance.
Note that this does not reflect the accrual method of accounting, since it is dealing with cash. Also, explain how the statement ties into the balance sheet’s cash amount.
Business owners are often frustrated because their financial statements show a large net income, and yet the business has cash flow problems. If possible, use a sample cash flow statement to discuss how cash outlay can build inventory, decrease debts, buy new assets, etc.
Ratio Analysis
As we discussed earlier, the tools used to analyze financial information are standardized because this improves communication between users of the information.
Discuss the usefulness and limitations of ratio analysis, which allows comparisons to be made among similar business types, industries, regions, etc. The standards developed from successful businesses are useful benchmarks for other business owners. However, regional and business-specific adjustments must always be factored in.
If possible, bring in a copy of Annual Statement Studies by Robert Morris Associates and Key Business Ratios by Dun & Bradstreet, and demonstrate how to find industry information. Also, note that many useful ratios are discussed in Chapter 26 Financial Management.
Comparing past performance to present performance is crucial to assessing your growth plans and understanding where your business is headed. Ratio analysis can tell you whether your financial condition is getting better or worse, and help you identify and fix problems before they spiral out of control. It can also keep growth on track by telling you whether you’re holding too much or too little inventory, or collecting receivables too slowly.
Use OHD 8-8 to discuss common asset management ratios and profitability ratios, all of which analyze income statement information. Discuss how lenders and investors use these ratios.
Use OHD 8-9 to discuss liquidity ratios and capital structure ratios, which are derived from information on the balance sheet. Briefly explain each ratio, and note the lenders’ preferred benchmarks for the current ratio (2:1) and quick ratio (1:1). Also, discuss how lenders view the balance of debt and equity. This will be a good lead-in for the financing section.
Financing Your Business
Securing capital requires selling lenders or investors on your track record, business plan, target market, employees, vision, professionalism and growth prospects.
In Session 1, we discussed strategies for bootstrapping. The value of this approach is clear when seeking startup or growth financing. Finding creative ways to lower your costs reduces the amount of outside financing you must seek, which reduces your liabilities and improves your business’s health. Don’t seek outside financing until you’ve made your business as lean and efficient as possible!
Types of Financing (see OHD 8-10)
Debt capital is borrowed money. No matter how your business fares, you must pay this money back by making scheduled loan payments, which include interest. This can be difficult during startup and early growth.
Equity financing is money raised by a business owner in exchange for a share of ownership. This isn’t a loan, so you don’t have to pay it back. However, getting equity financing usually entails sharing profits and giving up some management control to your new investors.
If your business is a sole proprietorship, it becomes a partnership or a corporation.
If your business is a partnership, the funder becomes a general or a limited partner and has all the rights specified in your partnership agreement.
If your business is a corporation, the investor becomes a holder of common or preferred stock and can exercise the powers of a stockholder as defined in your bylaws.
In some cases, a source of equity capital may ask you to guarantee a return on investment. If you agree to this, you will have to pay the investor even if your business fails.
Angel money
Financing from friends or relatives is often referred to as angel money. About 65 percent of small businesses start with financing from angel money and personal capital.
If you borrow angel money, handle it like a regular loan. Give your angel a promissory note stating the amount, interest rate and loan term. (If your angel doesn’t charge an interest rate, the gift tax may apply.)
If the angel money is in the form of equity financing, draw up legal documents stating the conditions. Once it’s signed, the angel owns part of your business and has a legal right to a share of your profits.
Think carefully before borrowing from friends and family. Remember, no business is a sure thing. You already have a lot riding on your business. Do you really want to gamble your personal relationships on it, too?
Money Sources
Almost every entrepreneurial business will need to raise additional capital at some point. The rules governing this process depend in part on the type of corporate structure in place.
Sources of debt capital
Although most people think of banks when they think of debt financing, many other sources exist. Requirements, risks, interest rates, maximum amounts and turnaround times vary, so research your options carefully. Use OHD 8-11 to go over the following sources of debt capital.
Banks
Different banks serve different markets. Small community banks may focus on serving local businesses, while a large commercial bank will usually take a much more conservative approach. Many banks prefer not to lend directly to startups; they usually prefer to make government-guaranteed loans. Community banks tend to be a better bet.
