The equity component has several uses. It can be used to model any, or a combination of the following:
- Sell shares in the business for cash. This increases the equity in the business by a value equal to the selling price of the shares, and also provides cash at the point the shares are sold.
- Existing shares/equity in the business. This adds to the Opening Balance's equity entry and the Balance Sheet's equity line.
- Pay a dividend, either calculated as a percentage of profit, or as a set amount per shareholder.
Below we'll look at how to set up each of these cases. All of them use the same component.
Release equity to shareholders - choose either to sell shares for cash during the plan, or model existing shares which form part of the plan's Opening Balance.
Number of shares - the number of shares sold
Price per share - the sale price of a single share
Regular payments to shareholders (dividends) - choose how to calculate dividends. Dividend per share will calculate the dividend amount based on the number of shares x the dividend amount entered her. Percentage of profit will calculate the dividend as a percentage of post-tax profit in the plan, based on the percentage entered below.
Dividend per share - the amount paid to shareholders as a dividend. How this is calculated depends of the choice above.
1. Sell shares in the business for cash
- In this example, 10 shares are being sold for £100 each.
- This will generate £1000 in cash in the month the equity component begins in the Timeline.
- This will also generate £1000 of share capital in the equity section of the Balance Sheet.
2. Existing shares/equity in the business
- In this example, 1 share is set up worth £1000. This could represent a single owner's equity in the business.
- This does not add any cash to the plan - Starting cash must be added separately in the Opening Balance.
- This will generate £1000 of share capital in the equity section of the Balance Sheet and on the Opening Balance.
3. Pay a dividend
- In this example, 10 shares are set up with a dividend payment or £5 per share per month.
- This will result in a £50 dividend payment per month.
- There is no price per share, meaning that this component generates no cash or equity, just the dividend payment.