Chapter Fourteen Small Business Finance: Using Equity, Debt, and Gifts Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Because learning changes everything.® Sources of Financing for Small Businesses The number one source is from the owners themselves. Other major sources include family and friends, credit cards, trade credit, banks, and other commercial lenders. Less used sources include grants, angel investors, government programs, community financiers, stock sales, and venture capital. Sources of financing are either debt, equity, or gifts. Debt can take many forms of debt equity, such as borrow money from banks, agencies, governments, or individuals. When you sell part of your business, the money received is equity capital. Assets or money donated without obligation to repay is a gift resulting in gift equity. © McGraw-Hill Education ‹#› Financing with Equity Personal equity. The amount you contribute depends on your personal worth. Not all personal wealth is easily available. You need to know the amount and type of wealth you have. Outside equity. Outside equity is money from selling part of your business to people not involved in the business, called outside equity investors. This is only possible if the business is organized as a partnership, a corporation, or a limited liability company (LLC). © McGraw-Hill Education ‹#› Financing with Debt Debt is a claim on the value of a business’s asset but unlike equity, debts are legally enforceable to pay back. Secured debt provides a lender with the right to seize specific assets if the loan is not paid. Unsecured debt does not give the lender the right to seize any specific asset. Lenders must use court action to collect unpaid unsecured debt. Though debt is easier to obtain than equity, avoid it if possible. There are repayment obligations. Lenders can enforce payment regardless of your ability to pay. The amount of debt financing you can raise is limited by your personal wealth, your business’ wealth, and your debt history. © McGraw-Hill Education ‹#› Financing with Gifts Few are able to obtain gift funding for a start-up. Available to a few established businesses with several years of successful operations. Even then, a small business will get a grant if, and only if, the business operations meet some desirable societal goal. Virtually all gift financing comes either from governments or private foundations. Few foundations exist to support small business and none exist to specifically provide start-up or working capital funding. Remember that gifts come with strings attached – even grants require periodic reports detailing how the grant is being used and its impact. © McGraw-Hill Education ‹#› Financing with Equity: Getting Others to Invest in Your Business Small businesses get started because the owners want to make money. Investors want to make money, too. Lenders exp.

1. Chapter Fourteen
Small Business Finance: Using Equity, Debt, and Gifts
Copyright 2021 © McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Because learning changes everything.®
Sources of Financing for Small Businesses
The number one source is from the owners themselves.
Other major sources include family and friends, credit cards,
trade credit, banks, and other commercial lenders.
Less used sources include grants, angel investors, government
programs, community financiers, stock sales, and venture
capital.
Sources of financing are either debt, equity, or gifts.
Debt can take many forms of debt equity, such as borrow money
from banks, agencies, governments, or individuals.
When you sell part of your business, the money received is
equity capital.
Assets or money donated without obligation to repay is a gift
resulting in gift equity.
© McGraw-Hill Education
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Financing with Equity
Personal equity.
The amount you contribute depends on your personal worth.

2. Not all personal wealth is easily available.
You need to know the amount and type of wealth you have.
Outside equity.
Outside equity is money from selling part of your business to
people not involved in the business, called outside equity
investors.
This is only possible if the business is organized as a
partnership, a corporation, or a limited liability company (LLC).
© McGraw-Hill Education
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Financing with Debt
Debt is a claim on the value of a business’s asset but unlike
equity, debts are legally enforceable to pay back.
Secured debt provides a lender with the right to seize specific
assets if the loan is not paid.
Unsecured debt does not give the lender the right to seize any
specific asset.
Lenders must use court action to collect unpaid unsecured debt.
Though debt is easier to obtain than equity, avoid it if possible.
There are repayment obligations.
Lenders can enforce payment regardless of your ability to pay.
The amount of debt financing you can raise is limited by your
personal wealth, your business’ wealth, and your debt history.
© McGraw-Hill Education
‹#›
Financing with Gifts
Few are able to obtain gift funding for a start-up.
Available to a few established businesses with several years of
successful operations.
Even then, a small business will get a grant if, and only if, the

3. business operations meet some desirable societal goal.
Virtually all gift financing comes either from governments or
private foundations.
Few foundations exist to support small business and none exist
to specifically provide start-up or working capital funding.
Remember that gifts come with strings attached – even grants
require periodic reports detailing how the grant is being used
and its impact.
© McGraw-Hill Education
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Financing with Equity:
Getting Others to Invest in Your Business
Small businesses get started because the owners want to make
money.
Investors want to make money, too.
Lenders expect a return on their money by collecting interest on
their investment.
People expect to receive a gain on investment, or a dividend.
Even governments expect a return in the economic development
of an area.
© McGraw-Hill Education
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Financing with Equity:
Equity Capital from the Investors’ View
How do investors decide which business to invest in?
They want to know how likely the business is to produce a gain,
they want to know the business’s risk.
Investors know some investments will fail, so they diversify.
They will invest only if your business is organized to limit the
liability of outside owners.

4. To estimate an expected gain, investors will evaluate your
growth potential, a primary concern.
The time required to receive gains can be a deal killer.
Business angels want to know your plan to pay investor’s
profits, called the harvest or exit.
A hybrid form of investing, called royalty financing is rarely
used.
© McGraw-Hill Education
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Financing with Equity:
Methods to Obtain Equity Capital
Using your own capital and funds generated by the start-up is
called bootstrapping.
Minimize overhead costs.
Cloud computing, virtual storefronts, incubators, office co-ops,
or co-working spaces.
Maximize returns from employee expense.
Student interns, overtime, contractors.
Minimize operating costs.
Outsource, subcontract, rent space or equipment, work from
home.
Maximize the results of marketing.
Word of mouth and publicity.
Crowdfunding is a new way to gather investors.
IPOs are limited to a few start-ups.
Under the JOBS Act, investors must be a sophisticated investor
or an accredited investor.
© McGraw-Hill Education
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Financing with Equity:

5. Angel Investors
A number of high-wealth individuals invest in first- and second-
stage funding – called angel investors.
It is probable that few really good business ideas go
undeveloped, and a large percentage of “good ideas” prove not
to be in the long run.
Individual angel.
Hard to find, proximity is critical, informal involvement,
unplanned exit.
Angel network.
Easy to find, proximity preferred, informal involvement, cash-
out exit.
Angel fund.
Easy to find, proximity preferred, formal involvement, cash-out
exit.
More formal reporting requirements, but offers the highest
funding.
© McGraw-Hill Education
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Financing with Equity:
Equity Capital from the Owner’s View
Financing with equity is expensive and guaranteed to create
problems of control and decision making.
If you sell half your business, you sell half of all future profits,
future growth, and future wealth.
You will have to provide regular reports to investors and they
have the right to inspect the accounting records any time they
choose.
If investors disagree with your running of the company, they
can challenge you, sue you, or even replace you as manager.
There are three primary reasons to use outside equity in your
business.
You will reduce your own exposure to financial loss.

6. Your business will not have increased costs in the form of
interest.
Outside investors can reenergize an existing business by
providing new ideas, procedures, and processes.
© McGraw-Hill Education
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Financing with Debt:
Getting a Loan for Your Business
Done in three ways: (1) direct cash loans, (2) guaranteed loans,
and (3) reduced taxes by deducting interest.
Established firms have valuable assets to borrow against.
Small businesses look to banks, but there are options if turned
down.
The SBA guarantees loans through community development
organizations, microlenders, or an SBIC.
You may have access to incubators or accelerators in your area.
Lenders want to see the Four Cs of Borrowing.
Character of the managers of the business.
Capacity to repay both principal and interest on time.
Conditions of the industry and economy in which the firm
operates.
Collateral used to secure the loan.
© McGraw-Hill Education
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Financing with Debt:
The Four Cs of Borrowing
Owner character is largely judged by the owner’s personal
credit rating.
Find your rating at one of four credit reporting agencies
(CRAs).

