Untitled Document

Financial Planning for Entrepreneurs - I
Athwelage Sarath looks into costs
By Nilooka Dissanayake
Last week, I introduced you, dear reader, to Athwelage Sarath, the imaginary entrepreneur. We will use Sarath's story to learn all about the business planning process from now on.

Sarath has been very busy. He has been trying to see what costs he will have to incur for his business. His fiancée, Sumalee has been busy too. She had visited a book exhibition and bought a book on financial management for a small business called "Sulu Vyaparaye Mulya Kalamanakaranaya."

Sarath has been writing a long list of all possible costs he can think of. He's not sure if he has covered them all. He is already getting headaches just thinking of costs.

Sumalee: Don't worry. Let us start at the beginning. First, let us break the costs into the different types. Let's have your long list to see how it can be done.

You are starting a new business. So business registration fees and legal advice and what you pay to a company for secretarial service to get your registration documents prepared are called preliminary costs.

Then there is capital expenditure. All the things in your list about purchasing equipment and assets fall into this category.

Yes, the weighing machine and the cash register go there. Also, the cost of refurbishing the shop front can be in that category. Are you buying a vehicle? That goes in there too.

Sarath: What about running costs?

Sumalee: Yes, the amount of money you need to run the business on a daily basis is called the working capital. Working capital is needed to pay for all the running costs until you can pay for them with your sales proceeds.

Let us take over from Sumalee now. If you have been trying to plan you business, you will also be feeling just like Sarath - all tied up in knots with costs. But, this is only the beginning.

We need to separate our costs into more meaningful categories before we can proceed.

There are direct costs and indirect costs. Direct costs are those costs attributable directly to making and selling your product or service.

For Sarath, this means cost of purchasing the vegetables he plans to sell. The transport costs involved in bringing vegetables to his shop are also direct costs.

Indirect costs are all those not directly attributable to the product or service. Imagine Sarath's business. Sarath has to pay his electricity bills and wages. He has to purchase stationery and pay for insurance of the building. He has to provide meals for hisand tea staf.

Let us not get too deep into cost classifications. As entrepreneurs, we need to build up a realistic list of all possible cost items. Once that is ready, we can look at how we can finance those costs.

We must remember at this point that costs can be financed in many ways. We will talk about financing in another article. Before thinking of how much money you have and whether you need to borrow and about financing, you need to find out how much money you need to get your business started up.

You must decide what assets and services you need to get your business going, even in a small way. You also need to get an idea about how much money you will have to keep on spending until cashflows from sales will come to your aid

I invite you to list down the cost elements involved in starting up your dream business and for running it for the first 12 months.

Try if possible to break the costs into preliminaries, capital costs and into working capital needs. Then, see whether you can calculate monthly or weekly needs.

The above may seem like a daunting task at first. It is not really. Just imagine that your business is a reality and try to see how you will keep it going. All possible types of problems and costs will come to mind.

For example, before you start issuing cheques, you will need to register the company and open a bank account. Both require money.

So, on and on the list will grow and you will have a better idea as to your costs of running your business.

As for Sarath, it has been several years since he has been in the vegetable trade. So, we recommend that he goes to visit Manning market and also the Dambulla vegetable market.

It may not be a bad idea for him to visit a few districts and to meet farmers, transporters, vegetable vendors and middlemen.

That way, he can get a realistic idea of his market, buyers and suppliers as well as his competition.

Where will you need to go to get similar information for your business? Who will you need to talk to? Think upon this as you get ready for the financial plan for your dream business.

We invite you to share with us any problems you encounter at this point. Please send your questions and comments to btimes@wijeya.lk or call us on 074-304100.

The writer is the Managing Editor of Athwela Vyaparika Sangarawa (Athwela Business Journal), the only Sinhala management monthly targeting the small and medium sized business operators and its English version, Small Business International to be launched next month.

Back to Business