Planning the finance for my new business.

Finance

Introduction

Finance is an essential aspect of making a business successful because if a business is not financed properly the business will become bankrupt. Businesses need money for all sorts of things. Some money will be needed before the business is ready to open. More finance will be needed just to keep the business running on a daily basis. Once the business has been operating for a while, it may need further capital to help it progress into the future. Financing a business is the process of using research to organise a firm’s capital and ensure that a business does not exceed its budget.

Sources of Finance

There are many sources of finance which help businesses to gain all the money they need to start-up or expand. Two types of sources are available to a business, short term sources and long term sources. Short term sources include overdrafts, trade credit, factoring, higher purchase, loans and foreign loans. Long term sources include mortgages, retained profits, grants, venture capital, equity, share capital, debentures and contract hire.

An overdraft is an agreed limit with a bank to overspend the businesses account to a specified limit, this benefits a business because it is easily accessible to a firm when they have short term cash flow problems, however banks charge for this facility and interest is payable on overdrafts. Trade credit is an agreement between suppliers and a business to pay for goods over a period of time after they purchase them, this benefits a business because the goods can be used before they are paid for and no interest is charged for this facility, however cash discounts may be lost if the payments are not made within the agreed limit of time, the firm has to develop a good reputation with the suppliers before the suppliers are able to trust them with this facility and the business also has the possibility of over-stretching their budget. Factoring is the process of a business selling its debts to another company for approximately 80% of their worth, this benefits a business because money that has previously been tied up in debts can then be used, the responsibility of collecting the debt is passed on to the factoring company and the cash flow of the business is improved, however factoring companies tend to charge a fee for this and the business loses 20% of the debt. Higher purchase is the process of buying goods then paying for them in instalments, this benefits a business because the business is able to use the products before they have been fully paid for and the business can pay at regular intervals without spending large amounts of money, however the goods remain the property of the finance company until the business has made all the payments and a deposit has to be paid on the goods. A loan includes borrowing an amount of money to be paid back over a period of time, this benefits a business because the money is easily accessible to be immediately used in the business, however the money borrowed has to be paid back with interest, the interest rates can rise and banks usually require security so they may make the decision not to allow a business to be granted with a loan. A foreign loan includes borrowing an amount of money from a foreign bank to be paid back over a period of time, this benefits a business because the business can use foreign banks as well as domestic banks, however the loan has to be paid back with interest and the payments subject to the exchange rate fluctuations.

A mortgage is a loan secured on a property, this benefits a business because large amounts of capital are available to the business, however the money has to be paid back with interest and if it is not paid back there is a risk of losing the property. Retained profits are profits that are invested into the business, this benefits a business because no finance needs to be paid back and no interest is required to be paid, however managers may have to limit salaries for a period of time, the business becomes dependant on the amount of profit made and there is no money left in reserve for emergencies. Grants are money given to eligible firms by government agencies, this benefits a business because the money does not have to be paid back and there are large amounts of money available from EU, UK, local councils and charitable trusts, however the business has to be eligible. Venture capital is the process of money being given to a business in return for a shareholding in the business, this benefits a business because the money does not have to be paid back and large amounts of capital are available, however the owner has to give up a percentage of the business and lose some of the control they have over the business. Equity includes own finances, loans and shares, it is the finance provided by the owners of the business, this benefits a business because large amounts of capital are available and the values of shares may rise, however there is a risk that the business will lose the capital invested. Share capital is the money gained by selling shares to investors, this benefits a business because large amounts of capital are available and the values of the shares may rise, however issuing more shares means there are more dividends to pay and some of the control is lost. Debentures are loans to large companies at a fixed rate of interest, this benefits a business because large amounts of capital are available and the interest rates are fixed, however the money still has to be paid back with interest. Contract hire is the process when a business hires or rents machinery and equipment for a period of time, this benefits a business because the machinery comes with maintenance from the leasing company, the business can replace machinery when it is worn out or out dated and resources can be used for other aspects of the business, however the business does not own the business and regular fees have to be paid for the use of the equipment.

