The Business Plan: Startup Costs and Financing

1. Week 8 – November 23, 2004 The Business Plan: Startup Costs and Financing FM20731 – Entrepreneurship

2. The Financial Section • Startup Costs • Financing • Projected financial statements • Opening-day balance sheet • Projected income statements • Projected cash flow statements • Break-even point

3. Startup Costs • Inventory • Merchandise • Raw Materials • Supplies • Get estimates from suppliers • Furniture and Fixtures • Office furniture • Shelving, counters, displays, etc.

4. Startup Costs • Machinery and Equipment • Computers, registers, copiers, faxes, etc. • Manufacturing equipment • Construction equipment • Prepaid expenses/services • Legal fees • Insurance • Grand opening advertising • Everything that will be paid before opening

5. Startup Costs • Training costs for employees • Deposits • Lease • Utilities • Taxes • Renovations/building purchase • Working capital • Cash reserve • Covers expenses until self-sufficient

6. Working Capital Example • No Working Capital • Buy $10,000 of merchandise/month C.O.D. • Pay $1,000 for labor weekly • Generate $600 revenue/day

7. Working Capital Example • $10,000 of Working Capital • Buy $10,000 of merchandise/month C.O.D. • Pay $1,000 for labor weekly • Generate $600 revenue/day

8. Working Capital Example • $5,000 of Working Capital • Buy $5,000 of merchandise on 1st and 15th • Pay $1,000 for labor weekly • Generate $600 revenue/day

9. Working Capital Example II • $10,000/month in inventory C.O.D. • $15,000 Accounts Receivable/month • Terms: Net 30 • Must replenish stock • How much Working Capital needed?

10. Financing • How will you get the money? • Debt financing • Borrowed • Equity financing • Sell portion of the company

11. Debt financing • Borrowed • Must be repaid with interest • Interest rate usually prime plus 1-3% • Repayments can be a burden for startup • Personal assets used for collateral at risk! • Term depends on type of asset(s) bought • Real Estate: 15-30 years • Equipment: 3-5 years

12. Debt Financing: Bank Loans • Can be difficult to find • Different banks have different tastes • Some have tried 30 banks before success! • SBA: Small Business Lending Report • Ranks banks by loans to small businesses • Use to find a bank to pursue

13. Debt Financing: Government • Federal • Small Business Association • Provides many services • Including loan programs • Guarantees loans from local banks • If you default, they pay • State & local • Provide loan programs • Varies

14. Debt Financing: Finance Co’s • Finance high-risk companies • Finance specific situations • Usually much higher rate

15. Equity Financing • Investment, not a loan • Investor gets portion of company • Share in profits • Share in sale of company • May also get part of control

16. Equity Financing: Personal Funds • You may invest your own money • May be expected by other investors • “Skin in the game” • Don’t risk more than you can lose

17. Equity Finc’ng: Private Investors • Friends & Family • May strain or ruin relationship • Disagreements • Business failure • Wealthy individuals • A/k/a “Angels” • Matching networks exist • Partner(s) • See Legal section

18. Equity Fin.: Venture Capitalists • Interested in: • Very rapid growth companies • 25-40% annual rate of return • Go public or get sold within 5-7 years • So, invest $1 mil., expect at least $3-5 mil. • Excellent management team • Often invest in specific industry(ies) • May want 40% ownership or more than 50% • Rather own 100% of $1 mil. or 45% of $10 mil.?

19. Equity Fin.: Stock Sales • Public? • Not a new company! • Private, up to $1 million • May be OK in your state – check

20. Include in Your Business Plan • Source of funds • Uses of funds • Type of funding • Repayment, if necessary

21. Next Classes • November 30 • Financial Statements • Assembling the Business Plan • Work in class • December 7 • Financial Statements recap • Managing Growth • Work in class • December 14 • Business Plans due • Final presentations