Financing the Small Financing the Small BusinessBusiness

Dr. Muslim Suardi, MSi., Apt.Dr. Muslim Suardi, MSi., Apt.

School of Pharmacy, Faculty of SciencesSchool of Pharmacy, Faculty of Sciences UNIVERSITY OF ANDALASUNIVERSITY OF ANDALAS

Financial PlanFinancial Plan

1. Initial Capitalization Plan

2. Projected Income Statement

3. Projected Operating Expenses

4. Cash Flow Projection

Initial Capitalization PlanInitial Capitalization Plan

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

CapitalizationCapitalization

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

Capital AssetsCapital Assets

• Equipment

• Inventory

• Operational resources (including cash) that the business owns & uses in the operation of its activities

Challenge of CapitalizationChallenge 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 PlanFinancial 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 PlanFinancial 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 NeedsCapital Needs

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

Monthly Operating ExpensesMonthly 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 ExpensesInitial Operating Expenses

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

Financing a New BusinessFinancing 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 SourcesAnalyzing Financial Sources

Debt Capital

Equity Capital

Debt CapitalDebt Capital

“Creditor capital “

Borrowed money

Debt CapitalDebt Capital

• Friends

• Relative

• Commercial banks

• Savings & loan institutions

• Supply vendors

• State/local business development funds

• Small Business Administration

Friends & RelativeFriends & 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 banksCommercial banks

• Types of financing available: 1. Traditional loans 2. Line of Credit3. Installment loan 4. Mortgage loans 5. Accounts Receivable Financing 6. Inventory financing 7. Sales Contracts

Savings & loan institutionsSavings & 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 vendorsSupply 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 FundsBusiness Development Funds

• States

• Communities

Small Business AdministrationSmall Business Administration

• Government

• Provide financial assistance to small business owners, either directly or indirectly

Equity CapitalEquity 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 CapitalEquity 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 CapitalEquity Capital

• Personal savings

• Private investors

• Venture capitalists

• Sale of stock

• Investment bank

• Partnership

Personal savingsPersonal 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 investorsPrivate 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 capitalistsVenture 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 stockSale of stock

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

Investment bankInvestment bank

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

PartnershipPartnership

• 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

ConclusionsConclusions

Realistic!

Motivation

Success