Almost every bank loan is a secured loan. This means that the business or business owner must offer collateral for the debt. Even when a business is a separate entity from its owners, banks normally require the owners to make a personal guaranty for the loan in addition to collateral. Thus, to get a $50,000 loan for new equipment, you may have to sign the loan personally, grant the bank a lien on the title to the equipment, and put up personal assets as collateral.
If possible, build a relationship with a local banker so that you’ll have an ally when the time for a bank loan comes. If you wait until the last minute, you’re less likely to make a wise choice.
Credit unions
Credit unions are nonprofit, cooperative, tax-exempt financial institutions that are required by law to limit membership to a specific population, such as members of an occupational field.
They tend to offer lower interest rates than a bank, but they also tend to offer smaller amounts. Still, if you are eligible to join, you might be able to borrow some or all of the capital you need. Credit unions often favor loans that foster community development or benefit their members.
Microlenders
Microlenders are typically nonprofits funded by community banks, credit unions, community foundations or federal agencies. They make short-term loans of $35,000 or less to businesses that lack access to traditional loans. They may also offer business mentoring and support.
Community development financial institutions (CDFIs) aid community renewal by promoting business growth and economic independence in disadvantaged communities. They also serve populations that lack access to traditional credit and financial services.
Lending circles are an interest-free form of microlending in which multiple borrowers pool their funds to form and secure a group loan. Members receive loans one at a time. Once a borrower repays the loan, the next borrower in the circle can use the funds.
Peer-to-peer lending
Peer-to-peer lending bypasses banks and connects borrowers directly to lenders through social networking. These loans may be secured or unsecured. There are three basic models:
In the marketplace model, sites like Prosper Marketplace connect qualified borrowers with private lenders through an auction process.
In the crowdfunding model, many individuals each contribute a small sum of money to fund a specific project. Kickstarter and IndieGoGo are popular examples. Funding is usually treated as a loan or contribution, but there are also equity-based crowdfunding options.
In the community lending model, a community or group pools its money and loans it to one of its members.
Commercial finance companies
Commercial finance companies focus on business loans that are considered too risky or unique for banks. The Money Store is a good example. Hidden costs can make these loans very expensive, so read the fine print carefully! Be prepared to offer lots of collateral, pay a high interest rate and face heavy penalties for early repayment.
Suppliers
Suppliers can be a source of capital in two ways. First, a major supplier may be willing to provide equity or debt capital if your business would benefit them significantly. Second, suppliers may be willing to provide trade credit, which gives you 30 or more days to pay invoices. Example: You may be able to order raw materials with a trade credit of 60 days, allowing you to sell the finished product before the bill comes due. Alternatively, you may be able to pay for the materials over time (e.g., $50 a month). Get these agreements in writing!
SBA loan programs
The SBA guarantees a portion of business loans made by banks and other lenders. This helps small businesses that can’t afford the terms offered by conventional lenders.
NOTE: Get current information on SBA loans, as these federal programs change frequently. SBA brochures make good handouts. You may also choose to leave this topic for your guest speaker.
Rural Economic & Community Development Administration (RECDA) loans
Through RECDA, the U.S. Department of Agriculture offers various loans and grants for small businesses operating in or benefiting rural areas. These programs usually support specific development goals, such as increasing broadband coverage or energy efficiency. Visit www.rurdev.usda.gov for current information.
Other government loans
Federal and state agencies have created numerous grants, loan programs, incentives and other financing devices to help small businesses. In addition, each state has its own unique financing programs and tax incentives for small businesses. Before teaching this session, consult your local economic development organization to find out which resources are currently available.
Business incubators
Business incubators allow multiple startups to operate in a single building. In addition to office and manufacturing space, they usually offer technical assistance, support networks, and access to capital. Once a startup is profitable, it moves into its own space.
Loan guarantors
Small-business owners who cannot meet the collateral and capacity requirements of their loan application may be able to find a third party with assets that can be used as collateral. The third party assumes the loan payments in the event of default. The cost of such a guarantee varies.
Loan brokers
Loan brokers locate financing for business owners. They often charge an advance fee whether you obtain financing or not. Some will also take a percentage of your loan. Research loan brokers carefully, and always check their references.
