Wednesday, December 18, 2013

Starting a New Business: A Word About Capital

Because of the changes in price levels, the amounts required to start a new enterprise today are substantially above those of a few years ago.  Prices may or may not stabilize around current levels.  Therefore, any dollar figures given at a specific time may be substantially different two or three years later.  The New York State Department of Economic Development maintains detailed data on changes of this order and has material written expressly for the purpose of guiding owners.

Experience has shown, however, that over a period of time there is little variation in certain standard ratios.  It should be noted that in the food service industry, a diner may require twenty times as much capital investment as a roadside stand or luncheonette.  A dry cleaning establishment requires four times the capital needed to start a mail-order service.  A medium sized furniture store might need an investment half as large as that of a moderate volume shoe store.  Generally speaking, a cash and credit business requires at least 50 percent more capital than does a cash business.

How much money does it take to keep a business running?  One way of answering this is to show the different kinds of capital:

This includes all expenses needed before starting the operation of the business (security deposits, pre-advertising, research, etc.).

This includes operating expenses such as wages, rent, advertising, supplies (including stock), heat, electric, telephone, taxes, insurance, interest on borrowed money, repairs, improvements, delivery, etc.  These are commonly lumped together as overhead.

This amount is needed for machinery, fixtures, and all physical aspects of the business.

The buyer should be aware of all three forms of Working Capital.