CHAPTER FOUR

START UP BUSINESS
 4.1 Money Needed to Start an Enterprise

 Estimating the Start-up Capital

 If someone wants to start a business he/she must be aware that a certain amount of

money is needed during the start-up process of a business for making payments

before the business begins to generate enough sales income.

4.1.1 Pre-operation payments or investment capital

• Money needed to start a business will have to pay before the business starts

operating.

For example:
• The cost for installation of machines and

• The expenses for training of workers to use machines

• Fees for licenses and insurance

• Costs related to renovation of facilities

 4.1.2 working capital (Initial operation payments)

• It will occur when a new business starts to operate, to

cover immediate expenses until revenues from sales

flow back into the business.

For example:

• Payment for merchandise

• Money needed to pay salaries

• Funds needed for unforeseen expenses. etc.

 4.1.3 Personal expenses:
 Money needed for personal expenses that are
necessary to live , such as:
• Rent payments,
• Food,
• Transportation,
• Insurance,
• Clothing,
• Utilities,
• Medical bills and entertainment.
 Costs of starting a business

• Costs are resources consumed or used to produce

a unit of product or service.
• Every business generates costs, even if there is no
ongoing production, service or trading activities.
• To understand this, it is essential to know that
there are direct costs and indirect costs.
 Types of costs

1. Direct costs:
• Are those that only arise when an business is
manufacturing goods or producing a service or
buying goods to resell. These costs depend
directly on the number of products, services or
goods produced.
• Are composed of two cost sub-groups:
 Costs…

Direct Costs

Direct Material Costs Direct Labor Costs

 Costs...

A. Direct material costs:

• Expenditures for all items that become part of a product.

• Costs linked to the acquisition of raw materials, such as

transport, are included in the direct costs.

 Types of materials
 In production, a distinction is made among different kinds
of materials:
1. Raw materials, e.g. plywood, metal bars, metal
sheets, leather, wool, woven fabrics, plastics, fluor,
butter, etc.
2. Standard materials, e.g. nails, screws, bolts, nuts,
fittings, electrical appliances, spare parts, buttons,
zippers, etc.
3. Auxiliary materials, e.g. glue, paint, welding
electrodes, welding gas, saw blades, grinding paper,
yarn, threads, etc.
 In wholesale and retail business the costs for acquiring
finished goods for reselling are classified as material costs.
 B. Direct labor costs
• All wages for workers and helpers that are directly

involved in the production or the delivery of services.

For example: - daily labor

- contract worker

- permanent worker
 2. Indirect costs(overhead costs)
 Are all other costs generated from business activities that are not
direct costs.
 Are costs that cannot directly be attributed to a specific product or
service.
For example:
• Administrative salary
• Office stationery
• Rent for the office , shops
• Salary for the bookkeeper,
• Publicity
• Interest on the bank loan/capital costs
• Bills for; telephone costs, internet electricity and water
• Fire and car insurance, etc.
Sources of Business Financing

 There are two primary sources of financing to establish a

business. These are:

A) Owner’s equity
The main sources of equity financing for most

entrepreneurs are:
 personal savings

 Family and friends

 Partners

 corporation
Sources of Business Financing...
B) Borrowing from lending institutions

• Banks

• Finance companies,

• Governments agencies

• Trade credit and

• Microfinance institutions
 Considerations in applying for a business loan

• Different lending institutions have different

procedures which have to be followed by the loan
applicant.
• It is necessary to understand the following factors that
are taken into consideration when a banker is
appraising a loan application.
1. Type of loan
2. Purpose of the loan
3. Credit worthiness and integrity of the borrower
4. Capability
5. Repayment period
 cont…

7. Security or collateral
8. Guarantors
9. Business plan
10. Customers past financial records
 Sources of Business Financing….
A banker or loan officer will take into consideration the five
C’s of credit when evaluating a loan applicant:
1. Character
2. Capacity
3. Capital
4. Conditions
5. Collateral
Thank You For Your Attention!