Accounts receivable financing
This financing is secured by your accounts receivable (and in some cases, your inventory). Lenders usually base the loan amount on a percentage of your receivables. The older the receivables are, the less they tend to be worth.
Factoring
Factoring entails selling your accounts receivable at a discounted rate to a company that then earns a profit by collecting the full amount. As with accounts receivable financing, the age of the receivables affects their value. In addition to the discount, fees may apply.
Leasing
Leasing can be considered a form of financing because it frees up funds for other needs. Leasing is tax-deductible, requires little or no down payment, and may have a longer term than a loan. However, the long-term cost is almost always higher than that of a loan.
Use OHD 8-12 to discuss the pros and cons of leasing vs. buying.
Sources of equity capital
The most obvious and common form of equity capital is the business owner’s personal funds. Use OHD 8-13 to discuss other options, based on the needs and capabilities of your class.
Angel investors
Angel investors are wealthy individuals or groups who invest their money in promising early-stage startups in return for equity shares. Angel investors with expertise in your type of business may provide valuable guidance. But if you don’t find their guidance helpful, you may be stuck with it anyway! Angels tend to expect high rates of return (e.g., 25 percent).
Strategic partnerships
Large corporations often invest in small businesses that will help them enter new markets, develop a new technology or provide a return on investment. The motive is more than profit; they are looking for businesses that fit into a strategic mission or long-range plan.
Small Business Investment Company (SBIC)
This is the only venture-capital program sponsored by the federal government. The SBA licenses private venture-capital firms and guarantees a portion of their financing. SBICs then provide equity capital and long-term debt to small businesses with high growth potential.
Selling stock
Selling shares to investors is a common method of raising equity capital. Shares can be offered publicly or privately. Public offerings are extremely complex and expensive; they are beyond the scope of most small businesses. Consult an experienced lawyer before offering stock!
Private placements offer stock to a small group of prospective investors. Because the offer is private, SEC regulations that apply to public offerings are waived. However, state securities laws (also known as blue sky laws) and federal antifraud provisions still apply.
Employee stock ownership plans (ESOPs) allow you to sell shares of stock to your employees. This can provide equity capital for expansion, while also giving your employees a vested interest in your success.
Small Corporate Offering Registration (SCOR) enables small businesses to sell stocks with a minimum of cost and regulation by filling out Form U-7. Most businesses can raise up to $1 million per year, provided equity is equal to at least 10 percent of the capital raised.
Equity-based crowdfunding. Online portals such as EquityNet and SeedInvest have the potential to simplify the process and reduce the cost of raising equity capital for small and growing businesses. To get current information on this evolving market, visit Crowdfund Investment Regulatory Advocates at www.cfira.org.
Private exchanges allow shareholders to exchange their shares in startups for hard cash. The object is to create a market for exchange in startups as an avenue for raising capital. For more details, visit Sharespost.com or SecondMarket.com.
Venture capitalists
NOTE: Consider the needs of your students, and the local availability of venture capital, when determining how much time to spend on this topic. Venture capital will probably not be a realistic option for most students in your class.
Stress that venture capitalists invest in young companies with the potential for explosive short-term growth, millions of dollars in sales, and a large market share. They often want management roles in the company and the ability to exit within three to six years. To avoid a squeeze-out, consult an experienced lawyer and accountant before agreeing to such terms.
Preparing to Seek Financing
Use OHD 8-14 to discuss some of the main factors lenders and investors look at when evaluating a financing proposal. Explain that completing your business plan and making a confident presentation to prospective financing sources is the best way to address these issues.
Identifying Your Needs
Small-business owners often ask for a loan without realizing that the type of loan should always relate to its intended purpose. Use OHD 8-15 to discuss common needs. Emphasize the need to distinguish working capital requirements from real estate or equipment acquisitions.
Seasonal working capital covers seasonal fluctuations in expenses. Example: Ski resorts must overhaul their equipment and groom their slopes over the summer, which means they have many expenses but little revenue during those months. Seasonal capital loans are usually paid back within one year.
Permanent working capital covers ongoing expenses like payroll, debt repayment, utilities, marketing campaigns and rent. Permanent capital loans are financed as term loans and repaid over several years.
