Financing the Small Business Dr. Muslim Suardi, MSi., Apt. School of Pharmacy, Faculty of Sciences UNIVERSITY OF ANDALAS

Financial Plan 1.Initial Capitalization Plan 2.Projected Income Statement 3.Projected Operating Expenses 4.Cash Flow Projection

Initial Capitalization Plan The obstacle that prevents many entrepreneurs from fulfilling their dreams of starting a business is initial capitalization

Capitalization The activity of obtaining all capital assets necessary to operate a business

Capital Assets Equipment Inventory Operational resources (including cash) that the business owns & uses in the operation of its activities

Challenge of Capitalization The challenge of capitalization for the entrepreneur is determining where to obtain the money necessary to purchase and/or lease the items needed to successfully start a business

Financial Plan How much money is needed? How much income is needed for personal living expenses? ‘ What amount of profit does the entrepreneur consider? The amount of capital necessary to achieve the objective

Financial Plan A problem many entrepreneur encounter is that they do not develop a realistic plan of investment to earn the needed profits. When entrepreneur are not able to obtain the resources needed to successfully complete the business’s objective, the entrepreneur is considered undercapitalized Planning the amount of capital needed starts with making the sales projection

Capital Needs Starting Inventory Fixture & Equipment Decorating & remodeling Installation Cost Utility deposits Legal & other fees Grand Opening Promotion Cash on hand Other

Monthly Operating Expenses To keep the business running smoothly To estimate operating expenses, calculate the monthly rent ant employees’ salaries, & determine the average cost of utility services, insurance premiums, & other charges

Initial Operating Expenses Owner’s salary Other salary Rent Advertising Supplies Utilities Accounting Insurance Loan principal & interest Taxes, licenses Miscellaneous

Financing a New Business Having access to enough capital, or money, is critical to the success of a business, especially in the start-up phase What happens if you do not have enough capital to start your business? Should you give up your dream? Absolutely not! There are many sources of funds for entrepreneurs!

Analyzing Financial Sources Debt Capital Equity Capital

Debt Capital “Creditor capital “ Borrowed money

Debt Capital Friends Relative Commercial banks Savings & loan institutions Supply vendors State/local business development funds Small Business Administration

Friends & Relative Establishing trust is usually requirement for borrowing money. In many cases, it was encouraged from these people that prompted the idea to start the business in the first place.

Commercial banks Types of financing available: 1.Traditional loans 2.Line of Credit 3.Installment loan 4.Mortgage loans 5.Accounts Receivable Financing 6.Inventory financing 7.Sales Contracts

Savings & loan institutions Many of the loans that are available at commercial banks are also available at savings & loan institutions, & often at a lower cost. These institution also provide some types of financing that commercial banks generally do not, such as factoring

Supply vendors A company that supplies merchandise to a business can provide a source of working capital known as trade credit to that business Trade credit: a type of financing that allows delayed payment for merchandise

Business Development Funds States Communities

Small Business Administration Government Provide financial assistance to small business owners, either directly or indirectly

Equity Capital “Owner capital” “The money invested in a business by the owner or owners “ This might include the owner’s personal savings or investment by others, such as private investors, venture capitalists, stockholders, investment bankers, or partners

Equity Capital This might include the owner’s personal savings or investment by others, such as private investors, venture capitalists, stockholders, investment bankers, or partners

Equity Capital Personal savings Private investors Venture capitalists Sale of stock Investment bank Partnership

Personal savings The best source One of the advantage of using personal savings to start the business is that the entrepreneur keeps more of the business’s profits.

Private investors You may be able to obtain financial assistance from people who have excess income available for investment purposes Your banker, lawyer, or accountant may be able to provide a referral for a such a source.

Venture capitalists Only as a last resort Ventures capitalists do not often invest in start-ups. They prefer to invest in established business and business that have potential for an extremely high return on investment

Sale of stock Established business can raise capital by selling stock, or small pieces of the business

Investment bank Investment banks specialize in bringing together entrepreneurs who need funds with individuals or groups that have money to invest

Partnership Entrepreneurs who establish partnerships may seek a partner or partners for two reasons. They may want to increase the business’s capital or acquire expertise in areas that are unfamiliar to them

Conclusions Realistic! Motivation Success