Home' Trinidad and Tobago Guardian : May 18th 2017 Contents MAY 18 • 2017 guardian.co.tt BUSINESS GUARDIAN
FINANCIAL ROAD MAP | BG19
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Private investor: Inviting an investor may
mean divulging proprietary information that
could potentially harm him down at a later
point. Furthermore anyone who is offering
equity expects that they would have a share
of profits, part ownership and control of the
Debt financing: The fact that the business
is on a decline is a red flag for a potential lender
but if he presents his data convincingly, making
realistic assumptions and projections plus his
willingness to offer the land as collateral he may
be able to negotiate a good financing package.
Quantifying capital needs
If Stephen stays in the larger space he has
to secure sufficient financing to:
1. Fill the store to an acceptable level so that
it could generate adequate cash flows to cover
the increased recurring expenses
2. Establish a working capital reserve to pay
bills until sales can break even and then gen-
erate a net profit (sales minus cost of goods
sold minus operating expenses).
Whilst it is fairly straightforward to quantify
the capital needed to fill the store, knowing how
long it would take before the business breaks
even would require some assumptions about
sales, prices and overheads.
Firstly, we assume that gross sales would stay
at $40,000 per month and then increase by 10
per cent every month thereafter. Secondly, we
will assume that the prices can be increased.
Thirdly, the overhead will incorporate new
Price Change: The data shows that sales
increased at an average rate of 10 per cent per
month for the first two and a half years before
falling off suddenly. In spite of this decline Ste-
phen still maintained a running list of back
orders from clients.
This tells us that there might be an inelastic
demand for his goods, whereby a slight increase
in prices should not significantly reduce the
quantity of goods demanded.
In light of this we propose an increase in
prices by at least 15 per cent, so an item that is
sold for $350 will now be sold for $403 ($350 x
1.15). This reduces the relative "cost of goods"
from 50% to 43% ($350 x 50% = $175 / $403),
and increases the relative "gross profit margin"
from 50% to 57% ($403 - $175 = $228 / $403).
Inventory: Currently the store is filled up
to one-third of its maximum capacity (3,500
x 1/3 = 1,167) -- Stephen may not have to fill
the entire store to turn the business around.
We propose an increase in inventory of one-
third of maximum capacity. This translates to a
cost of goods of about $204,000 ($175 x 1,167).
Working Capital Reserve: Currently
monthly overheads are $35,000 inclusive of
a loan payment of $3,500. If we cater for an
increase in overheads by about $5,000 to cover
capital repayments that figure would go up to
We estimate that it would take about six
months for Stephen to break even assuming
that projected sales increased up to about
$74,000 in the sixth month. The cost of
goods on that figure would be about $32,000
($74,000 x 43%), which puts the gross profit
to about $42,000.
Stephen should therefore have at least five
months overheads in reserve ($40,000 x 5 =
$200,00) to buffer any shortfalls.
Financing Package: Stephen's capital
needs would be about $404,000 to stock the
sore and cover monthly overheads for five
months. If he were to negotiate a 10-year
loan for this amount (privately or by tradi-
tional lenders) at 10 per cent APR the monthly
payments would be about $5,000, this would
bring his overall debt service ratio to just over
20% ($5,000 + $3,500 = $8,500 / $42,000) (if
measured against his gross profit), down from
34 per cent in the first month of projections.
Break Even: With a monthly overhead of
about $40,000 and a gross profit per item of
$228, Stephen would need to sell just over 175
($40,000 / $228) items to break even. If the
average sale per client were $1,000 he would
need to do business with about 74 people (74 x
$1,000 = $74,000 x 57% = $42,180 gross profit),
which is 21% (74 / 350) of existing clientele.
With 175 items moving in and out of stock
every month and a total projected inventory
of two-thirds maximum capacity (3,500 x 2/3
= 2,333 items) only about 8% of the stock is
turning over (175 / 2,333).
This suggests that 92 per ce of the asset is
inactive but as sales continue to increase, asset
performance would improve.
Nicholas Dean (CertFa) is a certified
independent financial adviser and is the
managing director of The Financial Coaching
Centre Ltd. If you have any questions or
need advice on today's subject please email:
email@example.com or visit website: www.
Set realistic targets
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