At the conclusion of this week, you will have reached the 50% mark of the course. We are moving swiftly towards the business plan due at the end of Week 8. As mentioned in last week’s assignment, it is likely that your business will not work out exactly as planned. Why? Because opportunities will present themselves down the road that do not exist today. We should plan anyway. Have you ever heard the phrase Extinct by Instinct? Small companies go out of business all the time because their owners are reacting to the market….not proactively planning their next moves.
Financial analysis plays a huge role in business planning. As entrepreneurs, we need to know where the money will come from, and where it will go. Sounds simple, but the reality is that many business owners are terrible in this facet of the business. It is logical when you consider that entrepreneurs are usually passionate about their product and/or service, not their accounting system. Yet, it is control of the accounting system that ensures there is adequate profitability.
As you read this week’s materials, you will be reminded that there is a difference between accounting and finance. Accounting is a system of mathematics. Finance is the relationship between time, money and risk. If you can understand your monthly checking account statement, you have the basic understanding of both a Cash-flow Statement and Income Statement (also known as a Profit and Loss Statement). If you can calculate your net financial worth by subtracting your liabilities from your assets, you understand the basics of a balance sheet. You should review Chapter 10 for new insights, but if you have taken an accounting course, this chapter is a refresher.
Chapters 11 & 12 are where the rubber meets the road for entrepreneurs. In Chapter 11, you will investigate how to forecast sales. This is a big part of the business plan’s financial section because you will have to show a banker or investor exactly how you will repay a loan or equity investment. Chapter 12 deals more with the sources of funding. Most small businesses are self-funded by their owners; some are financed by SBA loans; and private equity investors (e.g. Venture Capitalists, Angel Investors etc.) fund small percentages (i.e. 2%)..
You will probably fund your business out of your own pocket (this is what the statistics suggest). Should you take this path? Well, that is a decision we each must make separately. Some entrepreneurs would rather have investors for a simple reason: If they fail, they do not lose their own money. The trade-off is they have to share a percentage of revenue long after the business is profitable. A bigger challenge tends to be that investor opinions often clash with the entrepreneur’s views. There are ways around this, such as buy-out agreements and Limited Partnerships; however, these are decisions that need to be weighed carefully.
For this week’s discussion board post, please read chapters 10-12 and answer one question from each of the Discussion Questions at the end of each chapter. You can find them on: