The document discusses cash flow and taxes for entrepreneurs. It explains that the income statement does not show how much actual cash a business has, and that a cash flow statement should be used instead. It provides tips for managing cash flow, such as collecting payments quickly, paying bills on time, and avoiding excess inventory. The document also covers cash flow projections, taxes including self-employment tax, record keeping, and the concept of working capital.

1. Entrepreneurship
Chapter 9
Cash Flow and Taxes

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© 2010 Pearson Education, Upper Saddle River, NJ 07458.
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The Income Statement does not
Show How Much Cash You Have
 There is often a time lag between making a
sale & getting paid.
 You can make a lot of sales & still be low on
cash.
 The income statement includes non-cash
expenses, such as depreciation.
Use a cash flow statement to make sure you
always know how much cash you have on hand.

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Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Rules to Keep Cash Flowing
 Collect cash as soon as possible.
 Pay your bills by the due date, not earlier.
 Check your available cash daily.
 Lease instead of buying equipment when
practical.
 Avoid buying inventory (stock) that you do
not need.

4. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Cash Flow May Be Cyclical
 For many businesses, the amount of cash flowing
into the business ebbs & flow throughout the year.
 If this is true for your business, include a
seasonality scenario in your business plan.
Examples:
A flower store may have more cash around Mother’s Day &
Valentine’s Day & less cash during the summer.
A college bookstore will have more cash once school starts &
less when it has to buy inventory before the school year begins.

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Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Cash Flow Statements
have 3 Sections
1. Cash inflows (or receipts)
—operation (money used to run the business)
—investment (money invested in the business)
—financing (debt & equity used to finance the
business)
2. Cash outflows (or disbursements)
3. Net change in cash flow (positive or negative)
Cash Flow = Receipts – Disbursements

6. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Cash Flow
Statement

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Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Forecasting Cash Flow
 Prepare monthly cash flow projections
(estimates) to make sure there is
enough money coming in to pay bills.
 Project cash receipts from all possible
sources
 Checks, credit card orders, & cash
 Subtract expenses to be paid during
the forecast time period.

8. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Risking Your Cash on Inventory
 Inventory creates risk because it may not
be sold at a profit.
 Storage Costs: it costs money to store
inventory
 Pilferage: theft of inventory by employees
or customers can be costly
Make sure you can sell inventory at a price that
covers COGS, storage, and pilferage . . . and still
earn a profit.

9. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Other Cash Flow Concerns
 Credit Squeeze: when customers
want products & funds are needed to
pay vendors but are not available
 Burn Rate: initial deficits in operations
need to be covered by financing.
Burn Rate = # of Months Before Cash Runs Out =
Cash on Hand/Negative Cash Outflow per Month

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Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
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The Time Value of Money
 Future Value of Money = amount it will
accrue (gain) over time through investment
 Present Value of Money = amount an
investment is worth discounted back to the
present
 Inflation
 Risk
 Opportunity

11. Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
11
Self-Employment Tax
 Employees have federal Social Security tax taken out
of their pay by employers.
 Self-employed people must pay their own self-
employment tax into the Social Security system.
 If you earn over a minimal amount per year from self
employment, you must pay self-employment tax to
Social Security.
 Use tax form Schedule SE

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Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Income & Sales Taxes
 Entrepreneurs also pay income tax to federal & state
governments.
 Income & self-employment tax returns must be mailed to
the Internal Revenue Service annually.
 If you sell products/services to the public in most states,
you must collect state sales tax & submit the tax you
have collected quarterly.

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Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
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Each Legal Structure has Tax Pros & Cons
 Sole Proprietorship—all profits reported as personal
income by owner.
 Partnership—profits & losses shared by partners &
reported on their individual tax returns.
 Corporation—profits are taxed depending upon the
type of corporation. When owners receive share of
profits, they must report them on their individual tax
returns & pay tax on them.

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Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Maintain Good Records
 The IRS may audit (check) your financial
records at any time.
 Keep records accurately & retain all records,
receipts & invoices for at least 6 years.
 Use a professional tax preparer or have one
review all returns that you prepare.

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Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
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Working Capital
Working Capital =
Current Assets – Current Liabilities
 Cash company can use to grow
 How much cash a company will have left over if it
uses its cash to pay all its short-term debts.
 A company with positive WC will outperform a
company with negative WC, as it can use cash to
develop products, advertise, and the like.