Business Finance

Presented by: Matt H. Evans, SCORE Mentor Washington D.C. Chapter

Version 5 dated May 13, 2018 1 Three Major Topics

Part 1: Accounting and Financial Statements – How accounting works and flows into your financial statements including how to read the financials

Part 2: Business Taxation – A breakdown of business taxation at three different levels (county, state and federal)

Part 3: Business Financing – The different sources for funding a small business including how SBA loans work

2 Part 1 – Accounting and Financial

Statements

3 Accounting Overview

4 General Ledger Accounts

Cash Money in the bank Accounts Receivable Amounts owed to the company for sales Inventory Assets held for resale to customers Prepaid Expenses Amounts paid in advance Work in Progress Capture costs of projects Fixed Assets – Equipment Physical property owned by the company

Accounts Accounts Payable Amounts that must be paid to vendors Balance Sheet Loans Payable Amounts due to banks Long Term Debt Amounts due to investors who purchased bonds Owners Capital Account Amount invested by the owner of the business Retained Earnings Profits held by the business for reinvesting Sales Revenue Amount of revenues from selling products / services

Cost of Goods Sold Cost of inventory that has been sold Administrative Expense Cost of office support personnel Depreciation Expense Expensing a portion of a long-term asset Income Accounts Statement Utility Expense Gas, Water & Electric expenses Interest Expense Interest on Loans or Debt instruments 5 Five Groups of Accounts

6 Summarize Accounting Process

Accounting is a very iterative process that captures transactions (inputs) to generate Financial Statements (outputs)

Income Balance Financial End of Period Statement Sheet Statements Accrual Entries

Accounting System

Economic Activity of the Transactions Post to General Business (Mostly Cash Basis) Ledger Accounts

7 Three Financial Statements

• Financial condition of a company at a given point in time Balance Sheet • Consists of three components: Assets, Liabilities and Owners Equity

Income • Profit or Loss of a company over a period of time Statement • The critical indicator of company performance! • Consists of two components: Revenues and Expenses

Statement • Sources and uses of cash over a period of time of Cash • Consists of three activities: Operating, Investing, and Flow Financing

8 Reading the Balance Sheet

Liquid assets – ability to meet current obligations

Non Liquid assets – not easily converted into cash

Current Obligations

Long Term Obligations

Equity capital of the business – not available to pay debts 9 Reading the Income Statement

Be careful of the non-operating noise

10 Reading Statement of Cash Flow

Day to Day Operations of the business should reach a point where you are cash flow positive

Non recurring, less frequent cash flow activities should not become a source to carry the day to day operations of the business

11 Recap – Financial Statements

1. Income Statement > Profitable – Operational Perspective 2. Balance Sheet >Good Liquidity to Cover Current

Liabilities 3. Balance Sheet > Proportional Long Term Debt to

Long Term Assets 4. Statement of Cash Flows > Positive Cash Flows –

Operational Perspective

12 Part 2 – Business

Taxation

13 Three Levels of Taxation

County Level – Property taxes on personal property used in the business (furniture, computers, equipment). Maryland also includes inventory.

State Level – 1) Business income taxed at corporate tax rates or personal tax rates; 2) Unemployment Insurance; 3) Workmen’s Compensation collected by most states; 4) Sales and Use Tax on first sale of inventory

Federal Level – 1) Business income taxed at corporate tax rates or personal tax rates; 2) Unemployment Insurance; 3) Social Security and Medicare

14 Federal Income Taxation

Corporations are taxed at a flat rate of 21% starting in 2018

Pass through entities do not report and pay taxes. They pass the taxable business income to the business owners:

1. Sole Proprietorship – Business income and expenses are reported on Schedule C 2. Partnership – An association of business owners, file form 1065 and each partner reports his / her share of the profit or loss 3. Limited Liability Company – Can be treated as a Corporation, Sole Proprietorship or Partnership. For many SCORE clients, you are single owner LLC’s – treated as a sole proprietorship (dis-regarded entity by the IRS) 4. S Corporation – Treated similar to a partnership, passes taxable income to owners and files form 1120-S

15 20% Pass Through Entity Deduction

For calculating what your taxable business income is, you get to deduct 20% from this amount when you report and pay your taxes through the year 2025.

