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Entrepreneurship 1: Lecture 7 Determining your Initial Capital Requirement

Entrepreneurship 1: Lecture 7 Determining your Initial Capital Requirement. Avimanyu ( Avi ) Datta , Ph.D. Determining your initial Capital Requirement. SBA worksheet provides a quick and simple method of estimating your initial capital requirement

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Entrepreneurship 1: Lecture 7 Determining your Initial Capital Requirement

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  1. Entrepreneurship 1: Lecture 7Determining your Initial Capital Requirement Avimanyu (Avi) Datta, Ph.D.

  2. Determining your initial Capital Requirement • SBA worksheet provides a quick and simple method of estimating your initial capital requirement • Numerous Business with profit potential do not make it because they run out of money. • Focusses mainly amount of money needed to get your business through the first few months. • The SBA worksheet encourages you to have a sufficient amount of cash to meet various contingencies that may arise in the first few years of operation • http://entrp1.weebly.com/uploads/1/3/2/7/13275528/sba-initial_capital_requirement.xlsx

  3. STEP 1: Estimating your First year Sales • Estimating Target Market Potential • Census Retail Trade Data Reports total sales of your type of product by segments. http://www.census.gov/retail/ Free. • Industry Reports: IDC, Gartner, Frost & Sullivan etc. Could be tailored to your need. Expensive • Census Data may be dated so you need to forecast.

  4. STEP 1: Estimating your First year Sales • Estimating Target Market Potential..contd • Get trade data on what portion of overall sales comes from each segment of the market. • Get this data to see your target market. • Multiply overall market by your target market (percentage) to get your target sales • Eg overall sales = $5,000000, your segment is 60% of the market, thus $3,000000. Of which, you want to capture 50% of the market. Thus, sales = $1,500000.

  5. STEP 1: Estimating your First year Sales • Estimating your market size • Market size = Shipment * Average Unit price • Estimate a growth in market too. • So suppose your unit shipment is 50,000 and AUP is $100, then market size = $5,000000. • If the market grows by 3% a year, then on your second year market size would be $5,000000*1.03= $5,150000

  6. STEP 1: Estimating your First year Sales • Estimating your market size… contd • Keep in mind the sales to asset ratio. • For some business for every $10,000 of sales $5000 in asset is required, of which $2000 ill be inventory, $500 for additional fixtures, $2000 for additional space, and $500 for receivables and cash. • Projected sales will also be affected by the number of additional people needed to be employed to take care of growing markets.

  7. STEP 2: Estimating your Cash Outlays • Owners or Manager’s Salary • How will you pay your self? (MISTAKE) • SBA worksheet recommend that you double the figure in column 1 and pace this figure in column 2. • Rationale if your business is running short in cash you may want to forgo a part of your salary until things get better. • Put three times the managers salary in column 2. Manager may be less willing to postpone his/her salary

  8. STEP 2: Estimating your Cash Outlays • Salary and Wages • No of people other that the manager who will be employed • No. of hours they will work each month • Hourly wages • Payroll related outlays • Social Security • Medicare • Unemployment taxes • Workers’ compensation coverage

  9. STEP 2: Estimating your Cash Outlays • Rent • Multiply your monthly rent by 3 for your SBA worksheet • Advertising • Rule of thumb- 4% of sales on advertisement . Thus, if sales goal is $1,000000 advertisement cost will be $25,000

  10. STEP 2: Estimating your Cash Outlays • Telephone • Insurance • Loan payments • Equipment leases/ Service Contracts • Legal and Professional Fee • Attorneys and Accountants • Maintenance Expenses • Miscellaneous Outlays

  11. STEP 3: Identifying starting costs that you need to pay only once • Fixtures and Equipment • Installation of Fixtures and Equipment • Decorating and Remodeling • Starting Inventory (calculate Stock-turn ratio) • Need annual cost of goods • Average inventory turover

  12. STEP 3: Identifying starting costs that you need to pay only once • Starting Inventory (calculate Stock-turn ratio) • Need annual cost of goods • Projected levels of sales (e.g. $500,000 ,source: your estimate) • Cost of goods sold id X% of sales (e.g. 50%, source: trade data) • Thus, annual cost of goods sold = $250,000 • Average inventory turnover • Stock turn rate ( 4 times a year, source: trade data) • Stock-turn ratio = $250,000/4 = $62,500

  13. STEP 3: Identifying starting costs that you need to pay only once • Deposits • Legal and Professional Fees • License Permits and Fees • Grand Opening Advertising and Promotion • Accounts Receivable. • Try keeping a zero balance • Very Frustrating • Cash • Others

  14. STEP 3: Complete the SBA worksheet • http://entrp1.weebly.com/uploads/1/3/2/7/13275528/sba-initial_capital_requirement.xlsx

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