Many entrepreneurs fall prey to easy loans and cheap loans. They forget about the true costs of such easy financing.
Easy financing means HIGH exhorbitant interest rates. 24% per annum mostly.
Should young new entrepreneurs resort to using credit cards and unsecured bank overdraft facilities to finance? What other alternatives do they have?
One simple rule they should follow:
Finance A TRANSACTION
Never finance an operation.
What does that mean??
You can use your credit card when you want to purchase something to RE-SELL for profit.
For example,
Tom wants to sell PDA accessories in Singapore. He uses his credit card to purchase $5000 worth of PDA goods from Ebay and freight them into Singapore.
He again uses his Credit card to pay for freight by UPS or Fedex.
2 weeks later, the stock arrives and he sells it off at his retail shop or a shopping cart in a shopping centre.
In 30 days, he sold all his accessories $5000 worth of them. I always assume that NO entrepreneur will order MORE goods than he could reasonably sell.
His credit card bill arrives later, and he makes FULL payment. No interest, no finance cost, no harm done.
The bank is sad, Tom is happy.
This is called Financing a Transaction.
If you use your credit card or bank overdraft to pay rent, payroll, utilities because you are short of cash, then I am afraid to say that you are in deep trouble!
A company that uses overdraft facilities to pay for overheads is a company that is unprofitable!
Remember, always sell at a price to cover your FIXED and VARIABLE overheads.
To know how to price your products, make sure that you can:
1. Sell enough of it
2. Follow this common sense:
Breakeven = ( Fixed overheads + Variable overheads )/ gross margin per unit
For e.g.
Rental for one month = $3,000
Staff cost including yourself = $3,000
Telephone + Other expenses = $2,000
Total: $8,000
You buy PDA accessories for $25 and can resell it for $50 your margin = 50% (25/50) for ALL goods
So, how much sales you gotta make?
$8,000/(0.5) = $16,000
How does it work out?
Sales = $16,000
Less: Cost of sales (purchases + freight) = ($8,000)
Gross Profit = $8,000
Less: All expenses = ($8,000)
Net profit = $0
If on average one item sells for $50, you would need to sell $16,000/$50 = 320 units
Hope this helps.
Sunday, April 29, 2007
Cost of financing a small business
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3 comments:
Hm... I'll keep this post in mind because I'm looking to run a business soon. I'm ready for the challenge, but I can still use all the help and advice I can get. I've been thinking about buying a business lately instead of starting one from scratch. Maybe a franchise? I'm not sure. Any suggestions? Advice? Thanks.
Before you decide to buy a business rather than starting it from scratch, I hope that you would have listed down exactly what type of business you want to do.
Because, the decision to buy or start from scratch will come from considerations such as:
1. Barriers to entry -
a. Finance
b. Licensing/Regulations
c. Geographic..etc
2. Value of the franchise
If it is a generic franchise, or a franchise which does not have a great brand/value...the money won't be worth spending on it.
3. Economic conditions
Certain industry are very dependent on economic conditions, this will affect how big or small your investment should be.
...there are of cos others, there are books written on it. I certainly don't have the final word on it :)
@May -- I agree with Bob. Be sure to do your research and due diligence. Starting a business from scratch and buying one both have their pros and cons.
If you're thinking about buying a business, there are bunch of websites that offer the service. I know there's BizTrader.com, which is an online global marketplace where you can buy and sell a business. It has excellent tips and advice, and you can also use it to find a lender, broker, etc.
I also highly suggest checking out any small business groups in your area. They can be very helpful, and it's always good to network.
Good luck!
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