The start up costs of my business may require me to use one of these techniques as a source of finance for my business because I may not have enough money to afford everything. However as my business is only a small beauty salon I do not think that the start up cost will be significantly high.

Total start up cost: £4,135.26

This is a preview of the whole essay

Total start up cost: £4,135.26

I conducted research to discover if my business is eligible for a business grant. According to http://www.princes-trust.org.uk, Community Cash Awards are grants which help people to set up businesses and community cash awards can give your business a grant of up to £5,000 and also provide support to help plan the business/project, research the budget, set goals and learn about the local community. To be eligible you must be aged 16-25 and not in education, training or work (or working less than 16 hours a week). I also discovered from my research that grants are given to businesses which have owners who are women, minorities or aged 18-25, these people can receive up to £1,500 in business grants. According to Leeds City Council, Leeds City Credit Union has set up a £200,000 loan fund to provide access to finance exclusively for start up businesses in disadvantaged areas of Leeds. Loans of up to £5,000 are offered to help people finance the initial stages of their business. In addition to this Business Enterprise Fund offer loans ranging from £5,000 to £60,000 and provide mentoring support for all their customers to help guide new business through the various processes of start up and expansion. The Sharing the Success programme has also developed a business growth fund offering grant assistance for capital purchases to enable job creation. A wide variety of grants and loans are also currently available from Yorkshire Forward, Manufacturing Advisory Service and the Sharing the Success programme.

As my business is included in a few of the categories listed above such as, business owner is aged 16-25, business owner is a woman and business owner is of a minority background, I feel that it would greatly benefit my business to apply for a grant as my business is very likely to receive one. My business would be expected to receive around £1,000 in grant money, I think this because my research has informed me that on average most small business in the UK receive around £500 to £1,000, as my business is included in three different categories which business grants are prioritised to I think I am on the higher end of this scale and will therefore receive £1,000.

The sources of finance which I have chosen to use for the start up costs of my business are, to provide £1,135.26 of the capital through my own finances, to receive £1,000 of the capital in the form of a business grant and to apply for a loan of £2,000. I think these are the most appropriate techniques of financing my business because applying for a grant and using my own finances allows me to gain the money that I need without having to pay it back. Applying for a business loan as well as using the techniques mentioned above will also benefit my business because I will be able to gain the money needed to buy all the beauty equipment and set up my business quickly.

I conducted research using http://www.moneysupermarket.com to discover which policy is best for my business and to determine which will save my business the most money.

According to my research the bank with the lowest interest rate on a loan of £2,000 over a period of 2 years is Santander, if I applied for a loan with this bank I would pay 14.9% APR of interest, this means that I would have to make a monthly payment of £96 to the bank and over 2 years this would add up to £2,304.

According to my research the bank with the lowest interest rate on a loan of £2,000 over a period of 3 years is Zopa Loan, if I applied for a loan with this bank I would pay 11.5% APR of interest, this means that I would have to make a monthly payment of £65.42 to the bank and over 3 years this would add up to £2,355.

According to my research the bank with the lowest interest rate on a loan of £2,000 over a period of 4 years is Santander, if I applied for a loan with this bank I would pay 14.9% APR of interest, this means that I would have to make a monthly payment of £54.62 to the bank and over 4 years this would add up to £2,622.

Based on my research I have decided to apply for a loan with Zopa Loan for £2,000 over a period of 3 years. I came to this conclusion because the interest rate on this loan is lower than the interest rates on the loans from Santander. I decided not to apply for a loan with Santander for £2,000 over 4 years because although the monthly payment on a loan from this bank for £2,000 over a 4 year period is less than the monthly payment from Zopa Loan, the total amount repayable is a lot more with Santander over a 4 year period than the total amount repayable with Zopa Loan. I decided not to apply for a loan with Santander for £2,000 over 2 years because although the total amount repayable with this bank for £2,000 over a 2 year period is less than the total amount repayable with Zopa Loan, the monthly payment on a loan with Santander over a 2 year period is a lot more than the monthly payment from Zopa Loan.

