Business Start-Up Basics II

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1 Business Start-Up Basics II P R E B U S I N E S S P L A N P R E P A R A T I O N Presented by: SBDC Business Advisors Lisa Hutson Ana Badillo Susan Patton

2 Agenda 1. Determine financing needs a. Discuss Start up Costs b. Loan Requirements & Grants c. 5 C s of Credit 2. Transition to Financial Plan a. Forecast Unit Sales b. Preliminary Pricing a. Cost Driven b. Market Driven c. Costs COGS + O/H 3. Prepare Projections a. Start-up Costs b. Breakeven Analysis c. 1-3 Years

3 Look at Your Business Idea Can this idea be turned into a business? Is there a real need for the product or service? How much growth potential exists? Market share? Product/Service line expansion? Is there competition? How much? Who/Where is it? Who will buy? How much? How often? How much will they pay? What am I putting at risk? If I decide not to do the deal, have I failed? Will I regret it later? Can I afford to do this business now or ever?

4 Quick Review of BBI 1. Are you an Entrepreneur? 2. Types of Business Structures 3. Business Plan Components 4. Market Research

5 Possible Start-Up Costs Register with the State ($125) Starting Inventory Leasehold Improvements Professional Fees Equipment Computer, Printer, Software Website Networking Trade Shows, Chamber Salary

6 Do You Need Financing? How much money will you need and where will you get it? Private Funding (Family/Friends) Private Investors Stockholders Venture Capitalists Banks Grants Alternative Lending Micro Lenders Specialty Brokers

7 Grants SBA does not provide grants for starting and expanding a business. Government grants are funded by tax dollars and require very stringent compliance and reporting measures. -

8 Loan Requirements Sufficient Credit Score Business Plan (complete) Collateral Personal Finance Statement Owner Injection of Funds Cash Flow Experience

9 5 C s of Credit Character Capacity Collateral Capital Conditions

10 Character Previous Credit Employment History Time at Residence Education Background

11 Capacity Ability or capacity to repay Based on personal cash flow Income vs. expenses Debt to income ratios

12 Collateral Loan protected by collateral is safer to lender than one that is not Unsecured vs. secured Better the collateral, the better the lender likes the loan Loan structure to match collateral/need

13 Capital Personal net worth Other assets to help you pay debt if you default More assets at stake Net worth = financial astute

14 Conditions Terms of loan interest rate, principle, etc. Economic environment

15 Credit Credit Bureaus Experian, Transunion & Equifax What is included? Previous and current credit Average and current balances Late payments Over the limit charges Previous and current addresses & employers

16 Credit Credit cards 3-5 credit cards is average per cardholder $14,743 is average household credit card debt 14.83% is average APR

17 Credit FICO Scores Range from is excellent Under 680 is difficult to get financing Things that impact your score: Payment history 30, 60, 90 days late (35%) Average balance compared to credit limit (30%) Length of credit history (15%) Variety of debt sources (10%) Recent activity (10%)

18 Credit What is your credit score?

19 Credit Lender must send a letter informing you why on a personal loan Lender may not disclose real reasons on a business loan Try alternatives Try improving credit and apply later

20 Credit Credit Repair Correct outdated & incorrect data Dispute errors Consistently make on time payments Reduce your total debt Variety of debt not just credit cards Be careful of closing old accounts Maintain debt to credit ratio and length of credit

21 Pricing Parameters Pricing your product or service correctly is one of the most important business decisions Setting a price too high or too low could limit your business growth Cover both variable and fixed expenses (Cost Basis) Research what the competition charges (Market Basis) Set prices that reflect the value you provide

22 Pricing Parameters Cost Basis takes costs and adds amount to make profit Cost of Goods Sold Material Direct Labor Delivery Overhead Rent/Utilities Insurance Office Market Basis also known as competition based pricing Current Shelf Price Alternative Price (higher, lower, sale why?)

23 Breakeven Analysis To determine the number of units sold to cover overhead and make profit BE = fixed costs/(unit selling price variable costs) 1. Determine companies fixed costs (won t fluctuate with volume. i.e. rent & utilities) 2. Determine variable costs (fluctuate with volume. i.e. COGS) 3. Determine price you will sell product or service 4. Calculate your companies Breakeven Point

24 Breakeven Example You sell a gourmet pizza for $20 It costs you $6 in variable costs per pizza Your companies fixed costs are $2200 per month (rent, utilities, wages) BE = $2200/ ($20 - $6) BE = $2200/$14 BE = 157 You will need to sell 157 pizzas per month to break even

