How much money should I have?

Start-Up Expenses Expenses entrepreneurs have when starting their business Expenses entrepreneurs have when starting their business Usually they are expenses that occur one time Usually they are expenses that occur one time Examples of start-up costs: Examples of start-up costs: Equipment, beginning inventory, deposits for rent and utilities, business licenses and permits, advertising Equipment, beginning inventory, deposits for rent and utilities, business licenses and permits, advertising

Activity Break off into groups of 4 Break off into groups of 4 Develop a list of all start-up expenses that the business owner would probably have. Develop a list of all start-up expenses that the business owner would probably have. A small ice cream shop A small ice cream shop A video rental store A video rental store A resume writing service A resume writing service A video arcade A video arcade

Start-Up Expenses are grouped into the following categories: 1. Real estate: If you purchase a building or land for your business you will have to pay down payments and closing costs If you purchase a building or land for your business you will have to pay down payments and closing costs If you rent – you do not have real estate expenses If you rent – you do not have real estate expenses 2. Equipment, fixtures, and furniture 3. Building renovations

4. Prepaid items and deposits Rental deposit – if you are renting Rental deposit – if you are renting Utilities/telephone deposits Utilities/telephone deposits Business licenses and fees Business licenses and fees 5. Beginning inventory and supplies Must have some inventory to get started – but don’t buy too much! Must have some inventory to get started – but don’t buy too much!

6. Other start-up expenses Advertising for grand opening Advertising for grand opening Cost of training new personnel Cost of training new personnel Legal/accounting fees Legal/accounting fees

Operating Expenses

What are operating expenses? All the expenses that occur after the business has opened All the expenses that occur after the business has opened Examples: Examples: Rent or mortgage payments, insurance, utilities, payroll, repairs, inventory purchases, taxes, advertising Rent or mortgage payments, insurance, utilities, payroll, repairs, inventory purchases, taxes, advertising

Entrepreneurs opening a new business must: Plan for personal expsnses Plan for personal expsnses Expenses necessary for entrepreneurs to live day-to-day Expenses necessary for entrepreneurs to live day-to-day New entrepreneurs must plan for everyday expenses for at least the first three months New entrepreneurs must plan for everyday expenses for at least the first three months Examples: rent/mortgage for home, food, transportation, clothing, medical bills, entertainment Examples: rent/mortgage for home, food, transportation, clothing, medical bills, entertainment

Assessment Activity Your class want to open a new business – a portable cart that can be taken to parades, school activities, and sporting events. From this cart the class will sell hot dogs, chips, and soft drinks. Your class want to open a new business – a portable cart that can be taken to parades, school activities, and sporting events. From this cart the class will sell hot dogs, chips, and soft drinks. List all of the items needed as start-up costs AND all items that would be operating costs List all of the items needed as start-up costs AND all items that would be operating costs

Where can I get money to start my business?

Questions #1 What happens if you do not have enough money to start your business? Should you give up your plans? What happens if you do not have enough money to start your business? Should you give up your plans?

Question #2 Why do many lenders require entrepreneurs to put a lot of their own money into an entrepreneurial venture? Why do many lenders require entrepreneurs to put a lot of their own money into an entrepreneurial venture?

Terms to know: Capital: money needed to start a business and keep it operating Capital: money needed to start a business and keep it operating You may need different amounts of money at different periods of time You may need different amounts of money at different periods of time Short-term borrowing: usually requires repayment within 90 days Short-term borrowing: usually requires repayment within 90 days Usually used for purchasing inventory or lower-priced equipment Usually used for purchasing inventory or lower-priced equipment

Intermediate-term borrowing: usually for 1-5 years Intermediate-term borrowing: usually for 1-5 years Equipment, fixtures, or commercial vehicles are often purchased using this type of borrowing Equipment, fixtures, or commercial vehicles are often purchased using this type of borrowing Long-term borrowing: for longer than 5 years Long-term borrowing: for longer than 5 years Used when purchasing real estate Used when purchasing real estate

Activity Identify sources of capital to start a new business. Identify sources of capital to start a new business.

Sources of Capital Venture capitalists: usually provide loan money to high-risk entrepreneurs. Want a high return on investment! Venture capitalists: usually provide loan money to high-risk entrepreneurs. Want a high return on investment! Trade credit: form of credit provided by suppliers to their customers. Trade credit: form of credit provided by suppliers to their customers. Inventory and equipment are purchased through credit extended by their suppliers. Inventory and equipment are purchased through credit extended by their suppliers.

Small Business Administration (SBA): A federal agency whose mission is to help small businesses get started Small Business Administration (SBA): A federal agency whose mission is to help small businesses get started Assist entrepreneurs in obtaining “bank guaranteed loan” Assist entrepreneurs in obtaining “bank guaranteed loan”

Choosing… Good and bad must be looked at carefully for each funding source Good and bad must be looked at carefully for each funding source Usually a combination of several sources is used to obtain all the necessary capital Usually a combination of several sources is used to obtain all the necessary capital Sources of money (capital can be classified into 2 categories Sources of money (capital can be classified into 2 categories Debt and equity Debt and equity

Debt Financing Debt Financing Borrowing money to get the business started or keep it going Borrowing money to get the business started or keep it going Usually must make periodic interest payments to lenders Usually must make periodic interest payments to lenders Equity Financing: Consists of money that the owner or others invest in the business Usually requires the entrepreneur putting personal savings into business

When do I start making a profit?

Question At what point does a business start making a profit? At what point does a business start making a profit?

Break-Even Point Point where the revenue (money taken in) of a business equals its expenses Point where the revenue (money taken in) of a business equals its expenses Must estimate revenue and expenses Must estimate revenue and expenses

Two Types of Expenses Fixed Expenses: Fixed Expenses: Do not change Do not change Examples: mortgage/rent payment, insurance Examples: mortgage/rent payment, insurance Variable expenses: Change month-to- month Examples: cost of inventory is based on how much is sold

Calculating Profit/Loss Profit/loss = total revenue – total expenses Profit/loss = total revenue – total expenses If total revenue exceeds total expenses, the business is earning a profit If total revenue exceeds total expenses, the business is earning a profit If total expenses exceed total revenue, the business is operating at a loss If total expenses exceed total revenue, the business is operating at a loss

Calculating Break-Even Point Break-Even Point = Break-Even Point = Fixed Expenses 1-(variable expenses/sales revenue)