The running costs of my business may vary therefore there may be times at which I cannot afford to make the payments I need to. As a result of this I may be required to use one of the sources of finance to support me in these times. However as my business is not a seasonal business I do not think that the running costs cost will fluctuate too much.

Average total running cost per month: £4,235.90

My total running costs per month are fairly high and although I think my business will make enough sales to be able to cover this cost there may be times when my business does not attract as many customers it needs, therefore to ensure that my business always has the financial aid needed available to it, I have decided to keep an overdraft facility to ensure that my business always has the money needed available to it. Although banks charge for this facility ad interest can be payable on the money borrowed, it allows extra money to be easily accessible for short term cash flow problems.

Expected Revenue

The total revenue is the total amount of money going into a business from sales, this is also known as sales revenue or turnover and can be calculated by the prices per product multiplied by the number of products sold.

TOTAL REVENUE = PRICE PER PRODUCT SOLD x NUMBER OF PRODUCTS SOLD

According to my competitor analysis, my business will receive around 320 customers per month. I came to this conclusion because this is the number of customers that visit my competitor’s beauty salon per month. I also came to the conclusion that my customers will spend around £20 per visit because according to my questionnaire results most of my customers were willing to spend around £10 however a lot of my customers were also willing to spend £20, and according to my competitor analysis most customers spend around £15 but my beauty salon is a specialised salon therefore I think that my customers will spend more than this, they are more likely to spend £20.

Total Revenue = 20 x 320 = £6,400

Break Even

Break even shows at which point a company makes enough money from sales to cover its costs, this is the point at which the sales revenue and total costs are equal. Businesses use break even to detect how many products they need to sell to cover all their costs, this can be calculated by dividing the fixed costs by the selling price per product minus the variable cost per unit.

FIXED COSTS

BREAK EVEN = -----------------------------------------------------------------------

SELLING PRICE PER UNIT – VARIABLE COST PER UNIT

A company will make a profit when the sales revenue exceeds the total costs. A company will make a loss when the sales revenue is less than the total costs.

According to my research, my questionnaire results and the information I gained from my competitor informed me that the customers in my target market are most likely to spend over £20 per visit.

I calculated my fixed costs by adding up all the costs for my advertising, rent, wages, bills and loan repayment. I calculated my variable costs by adding up the costs of my products, I discovered that the total variable cost for one product is £2, I found this by adding up the price of each product then dividing this by the number of products there is, I did this because my business sells a range of different products so I calculated the average variable cost per product.

4172.4 4172.4

Break even = ----------- = ----------- = 232 -

20 – 2 18

Costs per month

Sales per months

Break even chart

The break even point for my business is to have 232 customers per month, this will be fairly easy to reach because according to my research my business is likely to attract 320 customers per month, this exceeds the number of customer that I need by almost 100 therefore even if my business does not reach 320 customers per month or the business is not doing as well as it normally does it will still be able to reach the break even point fairly easily.

Cash Flow

A cash flow forecast is a prediction of the cash that will come into and go out of the business over a period of time. Cash flow forecasts can be used by businesses to predict when it will be in surplus or when the business will be in deficit, the business can therefore predict when it may have problems and arrange things such as overdrafts.

A cash flow forecast consists of inflows and outflows. Inflows are money going into the business, this can be things such as sales, sponsorships, grants, shareholders and owners capital. Outflows are money going out of the business, this can be things such as rent, stock, bills, wages and advertising costs.