25 Financial Forms Breakeven Worksheet (by SCORE) Breakeven Analysis Enter your company name here Cost Description Fixed Costs ($) Variable Expenses (%) Inventory or Materials $ Direct labor (includes payroll taxes) Other expenses Other expenses Salaries (includes payroll taxes) Supplies Repairs & maintenance Advertising Car, delivery and travel Accounting and legal Rent Telephone Utilities Insurance Taxes (Real estate, etc.) Interest Depreciation Other (specify) Other (specify) Miscellaneous expenses Principal portion of debt payment Owner's draw Total Fixed Expenses $ - Total Variable Expenses 0.0 Breakeven Sales level = 0

26 Projections Revenue and Cost of Goods [Your Company Name] Projections For the Year Ended [Mmmm Dd, 200X] Jan. Feb. Mar. Apr. Revenue: Gross Sales (Note 1) $0.00 $0.00 $0.00 $0.00 Less: Sales Returns and Allowances $0.00 $0.00 $0.00 $0.00 Net Sales $0.00 $0.00 $0.00 $0.00 Cost of Goods Sold: Beginning Inventory $0.00 $0.00 $0.00 $0.00 Add: Purchases (Note 2) $0.00 $0.00 $0.00 $0.00 Less: Ending Inventory $0.00 $0.00 $0.00 $0.00 Cost of Goods Sold $0.00 $0.00 $0.00 $0.00 Gross Profit (Loss) $0.00 $0.00 $0.00 $0.00

27 Projections -Expenses Expenses:(Note 3) Advertising $0.00 $0.00 $0.00 $0.00 Amortization (Note 4) $0.00 $0.00 $0.00 $0.00 Bad Debts $0.00 $0.00 $0.00 $0.00 Bank Charges $0.00 $0.00 $0.00 $0.00 Charitable Contributions $0.00 $0.00 $0.00 $0.00 Commissions $0.00 $0.00 $0.00 $0.00 Contract Labor (Note 5) $0.00 $0.00 $0.00 $0.00 Credit Card Fees $0.00 $0.00 $0.00 $0.00 Delivery Expenses $0.00 $0.00 $0.00 $0.00 Depreciation (Note 6) $0.00 $0.00 $0.00 $0.00 Dues and Subscriptions $0.00 $0.00 $0.00 $0.00 Insurance $0.00 $0.00 $0.00 $0.00 Interest (Include in loan payments) $0.00 $0.00 $0.00 $0.00 Maintenance $0.00 $0.00 $0.00 $0.00 Miscellaneous $0.00 $0.00 $0.00 $0.00 Office Expenses $0.00 $0.00 $0.00 $0.00 Operating Supplies $0.00 $0.00 $0.00 $0.00 Payroll Taxes $0.00 $0.00 $0.00 $0.00 Permits and Licenses $0.00 $0.00 $0.00 $0.00 Postage $0.00 $0.00 $0.00 $0.00 Professional Fees (Note 7) $0.00 $0.00 $0.00 $0.00 Property Taxes $0.00 $0.00 $0.00 $0.00 Rent $0.00 $0.00 $0.00 $0.00 Repairs $0.00 $0.00 $0.00 $0.00 Telephone $0.00 $0.00 $0.00 $0.00 Travel $0.00 $0.00 $0.00 $0.00 Utilities $0.00 $0.00 $0.00 $0.00 Vehicle Expenses $0.00 $0.00 $0.00 $0.00 Wages (Note 8) $0.00 $0.00 $0.00 $0.00 Total Expenses $0.00 $0.00 $0.00 $0.00

28 Projections Loans and Other Income Loans: Mortgage Payments $0.00 $0.00 $0.00 $0.00 Term Note Payments $0.00 $0.00 $0.00 $0.00 Line of Credit Payments $0.00 $0.00 $0.00 $0.00 Total Loan Payments $0.00 $0.00 $0.00 $0.00 Other Income: Gain (Loss) on Sale of Assets $0.00 $0.00 $0.00 $0.00 Interest Income $0.00 $0.00 $0.00 $0.00 Total Other Income $0.00 $0.00 $0.00 $0.00 Net Disposable Income (Loss) $0.00 $0.00 $0.00 $0.00

29 Projections Notes All businesses, whether startup or growing, will be required to supply prospective financial data. Most of the time, creditors will want to see what you expect your company to be able to do within the next three to five years. For the first year, you should supply monthly or quarterly projections. After that, you may be able to stretch it to quarterly and/or yearly projections for years two through five. Make sure that your projections match your funding requests; creditors will be on the lookout for inconsistencies. It's much better if you catch mistakes before they do. If you have made assumptions in your projections, be sure to summarize what you have assumed. This way, the reader will not be left guessing. Finally, include a short analysis of your financial information. Include a ratio and trend analysis for all of your financial statements (both historical and prospective). Since pictures speak louder than words, you may want to add graphs of your trend analysis (especially if they are positive).

30 Questions?

31 What s next? BBI Learn Steps of Starting Business and About Writing a Business Plan BBIII Learn Basics of Balance Sheet, Profit & Loss Statement, Basic Chart of Accounts, etc.) How to request individual Business Counseling

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