7. The Fair Credit Reporting Act (FCRA) requires all information
reported to CRAs be accurate.
The capacity of your business is measured by profitability and
cash flows from operations.
The most important single factor for borrowing money.
Condition of the industry/economy includes factors such as
technology, competition, and economic growth.
Cell phones have made pay phones obsolete.
Collateral value is an estimated market value of tangible assets.
Intangible assets, though valuable, cannot be transferred to the
lender to satisfy debt.
© McGraw-Hill Education
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Financing with Debt:
Customer Funding of Your Business
This is debt because the customer gives you the money and you
owe them the product or service.
It provides cash inflows before the necessary outflows occur.
Matchmaker models – Airbnb.
Pay-in-advance models – Threadless.com.
Subscriptions models – Netflix.
Scarcity-based models – Groupon or Gilt.
Service-to-product models – BaseCamp or SaaS like Office 365.
These business models work and there are numerous common
examples of each.
The advantage is there is no interest to pay and it provides cash
flow from the start.
In addition, these sales are a validation of your business idea.
© McGraw-Hill Education
‹#›

8. Financing with Gifts:
Winning Grants for Your Business
Gift financing has a special allure – like getting something for
nothing.
Remember that anything that seems too good to be true usually
is.
Gift capital is anything but free – it costs time and money to
obtain and then report on the use of the money.
There are two general sources of gift financing:
One is institutional, from government agencies and foundations.
The other is personal, from family or occasionally from friends.
© McGraw-Hill Education
‹#›
Financing with Gifts:

9. Institutional Gifts
The most common form of institutional gift financing is in the
form or reduced taxes, either a tax abatement or a credit against
taxes payable.
Tax abatements are provided by state and local governments.
Tax credits are provided by the U.S. government and some
states.
Grants are available from the federal and state governments,
and semi-private and private economic development agencies.
Grants from foundations are rarely made to for-profit
businesses.
© McGraw-Hill Education
‹#›
Financing with Gifts:
Personal Gifts
Forms include: cash, picking up the tab, accelerated cash-outs,
free use, free work or unpaid labor, overpayment, favored status
or sweetheart deals, forgiveness, deferrals, or piggybacking.
Accepting money from family members and friends entails some
risks.
Put your agreement into writing.
If it is a gift, have the agreement specifically say so.
If it is a loan, have the agreement specify the exact interest and
payment terms.
If it is an equity investment, consider non-voting stock.
Gifts from crowdfunding have two models: nonequity and
equity.
© McGraw-Hill Education
‹#›
What Type of Financing Is Right for Your Business?

10. The cost of equity is much greater than the cost of debt.
With a capital mix of 70% equity and 30% debt, the weighted
average cost of capital is approximately 16%.
At a 50-50 mix, the weighted average cost of capital (WAC) is
13% and 10% at a 30-70 mix.
As debt increases as a percentage of total investment (called
financial leverage) returns on equity increase at a decreasing
rate up to some limit where more debt causes returns to decline.
This mix of debt and equity is the optimum capital structure.
Financial risk is the probability of financial loss and borrowing
money increased financial risk.
Selling equity provides neither the opportunity to repurchase
nor the obligation to make payments to owners.
© McGraw-Hill Education
‹#›
Figure 14.4: Interaction among Profitability, Control, and Risk
Borrowing enhances the potential for higher rates of return for
the owners and allows the owners to keep a greater level of
control.
Borrowing increases potential profits by lowering the WAC of
capital and provides funds allowing the firm to consider
opportunities.
Borrowing allows more control but even lenders impose
restrictions, called loan covenants.
© McGraw-Hill Education
‹#›
Tools for Financial Management
You must have something to compare with your position and
results.

11. Compare with your planned position and results, with prior
years’ position and results, and with the position and results of
other firms.
Most financial comparisons are made using ratios.
There are four broad categories of financial ratios: activity
ratios, profitability ratios, liquidity ratios, and leverage ratios.
The three most common are ROI, current ratio, and debt-to-
equity ratio.
The ratios considered important change as the firm matures.
As the firm reaches breakeven, profits become a reality and
profitability ratios become important.
Leverage ratios also become more important as they look at the
longer-term success of the firm.
© McGraw-Hill Education
‹#›
Financial Management for the Life of Your Business
Financial management for start-up.
Use the financial management techniques for bootstrapping.
Financial management for growth.
Focus is on obtaining cash inflows to pay for added inventory,
productive assets, and employees needed to meet growth levels.
Financial management for operations.
Emphasis is on building owner wealth, to conserve assets, to
match cash inflows to outflows, and to maximize return on
capital assets.
Financial management for exit.
Goals of financial management depend on the nature of the exit.
Exit can be a transfer to heirs, selling to outsiders or
employees, or through bankruptcy, a “work-out,” or closing and
selling the assets.
© McGraw-Hill Education

12. ‹#›
End of main content.
Copyright 2021 © McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Because learning changes everything.®
www.mheducation.com
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Chapter Thirteen
Cash: Lifeblood of the Business
Copyright 2021 © McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Because learning changes everything.®
Money as the Key Idea
Money is an accepted medium of exchange.
Three purposes for money.
To facilitate exchanges of unlike assets, such as your labor for a
grocer’s food.
To measure the value of things, both tangible and intangible.
To keep track of wealth.
What makes money “money” is the belief users have about the
information contained in the money.

13. Profits are not money.
Profits are information useful in predicting when and how much
money you may collect.
© McGraw-Hill Education
‹#›
Cash and Cash Equivalents
Cash is money that is immediately available to be spent.
Businesses use a concept called cash equivalents which are
assets that may be turned into cash within a few days.
Currency is a familiar form of cash: bills and coins.
Demand deposits make up most of the non-currency cash.
Marketable securities are stocks and bonds representing either
ownership or debt of public firms and government issued debt.
Commercial paper and short-term debt are two forms of short-
term financing by issuing a note for cash to another company –
issued to be paid to the bearer of the note and fully transferable.
© McGraw-Hill Education
‹#›
The Importance of Cash Management
The process of controlling how much and when money will
come into and go out of the business is referred to as cash flow
management.
Cash flow management is:
Having enough cash available to meet business needs.
Ability to quickly obtain cash from a variety of sources.
Understanding how (and when) cash is used by your business.
Monitoring accounts receivable for late payments and providing
motivation for prompt payments.
Using prompt payment discounts when cheaper than borrowing.
Cash flow management is not:

14. Keeping large sums of cash on hand at all times.
Obtaining all cash from business operations.
Assuming that all sales and expenses happen instantly.
Trusting customers to pay when the bill comes due.
Providing lengthy credit terms without charging interest.
Allowing large sums to “sit” in non-interest-paying accounts.
© McGraw-Hill Education
‹#›
Money In/Money Out – Just How Important Is It?
A firm must manage the timing of the receipt of cash to the
timing of the need to expend cash.
This is called the cash-to-cash cycle or the operating cycle.
You create a payable when you buy on credit and customer’s
promises to pay are receivables.
Access text alternative for this image.
© McGraw-Hill Education
‹#›
Figure 13.3: Cash-to-Cash Cycle – Many Vendors, Few
Customers
A construction firm has irregular, large cash receipts while
expenses are smaller consistent amounts.
© McGraw-Hill Education
‹#›
Figure 13.4: Cash-to-Cash Cycle – Few Vendors, Many
Customers

15. A restaurant has frequent small cash receipts while expenses are
less frequent but in larger amounts.
© McGraw-Hill Education
‹#›
Planning Cash Needs
The Sales Budget: Forecasting Sales Receipts
The key to cash planning is the cash budget, which needs a sales
forecast.
For many small businesses, the sales forecast is the cash
receipts forecast – each with its own pattern of sales and cash
receipts.
Access text alternative for this image.
© McGraw-Hill Education
‹#›
Planning Cash Needs
The Cash Receipts Budget
Understanding and predicting the patterns of cash flows begin
when you prepare a cash receipts budget.
Access text alternative for this image.
© McGraw-Hill Education
‹#›
Table 13.2B: Cash Receipts Budget
Once the pattern of cash collections is understood, the numbers
may be converted into a cash receipts budget.

16. Access text alternative for this image.
© McGraw-Hill Education
‹#›
Planning Cash Needs
Forecasting Cash Disbursements
A similar approach is used for the forecasting of cash
disbursements into a cash disbursement budget.
Access text alternative for this image.
© McGraw-Hill Education
‹#›
Table 13.4: Cash Budget
The Chapter 12 budgets and the cash budget combine to make
the comprehensive budget.
Access text alternative for this image.
© McGraw-Hill Education
‹#›
Planning Cash Needs
The Comprehensive Budget: the Pro Forma Cash Flow
Statement
The statement of cash flows is essentially the cash flow budget,
but with cash flow placed into the categories of cash from
operations, cash from investing, and cash from financing.
Access text alternative for this image.

17. © McGraw-Hill Education
‹#›
Managing Cash Flows
Cash only comes from three sources.
By selling the products/services and collecting cash from
customers, called cash flow from operations.
From investments such as stocks, bonds, land, buildings, or
equipment, called cash flow from investing.
Through financing, either for ownership or in the form of a
loan.
Protect cash from embezzlement, skimming, or phony
disbursements.
Effective separation of duties is effective.
Run credit checks periodically.
Identify opportunities to steal and investigate budget variances.
Conduct a formal audit and adopt a formal statement of ethics.
Provide coaching but terminate employees not meeting
standards.
Provide education about the economies of your business to
employees.
© McGraw-Hill Education
‹#›
Steps to Take for Effective Cash Flow Management
Review your cash needs on a set schedule.
Arrange a business line of credit or revolving loan before you
need it.
Obtain a business credit card.
Collect your receivables – do not become an interest-free bank.
Plan and schedule your payments.
Use online collections and payments.

18. © McGraw-Hill Education
‹#›
Increasing Cash Inflows and Decreasing Cash Outflows
Taking deposits and progress payments.
Offering discounts for prompt payment.
Asking for your money.
Take on paying noncore projects.
Factoring receivables.
Make wise purchase decisions and avoid waste.
Trade discounts.
Employee noncash incentives.
Use of temporary agencies.
Consignment and barter.
Control timing of paying out cash.
Negotiation of terms with suppliers.
Timing purchases.
Gaming of the payment process.
© McGraw-Hill Education
‹#›
Controlling Cash Shortages
One cause of cash shortage is a growth trap.
Due to increased sales, you need more labor, more materials,
more factory space, and more warehouse space – all require
money.
Strategies to handle cash shortfalls, by frequency of use.
Use personal money.
Borrow.
Adjust scheduled purchases.
Adjust scheduled payments.
Try to collect money due.

19. Sell investments.
Sell receivables.
Lay off employees.
© McGraw-Hill Education
‹#›
Appendix: Reconciling Bank Balances with Company Book
Balances
Key to managing your daily cash flow is knowing how much
cash is available at that moment – the bank’s available balance
may not be true.
To get a more realistic number, you need to reconcile the
differences between bank and book balances.
The company book balance is the sum of the company’s internal
accounting record of all transactions that affect cash.
Your books show a credit card purchase on the day of sale,
while the bank will not receive the payment for up to three
working days.
The bank ledger balance is the amount that recognizes all
transactions that affect the balance – still not a true measure.
The key measure is called the bank available balance, which is
the actual cash value of the account and can vary from ledger
balance.
© McGraw-Hill Education
‹#›
Appendix: Company and Bank Cash Balances
Deposits of cash, electronic transfers, and cash withdrawals
result in immediate changes in the available balance.
Checks, drafts, and automated clearinghouse payments result in
receipts or disbursements of money only after some delay.
Some banks allow customers to overdraft by paying a check

20. when the available balance is not sufficient to cover the check
amount.
Two reasons to reconcile the bank balance and the book
balance.
The bank knows information you cannot know – service
charges, direct payments, interest, nonsufficient funds (NSF).
You know information the bank cannot know – value of checks
written and mailed, and deposits mailed or made after bank
closing.
© McGraw-Hill Education
‹#›
Appendix: Reconciling – a Two-Step Process
Add (subtract) to the bank balance those things you know the
bank does not know.
Add (subtract) to your book balance those things the bank
knows that you do not know until you receive the bank
statement.
The corrected bank balance and the corrected book balance will
be identical.
Accepting credit card payments causes significant differences
because:
Your business records the gross amount of the sale, while the
credit card provider deposits the sale amount less the service
fee.
You show the sale deposited on the sale date, while the provider
takes up to three working days to actually deposit money to
your account.
Credit card clearing services reduce the amount deposited, or
will charge back the amount in the event of fraud or customer
challenge.