Cash flow

I expect my sales revenue to be below my calculated sales revenue in the first month because my business will be new therefore it will not have many customers so the sales revenue will be around £4,000, the income I gained from my government grant of £1000, my own finances of £1,135.26 and my bank loan of £2000 will help me overcome most of this, but there is still too little money to cover all the costs. However in the first month I have decided to invest £500 whereas in all the other months I will spend £250 in advertising to attract new customers to my business, I expect this to bring around 50 more customers to my business in February, increasing the sales revenue to £5,000. In March, October and December I expect the sales revenue to increase to around £8,000 because according to my research these are the months when most Asian holidays are celebrated. These holidays will increase the number or customers who are informed about my business therefore in April, June, July, August, September and November I expect my sales revenue to reach £6,400 per month as research shows that my business will attract 320 customers per month. In the first month I will spend around £286.16 on stock then in the months following I will spend £63.48 on stock however in the months that I am expected to get more customers I will spend 126.96 on stock. I will spend £3,744 on equipment in the first month, the prices of my bills will remain around the same each month, however these may change slightly, I expect these costs to be £40 per month for the electricity bill, £50 per month for the water bill, £67 per month for the gas bill, £80 per month for the phone bill, £65.42 per month for the loan repayment and £100 per month for the council tax. I also expect the cost of rent and wages to remain the same throughout the year, I expect the rent to be £336 per month and the wages to be £3184 per month.

By the end of the year I expect that my business will be in surplus, this is very good as my business is a fairly new business and it is small. I found that my net cash flow increased drastically throughout the months, however in the first month my business was in deficit therefore I may have to use my overdraft facility to cover this extra cost, although I will have to pay for this facility this will bring my business back into positive figures. The surpluses are extremely high and they may be slightly unrealistic as I am a new business setting up just as the recession is ending, my sales predictions are based on my research but these may be slightly incorrect in the current economic state.

Profit And Loss Account

Most businesses draw up profit and loss accounts at the end of their year of trading to see how much profit or loss their business is making, for some companies this is a legal requirement. If a business has higher costs than sales revenue it is making a loss, businesses need to make profits to survive and expand because some of this profit can be used to buy more stock or machinery.

Profit and loss account

The profit and loss account that I created for my business shows that my business will do very well in its first year, the sales revenue is very high compared to the costs of my stock, as a result of this my gross profits are also extremely high. Although my total expenses cost a large amount of money, my business is still able to make a net profit of £22,562.12. This profit and loss account is very good and informs me that my business will be very successful in its first year. I could use this large profit to re-invest in my business and allow it to expand.

Net Profit Margin

This involves the examination of accounting data to gain understanding of the financial performance of a company. It is useful as it provides insights into a company’s performance and financial liquidity, it also shows the shareholders returns of the business over time.

This ratio examines the relationship between profit and sales, the higher the percentage that is calculated, the better the performance of the business. The net profit margin is calculated by dividing the net profit by the sales revenue then multiplying this number by 100.

NET PROFIT

NET PROFIT MARGIN = ------------------------------ X 100

SALES

The net profit margin of my business is 29%

£22,562.12

Net profit margin = --------------------- X 100 = 29%

£77,800

According to www.lloydstsb.com the net profit margin for most new businesses is around 5%, the net profit margin for my business is significantly high compared to this therefore the performance of my business is a lot better than most other small businesses.

Return On Capital Employed

This ratio is a measure of the efficiency of a business in turning the capital that they invest into profit, this is extremely important because this is the amount of return we receive in the business being measured. Return on capital employed is calculated by dividing the net profit margin by the capital employed then multiplying this number by 100.

The return on capital employed should be over 10% for a small business, if it is under 10% business owners should invest in other things to gain more profit. However a large business is likely to receive 10%, this is good for a large business because, although the percentage is fairly low, the net profit and capital employed will be very high.

NET PROFIT

RETURN ON CAPITAL EMPLOYED = --------------------------------------------- X 100

CAPITAL EMPLOYED

The return on capital employed of my business is 545.6%

£22,562.12

Return on capital employed = ------------------------ X 100 = 545.6%

£4,135.26

The return on capital employed for my business is extremely large, this means that my business is performing very well and will be successful therefore there is no need for me to invest my capital in other ventures, such as a fixed deposit, to get a large amount of return on capital employed. My set up costs are low and my predicted sales revenue is very high as a result of this my return on capital employed is also very high, however I may have overestimated my sales revenue therefore these figures may be slightly unrealistic.

Planning the finance for my new business.

This is a preview of the whole essay

Document Details

Related Essays

Business and finance

Business Finance. There are a number of sources of finance, which businesse...

Research on sources of finance in a business

Finance for a new business. Mischa and Claire will need money to get them s...