Example: For the tax year 2018, the profits from your business is $ 50,000. You get to deduct 20% off this or $ 10,000. You report $ 40,000 as taxable income from your business

The deduction is subject to a ceiling, You start to lose the deduction when cannot go above 20% of: your taxable income goes above:

1. Total taxable income of $ 157,500 1. Total taxable income of $ 207,500 if single; or if single; or 2. Total taxable income of $ 315,000 2. Total taxable income of $ 415,000 if married joint return if married joint return

The calculations for taking partial deductions are somewhat complicated and I would recommend you seek the advice of a CPA or other professional for assistance – Section 199A Deduction. 16 Employment Taxation – 4 Parts

1. FICA or Social Security – 6.2% (up to $ 128,400 in 2018) of wages is withheld from employee + 6.2% contributed by the employer. *Self Employed pays the full 12.4% 2. Medicare – 1.45% (no ceiling, additional .90 > $200,000 single) of wages is withheld from employee + 1.45% contributed by the employer. *Self Employed pays the full 2.9% 3. Unemployment – 6% of Wages Paid contributed by the employer – paid mostly to state + small percentage paid to the IRS. Kicks in if: a) Wages paid is $ 1,500 or more in 3 month period; or b) You have 1 or more employees who work on and off for a period of 20 weeks during the year 4. Workers Compensation – Paid to the state. Required when you employ 3 or more employees in VA, 1 employee in MD and DC. Subcontractors count towards employee count

* Self Employed can reduce taxable amount subject to self employment tax by 7.65% 17 Sales and Use Tax – State Level

• Sales of tangible personal property are subject to state sales tax (VA=5.3%, DC=5.75%, MD=6%) • Collect only once – not for resale where tax was paid • Some items have lower rates (food in VA) or higher rates (alcoholic beverages in MD) • Paid annually, quarterly, monthly or electronically depending upon amount due (higher amounts pay more frequently) • Use Tax – Qualified sales outside of state or you purchase inventory, did not pay sales tax and plan to sell it here • Online Sales – Must collect sales tax on residents of the state where the business is registered

18 Federal Level Tax Credits State / Local

1. Health Care Insurance – Less than 1. Enterprise Zones – Hire 25 employees, employer pays 50% economically disadvantaged people or more of the premium and the or start in a distressed location coverage is listed on 2. Special Businesses – EX: Farm healthcare.gov (Form 8941) Wineries in MD and VA 2. Pay for Child Care Expenses – 25% of expenses up to $ 150,000 LINKS: per year DC Great Streets Grant Program > 3. Alternative Energy – Investments in https://greatstreets.dc.gov/ DC Guide > alternative energy assets http://wdcep.com/resource/20162017-dc-doi 4. Access for Disabled – Expenses ng-business-guide/ paid to make the business MD Credits> accessible for the disabled http://taxes.marylandtaxes.com/Resource_Li 5. Research and Development – brary/Tax_Publications/Business_Tax_Credi Somewhat complex and ts specialized, but possible VA Credits > http://www.tax.virginia.gov/content/tax-credit19 s Some Useful Links

Federal: https://www.irs.gov/businesses/small-businesses-self-employed (Start Here for federal) https://www.irs.gov/businesses/small-businesses-self-employed/understanding-employment-t axes (Employment Taxes)

DC: http://otr.cfo.dc.gov/service/business-taxpayers (Start Here for State requirements) https://www.taxpayerservicecenter.com/fr500/ http://does.dc.gov/service/employer-tax-information-unemployment-insurance (Unemployment)

Maryland: http://taxes.marylandtaxes.com/Business_Taxes/default.shtml (Start Here for State requirements) http://www.wcc.state.md.us/Gen_Info/ICR.html (Workmen’s Compensation) https://secure-2.dllr.state.md.us/webtax/welcome.aspx (File State Unemployment) https://interactive.marylandtaxes.com/webapps/comptrollercra/entrance.asp (Register to Pay Taxes)