Take a look at your sales records for the past year or more. Are there seasonal fluctuations in revenue? Do you have different levels of expense at different times of the year? Note that you may need both types of funding.
Choosing a loan amount
There are two things to consider when deciding how much funding to request.
The purpose of the funds and the type of collateral you can offer. Example: Banks may limit equipment financing to 75 percent of the purchase price.
The amount of money you need to borrow and the loan payments you can afford, as shown by your cash flow projections.
Determining the amount you need for permanent or seasonal working capital is trickier, since it depends on the accuracy of your financial forecasts.
Debt or equity financing?
Use OHD 8-16 to discuss factors that influence the choice between debt and equity financing.
Identifying Financing Sources
Once you know how much financing you need, you can start shopping for sources. Research the person or organization you want to approach and find out what they require:
To whom should you submit your proposal?
What information do they want?
Do they normally lend to businesses like yours?
If they don’t supply the funds, can they help you find other financing?
How long will the loan decision take?
Understanding Credit Factors
Use OHD 8-17 to discuss factors lenders will consider when evaluating your financing proposal. Emphasize that lenders usually require a certain percentage of the total funds to come from the owner, particularly for a startup. This shows them that you stand behind your idea and are willing to take a serious risk to make it work. They usually also require personal guarantees.
Creating a Financing Proposal
Your financing proposal should educate the lender about your business and make the lending decision easier by showing that you understand the factors that will determine your business’s success. Your financial proposal draws heavily from your business plan, but is not a substitute for it; lenders will want to see your business plan as well.
You are selling the promise of your business, so approach your financing proposal as you would any other marketing effort. First, get to know your lender. Then, tailor your proposal to speak directly to your lender’s interests, concerns and needs. You should also personalize your proposal with the name of the recipient, financing source, and financing program (if applicable).
Use OHD 8-18 to introduce the common elements of a financing proposal. Note that much of this information can be copied or adapted from the relevant sections of your completed business plan. That’s all the more reason to create a thorough and well-organized plan!
Stress that the Summary of Financing Request should outline the purpose of the loan; the amount and proposed terms; and the collateral offered. This helps to establish rapport with the lender by offering a concise picture of your intentions and needs.
Your Financing Presentation
To develop an effective presentation, keep these hints in mind:
Preparation. Be thorough in preparing your business plan. Think about all the questions you might be asked, make sure your numbers are realistic, and be prepared to detail and defend your game plan for profitable growth.
Practice your delivery with friends, family and your mentor.
Positive attitude. Show your justifiable confidence in yourself and your business.
Persistence. It may take more than one try to get financing, so don’t give up!
Seeking money will test your stamina, your patience, your sense of humor and your self-confidence. Ask yourself these questions to test if you’re ready to go through with it:
Are you ready to hear “No”? Not all businesses get financing on the first try!
Are you ready to hear “Yes”? Are you mentally and organizationally prepared for success? Are you ready to swing into high gear and actually start or expand your business?
Are you ready to make any necessary changes? Loans are denied for specific reasons—you’ll need to address them before you try again.
Working with your banker
Because most small-business financing comes from banks or similar lending institutions, it’s wise to build a strong relationship with your banker. This can also save your business in times of crisis!
Use OHD 8-19 to discuss tips for building a good banking relationship.
Guest Speaker
Small-Business Banker or Local Entrepreneur
Prepare some questions you want your guest speaker to address in 20 minutes of talking, plus 10 minutes of questions. Give the questions to your guest well in advance.
Suggestions—Small-business banker
What paperwork do you require for a business loan?
Is your bank a preferred SBA lender? What does that mean?
How do you decide whether to make loans to startups? Growth companies?
What’s the most important thing a business owner should do before seeking a bank loan?
What financial ratios do you pay most attention to when reviewing financial statements?
What are my next steps if a banker turns me down?
What are the most important sections of the business plan to a lender?
Suggestions—Local entrepreneur
What did you do to get ready to seek financing?
What paperwork did you take with you the first time you approached the lender?
How much of your business was self-financed? What bootstrapping methods did you use?
In retrospect, what would you have done differently in terms of financing startup or growth?
Work Period
NOTE: Depending on the topic of the guest segment, consider asking your guest speaker to stay and help students with the financial worksheets.
