The amount of money to ask for

MattTurpinMattTurpin subscriber Posts: 22
edited February 2009 in Business Planning
When you people started your businesses, you needed startup capital like I do. I`m trying to figure out how much to expect to need. Specifically, I`m looking into the advice that "all businesses save up one year`s operating expenses" before opening, on the notion that no business makes a profit on the first year. I can`t say I buy this, but I want to make all the right choices. I`m opening an espresso drink oriented cafe with some characteristics of a social club. The business itself will cost in the ballpark of 100,000. Not a big deal. I think I can be in business within a year, if 100,000 is what I need. However, my yearly operating expenses are in the ballpark of 285,000. To be frank, I don`t want to save up 20-25% of let`s say 400,000. That`s 100,000. Did any of you amass that much extra money before opening shop? If it`s what has to be done, I`ll make it happen, but to be frank again, if I had a job where I routinely saved 100,000, I`d probably be happy working there and would never have been inspired to entrepreneurship.
Is it safe to simply collect the startup cost? Is it really necessary to save a year`s worth of expenses? Any suggestions on the matter are appreciated. 

Comments

  • MattTurpinMattTurpin subscriber Posts: 22
    Thanks for the reply. For clarification of what was included in my proposed budget, I`ll just make a big list. I`ll leave the numbers off for now.
    We have a 30% cost of sales - if I had done this a couple years ago, it`d have apparently been 23%, but c`est la vie.Labor alone is more than the amount of the startup loan.Rent, supplies, phone, insurance, maintenance, utilities, garbage, and misc. Taxes and loan payment weren`t included in the 280k figure. I don`t have the loan yet to determine how much I`d be repaying a month. If it works the way my personal loan did at the same bank, I can estimate something like 800 a month for an 80k loan - a fair ballpark. Not trying to be authoritative there yet - 9,600 a year? No clue there. I`m still figuring out how the taxes and labor expenses work. The only part of labor I understand is the salary. I`m still figuring out how much extra gets paid to the government.I`m working with consultants to get the rough numbers to fill in the blanks. The 280k is a rough estimate of other espresso houses of similar situation to my own. The specific numbers will be catered to the specifics of my own situation. For example, I`m keeping staff to the absolute minimum, the proposed rent is the high end of the possible spectrum. In summary, I still have an awful lot of flexibility to make the budget work.I`ll explain. When I first had the idea, I was totally ignorant. I thought I could fund everything via a loan, a loan that would be easy to get (lol). I was "only" going to borrow 3-500,000. Once I got most of my data, I went to the bank to get the reality. "Let me ask you a blunt question," the loan officer said. "How much money do you have?" I said, "Hmm, well, I`ve got stocks, and tax returns coming, so let`s say 2,000? Something like that." He said, "That`ll buy you a lot of coffees but if you want to work with us, you`ll have to bring around 25% to the table." I thought the whole business was dead. If I wanted 300,000, I`d need 75,000 dollars!I went back to the grindstone and made my idea infinitely less extravagant. I like this loan officer. He tells it like it is, and I needed the bucket of cold water in my face that people call reality. I didn`t have reality in my business plan. I think I do now. He likes my idea, and if I can come to the table with the right equity, the topic of another thread I started in the financing forums, this is a sure deal.So, since you corroborated the advice I was already given, I`m going to take that advice. I`ll definitely collect more money than I need. It does seem smart. I wanted to do something to the effect even before I knew how financing worked. Then when I learned how the banks worked, the surplus safety money was the first to go. Seems a compromise is in order.
  • MattTurpinMattTurpin subscriber Posts: 22
    Thanks, Craig. You`ve been more help in two posts than the entire internet has been for two days. I think I`m going to like this place.
  • MattTurpinMattTurpin subscriber Posts: 22
    I have lots of budgets, but they need to be fine tuned. I have a list of start up expenses from supplies to taxes to rent. I have sales vs expenses lists for one month, three months and one year. My consultants supplied the base data, and I`ve gone in and adjusted here and there for better or worse as it may be, for my own situation.
  • MattTurpinMattTurpin subscriber Posts: 22
    Let me see if I can answer that fully. The cost to start the company will be 100,000 on the high end. When I plan I round up expenses and round down income. I plan to always be pleasantly surprised.
    The first month`s gross sales will be around 18,000, if we start a year from now, in Feb.The gross income with a cost of sales of 30% will be 12,600.The salary expense will be 5,729. This includes FICA and whatnot.Rent is expected to be in the ballpark of 4,000.Utilities, trash, phone around 800.Insurance 180.Paper/supplies 1,200.Maintenance & misc 300.Loans 3,300Total expense for first month: 15,509We deduct 2,909 from safety net.The 2nd month is 1,000 worse than the first because it`s a bad time for a college area cafe.
    3rd Month I don`t want to go into the nitty gritty again, so I`ll just post that the third month`s gross income (not cumulative) is expected to be 29,260 from a total sales of 38,000. It`s this month that we finally stop dipping into the safety net. In fact, we stand to profit by about 7,000 on the conservative side.
    After a year, our gross income is 284,130.What`s interesting is we allocated 108k for year`s labor. While salaries for the first two months were the cause of the deficit, by year`s end, we`ll be under our 108k mark by half. I`ll be working almost every day that first year. It`s going to be hard, but I need to get the bottom line where it should be. I have one employee who`s pretty much a partner, who can cover almost as much - won`t need two people in shop on weekends when it`ll be dead. He needs a salary of around 30k to keep the kids fed. I have no such responsibilities. I`m only going to make 25k. If the year works out well, I`ll give myself a 5k bonus to even out, and the rest will go towards repaying the loan and buffering that safety net. We project a net profit of well over 50,000. I hope I was able to answer your question. Thanks for all your help.MattTurpin2/20/2009 12:50 AM
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