20 Some Useful Links - continued

Virginia: https://www.tax.virginia.gov/businesses (Start Here for State requirements)

Montgomery County: http://www.montgomerycountymd.gov/Biz-Resources/index.html

Arlington County: https://taxes.arlingtonva.us/business/new-businesses/ (Business License Tax and Personal Property Tax on Business Property)

Fairfax County: https://www.fairfaxcounty.gov/taxes/business

Prince George: http://www.princegeorgeva.org/residents/property_and_taxes/commissioner_of_the_revenu e/business_personal_property_tax.php

21 Part 3 – Business

Financing

22 Two Types of Financing

Equity Debt • Owners put in money • Borrow against the future of • Does not require repayment the business • Reduces risk to the • Fixed Payments are business required • More expensive than debt • Does not dilute ownership since investors must get • Less expensive than paying paid back for the high risk back investors • May not be able to secure if • Requires strong recurring business has high debt sales to pay back the debt • Sources include owners, • Sources include banks, friends, family, micro-lenders and private crowdfunding equity investors

23 Original Funding for Startups

Here is how the Inc Magazine 5000 Fastest Growing Private Companies got their original funding in 2015:

24 Startups (Pre-Revenue)

Start with Self Funding (Internal Sources): 1. Your own savings – Gives you full control and not accountable to outside investors. Very limited source of funding. 2. Friends and Family – Very flexible terms (debt or equity). Can damage your personal relationships. 3. Bootstrapping – Leverage existing resources as much as possible. Examples include: a. Social Media for Marketing b. Outsourcing for Needed Expertise (such as using Paychex for payroll or SCORE for advice) c. Use Software Programs to streamline processes (Quick Books for Accounting, CRM for Customer Management, etc.) d. Trade or Barter with others Spend as little money as possible and work as fast as you can to standup the business so that you can secure outside funding down the road when the 25 business gets traction. Two Major SBA Loan Programs

7 a Loan Program 504 Loan Program • Most popular and flexible • Used to help acquire key program assets • Can be used for multiple • Collateral is restricted to the purposes asset being financed • Business size restriction • Business size no greater based on NAICS Code than $ 15 million net worth • Loan amounts up to $ 5 and $ 5 M profits (2 years) million ($ 3.75 backed) • Loan amounts up to $ 5 • 60% of the loans issued are million up to 20 years under $ 150,000

In 2016, the SBA issued $ 5 billion in 7a loans – 64% went to existing businesses and 36% went to startups; $ 1 billion was issued under the 504 program – 81% went to existing businesses and 19% went to startups. 26 Credit Score

• Credit Score = How likely you will pay back your debts • Be pro-active and manage your credit score – doubles your chances of getting a loan • Build up your score by making payments to vendors over an extended period of time • Know your score before you apply for a loan • Score is based on FICO Model – combination of credit files and ratings by three credit bureaus: Equifax, Experian and Trans Union • Increase the credit limit on credit cards to lower the utilization ratio (metric used in the FICO Model). Amount Spent / Credit Limit = Utilization Ratio • Minimize the number of financing credit accounts you have – too many raises a red flag in the FICO Model • Dun and Bradstreet – Credit rating used by government agencies to evaluate small business risk. Score is based on percentage of delinquent payments outstanding by the business. 27 Who is issuing SBA Loans?

