entrepreneurship 1: lecture 7 determining your initial capital requirement avimanyu (avi) datta,...
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Entrepreneurship 1: Lecture 7Determining your Initial Capital Requirement
Avimanyu (Avi) Datta, Ph.D.
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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
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STEP 1: Estimating your First year SalesEstimating 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.
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STEP 1: Estimating your First year SalesEstimating 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.
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STEP 1: Estimating your First year SalesEstimating 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
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STEP 1: Estimating your First year SalesEstimating 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.
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STEP 2: Estimating your Cash OutlaysOwners 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
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STEP 2: Estimating your Cash OutlaysSalary 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
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STEP 2: Estimating your Cash OutlaysRent
◦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
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STEP 2: Estimating your Cash OutlaysTelephoneInsuranceLoan paymentsEquipment leases/ Service
ContractsLegal and Professional Fee
◦Attorneys and Accountants Maintenance ExpensesMiscellaneous Outlays
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STEP 3: Identifying starting costs that you need to pay only onceFixtures and EquipmentInstallation of Fixtures and
EquipmentDecorating and RemodelingStarting Inventory (calculate
Stock-turn ratio)◦Need annual cost of goods◦Average inventory turover
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STEP 3: Identifying starting costs that you need to pay only onceStarting 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
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STEP 3: Identifying starting costs that you need to pay only onceDepositsLegal and Professional FeesLicense Permits and FeesGrand Opening Advertising and
PromotionAccounts Receivable.
◦Try keeping a zero balance◦Very Frustrating
CashOthers
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STEP 3: Complete the SBA worksheethttp://entrp1.weebly.com/uploads
/1/3/2/7/13275528/sba-initial_capital_requirement.xlsx