In class we moved into chapter 8, which talks solely about the different financial statements that are extremely important when starting your own business. The three statements are the income statement, the balance sheet, and the cash flow statement.
The income statement is one of the more basic, yet most important, financial statements all business use. An income statement basically covers how much income the company brings and what expenses the company has to generate that income. The very first part of the income statement is income or revenue that company received. Then you subtract the variable costs the firm incurred, which gives you the contribution margin. After you find the contribution margin, you subtract the fixed costs, leaving you with either a net profit or net loss.
The income statement gives you a view of the entire year or quarter one of what income the company has brought in or will bring in. The balance sheet, however, gives you a snapshot of the assets, liability, and owners’ equity of a company at a certain point in time. The basic equation for a balance sheet is: assets = liabilities + owners’ equity. The balance sheet is used to show what assets the company owns, and who has the rights to these assets. Liabilities can be both short term and long term. Whatever value is left after you pay the credits will give you how much value the owners have in the company, thus the equation to figure out the value of owners stake you the company the equation would be: owners’ equity = assets – liabilities. You can use this equation in many different ways to figure out how much a company is worth and why it is worth that.
In short, the income statement gives you a picture of a company’s revenue and expenses, whether in cash or credit. The balance statement give you a “snapshot” of a company’s assets, liabilities, and equity at a certain point in time. The final important statement for new businesses is the statement of cash flows. It is different from the income statement in that the cash flow statement only shows what cash comes in and what cash goes out. This is important because it shows how much cash a business is actually taking in and how much cash it is spending.
We also watched another Shark Tank. There were two entrepreneurs that invented this new and improved type of tape that is extremely strong. They initially came in asking for, I believe, $90,000 for 10% stake in their company. This was one of the lowest prices for equity I have seen on the show, thus valuing their company at $900,000. One of the “Sharks” was out because of previous business agreements, but three of the “Sharks” were interested. They got a variety of different offers and, when they left to talk in private, the “Sharks” discussed how they had undervalued their company, which is pretty uncommon from what I have seen of the show. They came back and wanted basically their original offer, but they wanted a whopping $2 million in line of credit. I don’t how exactly how the “sharks” do a line of credit, but I assume it basically means they can borrow up to $2 million at any time for any business purpose. Considering they came in valuing their company at $900,000, I was little surprised that they wanted a $2 million line of credit. The “sharks” where also very surprised, but in the end, they settled on a deal with Lori Greiner for something like $120,000 for 12% equity and then she would provide them with extra cash if they needed it. I think it was a good deal on their part because not only will she help them advertise and sell their product, it will be nice to have someone to get cash if they need it.
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