Per the Washington Business Journal Book of Lists for 2016, 2 banks accounted for 45% of all SBA loans issued in the greater Washington D.C. area

28 Loan Application Requirements

Specific requirements from M & T Bank (No. 1 SBA Lender):

Under $ 100,000 Over $ 100,000 • Credit Application • Credit Application • 2 Years Business Tax Returns • 2 Years Personal Signed Tax • IRS Form 4506 T – Transcript Returns Permission • Personal Tax Returns for each • Interim Balance Sheet and loan guarantor Income Statement for period • 3 Years Business Tax Returns greater than 180 days from • Interim Balance Sheet and previous year Income Statement for period • 3 Years of Financial greater than 180 days Projections by Month • 3 Years of Financial • Business Plan Projections by Month • Business Plan

29 Additional Tips for Securing Loans

1. Establish a relationship with a banker before you need a loan 2. If you are not comfortable with numbers, then find someone to help represent you in front of the banker 3. If you have borrowed money in the past, demonstrate your ability to pay back past loans 4. Be prepared to negotiate restrictions on the loan that you believe you cannot meet 5. Be prepared to have your spouse also sign for the loan 6. Don’t forget about the “C”’s that bankers often look at: a. Capital – What assets does the owner own clear and free b. Capacity – Can the owner take on more debt? c. Collateral – Does the owner have assets that he can put up to back the loan (home, car, equipment, etc.) d. Character – Reputation of the Owner e. Conditions – Business conditions and chances of success f. Credit – The owner’s credit history and score 30 Other Sources of Funding

1. Leasing – Instead of owning the asset, lease the asset from the company that sells vehicles, equipment, etc. 2. Asset Based Financing – Borrow money against the asset with a down payment, such as trucks, equipment, etc. 3. Crowdfunding – Secure seed / startup capital with a compelling video. Helps if you have a large social network you can tap into. 4. Micro Lenders – Somewhat like a bank, but more flexible terms. Short term only for day to day operations. Local Lenders include: Kabbage, Street Shares and Business Finance Group 5. Contests – Seed capital and / or intellectual capital can be obtained through exposure with startup pitches – 1776, WeWork, etc. 6. Angel Investors – Well-off and experienced professionals who are more willing to accept risky unproven ideas. Brings more than money – expertise. 7. Private Equity Groups (PEG’s) – Acquire sizeable ownership in the business to grow and sell it. Industry retired CEO’s are often brought in to help run and grow the company on a fast track. 31 Some Useful Links

Non Bank Lenders Crowdfunding Resources www.borro.com www.crowdfundinsider.com www.lendio.com www.nlcfa.org www.kabbage.com http://crowdsunite.com www.streetshares.com www.lendingclub.com Crowdfunding – Top Sites www.ondeck.com www.razoo.com www.prosper.com www.gofundme.com www.bolstr.com/ www.indiegogo.com www.fundera.com www.kickstarter.com www.patreon.com Funding Platforms www.pozible.com www.angel.co www.fundable.com www.gust.com www.inkind.com (Restaurants) www.pitchmantra.com https://plumalley.co (Women in www.symbid.com Fashion)

32 Some Useful Links - continued

Accelerators Grants www.betaspring.com www.grantwatch.com www.brandery.org www.foundationsearch.com www.startupgrind.com www.grants.gov www.ycombinator.com www.grantcraft.org www.mixergy.com www.younoodle.com www.1776.vc (DC Area)

M&T Bank SBA Loan https://bank.mtb.com/sbalending? &pid=25&bposn=7

Wells Fargo SBA Loan https://wellsfargoworks.com/credit/ video/applying-for-sba-loan

33 SCORE Mentoring Locations

MAIN SCORE OFFICE THE ROCKVILLE LIBRARY BUSINESS CENTER 409 3rd Street, SW, Suite 100A, Washington, DC 21 Maryland Avenue, Rockville, MD 20850 20024 Appointment - (240) 777-0001 (202) 619-1000 JOYCE GREENE - Tuesday Appointments - 9:00 am - 3:00 pm Weekdays DAVE ROTHFELD – Wednesday MARIA STEYN - Thursday Monday – DANA GLENN | JOHN HOCKER | MARTIN ANNE-MARIE MEHRA - Thursday 4:30 pm - 8:30 pm CROWSON | MICKEY SHATTOW LEONARD BRISKMAN - Saturday

Friday – GORDON CHISHOLM | NICOLE COBER | WARREN EMAIL MENTOR FARB | GARY SALISBURY SOM KARAMCHETTY – [email protected] 34 SCORE Mentoring Locations

