Show Me The Money

The American dream is often interpreted as being able to live life on your own terms, the pursuit of personal happiness, and the ability to become rich. The ability to become rich in America is achieved by creating ownership through starting a business, investing in stocks, bonds, or real estate. The American economy is based on capitalism, which is an economic system where by goods and services are exchanged on a for-profit basis. The concept of capitalism, if implemented correctly, can make any individual who owns a business that operates on a for-profit basis extremely wealthy. However, there are thousands of individuals who attempt to open a small business to achieve wealth. Many small businesses fail within the first five years of operation. When starting a small business, an individual must be able to obtain suitable startup capital. There are a number of ways to obtain startup capital, which includes loans, family and friends, credit cards, and angel investors.

The most common and widely used method to obtain capital for a small business is to obtain some type of loan. The small business administration (SBA) is a great place to apply for a startup business loan. The application requirements for a SBA loan are a business plan, loan request amount, collateral, personal financial or business financial statements. A personal loan from the bank is another type of loan obtained for startup capital. The personal loan is usually considered an unsecured loan, therefore the bank may limit the loan to a maximum of $5000.00. The individual applying for the loan must have a good credit rating, show proof of income, and tax statements for at least two years. When applying for a personal loan, do not state you are using the money for the purposes other than personal use.

Family and friends are a great resource to obtain startup capital for your business. This method is often taboo in terms of mixing family and business. If the terms are structured right, the family and friends’ method can be a win-win solution for both parties. Creative financing can play a major role in which the family member loaning the capital may give you a great payment schedule to repay the loan. This payment schedule may allow a person to borrow $25,000.00 and make small payments at the end of each year for a time period of ten years.

Credit cards are certainly a risky way to start a small business, however many people have been successful. Credit cards are risky because credit card companies allow you to get a cash advance. The payments must be on time to avoid late fees and high interest rates being charged. If the business fails to make suitable capital to operate then not only does the business fail but also the owner is now responsible to pay off the debt. This method is not recommended to start a business. A small business loan or bank loan is less risky.

New business owners commonly seek after angel investors or equity investors. The angel investor is an individual with a large excess of capital that is looking to invest in businesses and ideas that will make them additional money. The angel investor will invest a certain amount of money for an equity share in your business. The angel investor may also have specialized expertise in your business in which he/she may offer more startup capital for a 50% partnership with the business owner. A rule of thumb when dealing with angel investors is to know how much of the business you are willing to give up before negotiating with them. Lastly, confidence is key. Know your business and your target market.

Reading the Numbers

The only thing that matters in any business is knowing how to read the numbers. Financial income statements tell the story of how any business is operating in terms of cash flow.  This income statement is the lifeline for any business that is looking for long-term success.  The income statement is also what determines if a business will receive funding for operation. This funding can be in the form of a bank loan or from a group of investors. There are some important factors that can affect the outcome of a company receiving money. These factors are net sales, gross profit, total expenses, and net profit.

The net sales on an income statement are the total amount of revenue made from sales minus the amount of returns and allowances. Net sales are important because it shows that the business has the ability to make some money. Net sales also show that the company may have a chance of growing in the future. In any business you are going to have some customers who are not going to be pleased with the product. So these customers will return the product. In terms of the film industry an example of a return would be a producer who is not pleased with the final cut of the film. In order to compensate the producer you would discount the original amount you billed to the producer to make the movie and pay a refund for the difference.

The gross profit is the amount made after you subtract the cost of goods sold. The cost of goods sold is merely the amount the business paid to actually produce the product. For example if a company was selling tennis shoes the cost of goods sold would be the raw materials, wages paid to the employees making the shoes, and other costs associated with production of the shoe.  Once the cost of goods sold is subtracted from the net sales you have the gross profit of the company.

Another important factor is the total expenses category. Total expenses is the brick and mortar of the company in which you breakdown each component necessary to conduct your daily operations. Total expenses will vary according to each type of company. These components will include salaries and wages, rent, insurance, employee benefits, etc. In order to establish an effective business, the business owner must have a clear understanding of what he/she needs to conduct the business as a whole. This is the purpose of the total expenses category.

Net profit is the one category that means the most to any business. Net profit is defined as the total revenue a company has earned over a period of time. This is calculated by subtracting the gross profit from the total expense category (minus the interest of long term loans). Net profit is also called the bottom line. The net profit shows the bank or initial investors whether your company is worth investing in.

 

If you are an aspiring business owner, you must master learning how to read an income statement. Many companies fail because the CEO entrust the reading of the numbers to other people. If you a CEO of a company can’t read the numbers then your company will fail or even worse be accused of ethical violations. The moral of the story is know your business financially or have no business at all.