Homework Review—Session 7
Ideally, most of this Work Period will be used to tackle the Session 8 worksheets. However, you may need to begin by helping students to complete the Session 7 worksheets. Therefore, we recommend that you be prepared to allocate up to 30 minutes for the Session 7 homework review. If you have students who completed the assignment successfully, consider having them help students who are still struggling.
Workbook Preview—Session 8
Hopefully, at least some of the financial statement worksheets will have been started in class. Ask once more if there are any questions relating to preparing financial statements. Be prepared to offer sources for help and advice.
Use the Sample Cash Flow Posting Problem from Session 7 to show how those numbers will move to the balance sheet and income statement. Discuss what additional information you need to add in order to complete the income statement and balance sheet (e.g., non-cash items, inventory balances, etc.).
After working through the balance sheet, liquidity ratios, and income statement, have students look again at the Projected Balance Sheet. Explain the difference between the starting balance sheet and the projected balance sheet. Again, point out that they will be analyzing the effects of their decisions by calculating new, projected liquidity ratios and comparing them to the ratios calculated for the starting balance sheet.
Next, have students turn to the Sources and Uses of Financing Worksheets on page 8-150. Show them how to use their previously completed worksheets to determine their startup needs.
Go through the Sources and Uses Statement Worksheet, and explain the importance of documenting the source, amount and purpose of any financing they will receive. They will need this information to write the Capital Requirements and Sources and Uses Statement sections of the business plan. If possible, hand out a sample sources and uses statement to show how uses are typically broken down into categories.
Last, remind students that they may need to update the personal financial statement they completed in Session 1, particularly if they will be using the business plan to secure financing.
Assignment Review—Session 9
NOTE: Session 9 includes an extended work period to help students finish the marketing and financial sections of the plan. Take stock of your students’ progress up to this point and decide in advance how to use the extended work period to their best advantage. Consider asking them how they’d like to use this time, and encourage them to bring questions to the next class.
Have students look at the Assignment for Session 9 at the bottom of the Session 8 Student Outline. Stress the importance of reading the Session 9 text before the next class.
Use OHD 1-14 to show the second half of the NxLeveL® Business Plan Outline, so that students understand how this assignment fits into Section V, Parts A and D. Stress that the plan is nearly finished; this is the last major section that must be completed! Have students look at the presentation of financial information in several NxLeveL® sample business plans.
Overheads for Session 8
OHD	8-1	Overview of Financial Statements
OHD	8-2	Sample Balance Sheet
OHD	8-3	Sample Income Statement
OHD	8-4	Vertical Analysis
OHD	8-5	Horizontal Analysis
OHD	8-6	Statement of Owner’s Equity
OHD	8-7	Annual Cash Flow Statement
OHD	8-8	Ratio Analysis: Asset Management and Profits
OHD	8-9	Ratio Analysis: Liquidity and Capital Structure
OHD	8-10	Sources of Capital
OHD	8-11	Debt Financing Sources
OHD	8-12	Leasing vs. Purchasing
OHD	8-13	Equity Financing Sources
OHD	8-14	Financing Factors
OHD	8-15	Why Do You Need Financing?
OHD	8-16	Debt or Equity?
OHD	8-17	The Six Cs of Credit
OHD	8-18	Components of a Financing Proposal
OHD	8-19	Tips for Working with Your Banker
Suggested Supplemental Materials for Session 8
Sample financial statements
Current handouts on SBA loan programs and eligibility
Sample sources and uses statements
Introductory and sample pages from Annual Statement Studies by Robert Morris Associates and Key Business Ratios by Dun & Bradstreet
You have the option of finding reputable articles and publications for use in class, or suggesting that students search them out on their own and share what they find with the rest of the class. Keep track of supplemental materials you used by making notes below. (This will be helpful if you choose to teach this course again.)
Supplemental materials used for Session 8
Notes

Learning Objectives
Prepare the Monthly Projected Income Statement and understand how it differs from the Cash Flow Projection. Develop a Projected Balance Sheet and compare it with the Beginning Balance Sheet. Understand managerial uses of financial statements. Become aware of sources for debt and equity capital. Understand how to produce and submit a financing proposal.