PRINCE GEORGE’S COUNTY ECONOMIC GAITHERSBURG – LAUNCH WORKPLACES DEVELOPMENT CORPORATION 9841 Washington Blvd, Suite 200, 1801 McCormick Drive, Suite 350, Largo, MD 20774 Gaithersburg, MD 20878 Appointment only - (301) 583-4650 Appointment only - (301) 291-5776 CLEVELAND JULIAN – Wednesday DAVID WESTREICH – Tuesday (9:00 a.m. – 3:00 p.m.) MALCOLM SLOVIN – Thursday MARIANN ZYLSTRA – Wednesday (10:00 a.m. – 1:00 DAMIEN WANNER – First Friday of the Month p.m.)

SILVER SPRING LIBRARY ALEXANDRIA ECONOMIC DEVELOPMENT 900 Wayne Avenue PARTNERSHIP Silver Spring, MD 20910 625 North Washington Street, Suite 400, Appointment Alexandria, VA 22315 http://score-silver-spring-library.as.me or Appointment only - (202) 619-1000 call 240-773-9420 LEN JOHNSON - Thursday MATT EVANS – Saturday 1:00 to 5:00 p.m. and Tuesday 6:00 to 9:00 p.m. ALEXANDRIA – BARAKA MARKETING WHITE OAK LIBRARY SOLUTIONS, 535 East Braddock Road, Suite A, 11701 New Hampshire Avenue Alexandria, VA 22314 Silver Spring, MD 20904 Appointment only - (202) 619-1000 Appointment only - (240) 773-9560 MICKEY SHATTOW – Tuesday (9:00 a.m. – 3:00 p.m.) GARY O’SHAUGHNESSY - Monday 35 SCORE Mentoring Locations

ARLINGTON ECONOMIC DEVELOPMENT LEESBURG/LOUDON MASON ENTERPRISE CENTER 1100 North Glebe Road, Suite 1500, 202 Church Street SE, Suite 100, Arlington, VA 22201 Leesburg, VA 20175 Appointment only - (703) 228-0808 Appointment only - (571) 441-1826 ED COLEMAN - Monday KALPESH PATEL – Wednesday and Friday FRANK GUNION - Wednesday ASMITA PRADHAN – 4 th Thursday of the Month GERRY SANZ - Thursday Video Mentoring is also available at this location

FAIRFAX COUNTY ECONOMIC DEVELOPMENT GREATER RESTON CHAMBER OF COMMERCE 8300 Boone Boulevard, Suite 450, 1886 Metro Center Drive, Suite 230, Vienna, VA 22182 Reston VA 20190 Appointment only - (703) 790-0600 Appointment only - (703) 707-9045 RON PAULSON - Wednesday ED SHANAHAN – Monday MARK SKOLNIK - Thursday

GEORGE MASON ENTERPRISE CENTER PRINCE WILLIAM CHAMBER OF COMMERCE 4031 University Drive, Suite 100, 9720 Capital Court, Suite 203, Fairfax, VA 22030 Manassas, VA 20110 Appointment only - (703) 277-7700 Appointment only - (703) 368-6600 (Ask for KEVIN WEIR – Tuesday Becky Ward) ELLEN BROTMAN – Wednesday GARY ALFANO – Monday and Wednesday (1:00 to ED FALKOWITZ – Friday 3:00 p.m.) 36 SCORE Mentoring Locations

WARRENTON MASON ENTERPRISE CENTER ADDITIONAL MENTORS 70 Main Street, Suite 23, Warrenton, VA 20186 ALLAN CHAN – [email protected] Appointment only - (540) 261-7100 (ask for Alice Felts) JOTHI NEDUNGADI – [email protected] DAVID ROTHFELD – (Video Mentoring also available

([email protected]) CURTIS ODEN – [email protected]

CORLISS UDOEMA – [email protected]

Search / View Mentor Profiles:

https://washingtondc.score.org/content/search-mentor