21. © McGraw-Hill Education
‹#›
Appendix: Reconciling Serves Four Purposes
It gives you a way to estimate the bank’s available balance for
the purpose of managing your cash flows.
Regular reconciliation identifies any mistakes made by either
the bank or by your own bookkeeper – and they do happen.
It checks the accuracy of both the bank and business records,
providing an accurate statement of the value of cash the firm
holds.
A reconciliation lets you know about items on the bank
statement that would not otherwise be included in the
accounting records.
© McGraw-Hill Education
‹#›
End of main content.
Copyright 2021 © McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Because learning changes everything.®
www.mheducation.com
Accessibility Content: Text Alternatives for Images
© McGraw-Hill Education
‹#›

22. Money In/Money Out – Just How Important Is It? – Text
Alternative
This cash-to-cash cycle is depicted at a flow chart in the form
of a loop with cash leading to purchases on the right side, then
to the product or service at the bottom, then back up to sales on
the left side and back around to cash. The cycle is also color-
coded.
At the top of the cycle is a large green cash symbol, the
beginning and the end of the cash-to-cash cycle. Cash flowing
out, in red, leads to purchases. These purchases are payables to
vendors for labor, materials, and overhead, all in red.
The next step of the cycle, depicted in black, takes the labor,
materials, and overhead and turns that into the product or
service, depicted in a symbol at the bottom of the cycle. The
outflow from this process, also depicted in black, turns the
corner heading back up to sales.
The last part of the cycle is depicted in green as it represents
cash coming back into the company. Sales, in the form of
receivables from customers is turned back into cash, entering
the cash symbol at the top of the flow chart in green.
Return to parent-slide containing image.
© McGraw-Hill Education
‹#›
Planning Cash Needs - The Sales Budget: Forecasting Sales
Receipts – Text Alternative
This table shows the fourth quarter sales budget for Red Jett
Sweets, showing monthly breakdowns for October, November,
and December; quarter four totals and finally a column for
January numbers.
The budget includes all revenues resulting in gross sales, less
three expenses to product net sales revenue.
Revenues list unit sales, sales price, cash sales and credit card

23. sales. The three expenses include credit card fees, spoilage and
over production, and sales tax collected.
Gross sales for each month are $8,778, equally split between
cash sales and credit card sales, for a fourth quarter total of
$26,334 in gross sales.
After deducting the credit card fees, spoilage and over
production, and sales tax collected, net sales revenue for
October and November are $8,014, while December’s is $5
higher due to less spoilage and over production that month.
Fourth quarter net sales revenue is $24,048.
The January projections show a price increase to $2.94 and are
projecting slightly higher unit sales at 3,000. This also
increases gross sales a bit from $8,778 to $8,828 and net sales
revenue from $8,014 to $8,060.
Return to parent-slide containing image.
© McGraw-Hill Education
‹#›
Planning Cash Needs – The Cash Receipts Budget – Text
Alternative
This spreadsheet has ten columns and nine rows.
Columns include month of sale, gross sales, cash sales which
are 75% of total sales, credit sales which are 25% of total sales,
prompt pay discount which is 2% of 25% of credit sales
collected, a column each for cash collected on accounts
receivables in October, November, and December, cash
collected on accounts receivables in January and the final
column is cash collected on accounts receivables in February.
In each of the months August through December, gross sales are
$8,778, with cash sales comprising 75%, or $6,584 and credit
sales of $2,195 and each month shows $11 in prompt pay
discounts.
In October, cash collected on accounts receivable was $110 for
sales made in August (5% of customers), $1,536 on sales made

24. in September (70% of customers), and $538 on sales made in
October (25% of customers) for a total of $2,184 collected on
accounts receivable for the month. Add this to $6,584 of cash
sales for $8,768 total cash collected from customers for the
month. The balance of accounts receivable if $1,756 for the
month.
This same pattern is repeated for the months of November and
December and into January and February of the next year.
Return to parent slide containing image.
© McGraw-Hill Education
‹#›
Table 13.2B: Cash Receipts Budget – Text Alternative
In this cash receipts budget for the fourth quarter, each of the
three months in the quarter (October, November, December)
show total sales to be $8,778.
From that total is subtracted credit sales, which are 25% of
gross sales, or $2,195. Doing so leaves $6,583 in cash sales.
Added to this is cash collected on accounts receivables in the
amount of $2,184. This amount is figured by taking 25% of the
current month’s credit sales, less the prompt pay discount, plus
the amounts due from the previous two months’ credit sales. So
for the October amount, it equals (.25 multiplied by 2,195
multiplied by 0.98) plus 1,646.
This amount, $2,184, is added to cash sales of $6,583 for total
cash receipts of $8,767. The same is true for the other two
months, November and December.
The fourth quarter totals are: total sales of $26,334, less credit
sales of $6,585 for cash sales of $19,749. Adding the cash
collected on accounts receivable of $6,552 provides a total of
cash receipts for the fourth quarter of $26,301.
Return to parent-slide containing image.

