Financing Entrepreneurships Paper and 4 Discussion Questions

The Basics of a Start-Up

Name

University

Professor

Financing Entrepreneurships

31 October, 2014

Assignment #2

Financial start-up needs for a restaurant business

The next step after acquiring the right permits to start up a restaurant business is deciding whether to start a business from a scratch or purchasing and fix an existing restaurant. In this case, for a new start up business, depending on how fancy the owner needs the restaurant to be, the total cost will range from $150,000 to $350,000. This capital will ensure the restaurant has items such as industrial cooking and ventilation inventories, tables, refrigerators, freezers, shelving and counters, and among other small items such as a point-of-sale-system that allows various kinds of payment methods and menus. On the hand, renovating an existing restaurant may cost less but the rent may be higher because of the value already gained by the previous restaurant (Brown, 2007).

In addition to the equipment needed, the restaurant also needs a starting inventory. Some people will opt to start with a high inventory in order to avoid running out of food. In this case, it will require a business to have a food vendor who will be supplying the inventories (Brown, 2007). Additionally, a business will also need employee wages when starting a restaurant business. Employees helping in the development of the restaurant will need payments; therefore, some of the capital will go to the wages. During start-up, there will be marketing campaigns before launching a business. The campaigns mean that a significant marketing capital will be incurred, so a thorough marketing plan is important. Lastly, there is a period in any business where it experiences higher expenses rather than the amount of the cash inflow (Brown, 2007). Therefore, this is the miscellaneous or working capital that the restaurant needs, and this can be a working capital that will run the business for one year, or more before the business starts becoming profitable. These are the basic financial start-up needs of the restaurant business.

The best financing options to obtain the needed capital

Planning for a new business needs much research and preparation. In order to finance the restaurant costs, one will need to convince the lenders may it be investors, banks, or friends and family members that the business will be a success. First, one must maximize their investment, this can be by investing their own time and money, and this shows a commitment and a viable candidate for investors. Secondly, choosing a suitable location for the restaurant is essential for lenders since they will need certainty that that location will attract profits to the business. Lastly, developing a good business plan is integral to gaining financial support from lenders and investors, and it should contain all the information of the restaurant, predictions of the business cash flows, and research insights on the trends in the industry (Parks, 2006).

The next step after estimating the financial needs or the start-up cost of the restaurant is deciding how to finance the business. Owners of start-up businesses will always use their savings or their cash-at-hand to fund the business since it reduces the amount of money one will have to borrow. Nevertheless, with this kind of business, the possibilities are that owner’s money will not be enough, thus borrowing is inevitable. The U.S. Small Business Administration (SBA) loan program is the other viable source of funding for the business. These loan programs do not offer loans directly, but it guarantees the loan is made by public and private intuitions in terms of personal financing or investors (Parks, 2006).

In this case, the best type of the SBA is the Loan Guaranty Program where the commercial lending institutions participate in lending the business up to $2,000,000. The other form of funding the business is receiving support from is investors. In this case, the owner will present the business plan to the willing parties and the right contacts who will share the vision you have for the business. In this case, it is important for the investors to be impressed by your operational skills and the incentives being offered if they invest in the business. Therefore, how a person presents themselves to the investors is very essential (Parks, 2006).

Financial ratios to track the health of the business

A financial ratio involves the comparison of the various business financial statements in order to acquire a clear picture of business performance. In this case, they raise red flags, indicators, clues, and in general, the health of the business. Profitability ratios are commonly used to provide measures of profits performance thus evaluating the success of the business. In this case, return on sales will be used to provide the bottom-line profitability of the business while gross margin will measure the direct production costs of the restaurant. Both the methods will be used to indicate whether the business is spending more than it is gaining from its operations thus measuring its health.

Asset Utilization Ratios are the other methods effective for determining the health of the restaurant’s operations. They serve as indicators to critical factors in regard to the use of the business’s assets, inventories, and the account receivable in its daily operations. These ratios are important in monitoring internal performance over a certain period thus providing benchmarks, red flags, and other meaningful issues. In addition, the ratios measure how well a business is using its assets to generate sales revenue. For example, Cost of goods sold is derived from the income statement, and it indicates the inventory sold and is attributed to the amount expected from the sales and reduction of the expenses in a certain period. In this case, if the COGS are less the business may be running at a loss depending on the expenses of the restaurant, but if it is higher than the expense then its means the business is healthy and profitable.

References

Brown, D. R. (2007). The restaurant manager's handbook: How to set up, operate, and manage a financially successful food service operation. Ocala, Fla: Atlantic Pub.

Parks, S. (2006). How to fund your business: the essential guide to raising finance to start and grow your business. Pearson Education.