new business module

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104 BUSINESS SKILLS recurring expenditures such as payments for material, rent for a workshop and the entrepreneur’s salary. It also depends on how the business develops in terms of income: sales may start slowly and income may be insufficient to cover all of those costs. However, as the business becomes better known and sales pick up, it should eventually reach the point where income is sufficient to cover all costs and the business starts generating profit. Entrepreneurs have to estimate their monthly recurring expenses and monthly sales to estimate working capital needs. Without sufficient working capital, a business risks running out of cash. If this happens, it can no longer pay the costs of running the business and it has to close down. Again, entrepreneurs should try to keep recurring costs as low as possible when starting a business. For example, they should refrain from employing unnecessary staff unless they are sure the staff are needed and they should keep material purchases as low as possible but sufficient to cover needs.
Session 2: Estimating capital requirements A good way to determine the cash needs of a starting business is to conduct an income and expenditure analysis. In such an analysis, entrepreneurs estimate their monthly income, the costs of initial investments, and recurring operational expenses. Put into a simple table, this information can be used to determine the cash flow of the business. The cash flow is simply the money flowing into and out of a business. As money is needed to pay recurring expenses, it is important to know if a business is generating sufficient money to cover expenditures. This is best explained using a simple example. 17 FINANCING A BUSINESS 105 The following box shows an income and expenditure analysis for Lara’s dumpling business. The capital investment needs are easy to calculate and need no further explanation. To determine her working capital needs, Lara calculated her monthly free cash flow, i.e. the cash that remained after paying the costs of running the business. Lara’s calculations showed that her business would generate a negative cash flow during the first five months. In other words, during the first five months, her business is not generating enough money to cover all the expenses incurred in running it – she will not be able to pay all the materials, utilities and transport required. To determine her working capital needs, Lara calculated the cumulative free cash flow. In the first month the business had many initial expenses and more money flowed out of it than into it. The business therefore generated a negative cash flow (– $3,675). In the second month, the business faced fewer expenses and more money was flowing into it than out of it; the business generated $625 of available money (free cash flow). Going through the different months, Lara saw that the fourth month incurred the largest negative cash flow (– $4,250). She therefore knew that if she could start her business with $4,250 in cash, she would be able to pay for all the 17 Adapted from IFRC (2001, p. 29) and ICRC (2009, p. 128).
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BUSINESS SKILLS TRAINING COURSE FOR
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BUSINESS SKILLS TRAINING COURSE FOR
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4 BUSINESS SKILLS MODULE 5: ESTIMAT
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6 BUSINESS SKILLS It is important t
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8 BUSINESS SKILLS They make the cou
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Monluck Sidara/ICRC
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12 BUSINESS SKILLS Module 1 starts
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14 BUSINESS SKILLS (d) Trading busi
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16 BUSINESS SKILLS The main duty of
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18 BUSINESS SKILLS must be able to
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20 BUSINESS SKILLS Typically, small
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22 BUSINESS SKILLS 2.2 From busines
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24 BUSINESS SKILLS 2.3 Discussion o
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26 BUSINESS SKILLS Session 3: Plann
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28 BUSINESS SKILLS 6 Typical questi
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30 BUSINESS SKILLS NOTE: Hand-out 4
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MODULE 2: DEFINING AND ASSESSING A
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DEFINING AND ASSESSING A BUSINESS I
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Session 3: How to assess a business
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MODULE 3: MARKETING PRODUCTS
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MARKETING PRODUCTS 51 • enquiring
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