25. © McGraw-Hill Education
‹#›
Planning Cash Needs – Forecasting Cash Disbursements – Text
Alternative
This cash disbursements budget for Red Jett’s Sweets’ fourth
quarter lists all cash paid to vendors each month for October,
November, and December. The table also provides monthly
cash disbursements and total disbursements for the quarter.
There are eleven instances of cash paid to vendors each month.
$88 is paid to credit card providers each month for a quarterly
total of $263. Sales tax paid to Texas total $615 per month, for
a total of $1,845. Raw material used in production total $2,029
each month for a quarterly total of $6,87. Salaries and wages
are the largest monthly expense at $4,141, totaling $12,423 for
the quarter. Payroll taxes and benefits total $358 per month, for
a total of $1,075 for the quarter.
Rent is $1,000 per month, and $3,000 for the quarter. Website
and marketing is $100 each month and $300 for the quarter.
Telephone charges are $110 per month and $330 for the quarter.
Transportation is $343 each month, totaling $1,029 for the
entire quarter. Insurance amounts to $167 per month and $501
for the quarter. Finally, legal and accounting charges are $35
per month, and a quarterly total of $105.
Total cash disbursements each month total $8,986, and quarterly
total is $26,957.
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© McGraw-Hill Education
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Table 13.4: Cash Budget – Text Alternative
The beginning cash balance in October is $3,995 and adding
cash receipts of $8,767 gives total cash available as $12,462.
Less cash disbursements of $8,986 provides a forecast balance

26. of $3,476. The next line states the desired minimum balance is
$5,000, leaving a shortage of negative $1,524. In October,
borrowings equal $3,000 and added to the forecast balance,
gives an ending cash balance of $6,476.
November’s beginning cash balance is $6,476 to which is added
cash receipts of $8,767 for total cash available of $15,243.
Less cash disbursements of $8,986 leaves a forecast balance of
$6,257. The desired minimum balance is $5,000, leaving an
excess of $1,257. There are no borrowings or repayments in
November, so the ending cash balance is the forecast balance of
$6,257.
December’s beginning cash balance is $6,257 and added to that
is cash receipts of $8,767 for total cash available at $15,024.
Less cash disbursements of $8,986, leaves a forecast balance,
and an ending cash balance of $6,039. December had an excess
of cash of $1,039 with no borrowings or repayments.
The fourth quarter totals start with a beginning balance of
$3,695 (October’s beginning balance) and add cash receipts of
$26,301 for total cash available of $42,730. Less cash
disbursements of $26,957, leaves a forecast balance of $15,772.
The desired minimum balance is $15,000, leaving an excess of
$772. The ending cash balance for the quarter is $6,039, which
is December’s ending balance.
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© McGraw-Hill Education
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Planning Cash Needs: The Comprehensive Budget: the Pro
Forma Cash Flow Statement – Text Alternative
The cash flows statement for the fourth quarter of Red Jett
Sweets’ begins with cash received from customers in the
amount of $26,301.
The first section is cash paid to vendors, including credit card
providers, sales tax paid to Texas, raw material used in

27. production, salaries and wages, payroll taxes and benefits, rent,
website and marketing, telephone, transportation, insurance, and
legal and accounting totaling $26,957, leaving a net cash flows
from operations of negative $656.
There was no cash flow from investing activities and no
purchase of equipment.
In the cash flow from financing activities, there was no
investment by owners or cash paid on loans, but there was
$3,000 of cash received from borrowing, giving net cash flow
from long-term financing activities at $3,000.
The beginning cash balance was $3,695 and there was a net cash
increase of $2,344 ($3,000 minus $656 of negative cash flows
from operations), gives an ending cash balance of $6,039.
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