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Question

You are looking ahead to starting a business after graduation. A colleague recommended that the two of you begin developing a plan now to determine how funds will be obtained to launch the business and support operations. You both agree that the business will require at least $50,000 of start-up capital and one employee besides yourselves. Include the following information in your plan:

1. Describe the type of banking and loan arrangements you would use to collect the funds to launch the business, and explain how these accounts would be monitored to ensure accuracy and sufficiency of funds. Show an example of how a loan might be constructed to obtain the start-up capital, including computations of payments and interest.

2. Discuss the types of taxes you will need to consider collecting, paying, or remitting relative to your business, and explain how these are computed.

3. Explain how you will use pricing, commissions, discounts, markups, or markdowns strategically to help generate interest in your business product or service offering.

1. Discuss how these will affect income and the cash available to the business.

4. Assuming that inventory and computers are among the first asset purchases planned, explain how these will be acquired.

1. Show computations of how costs will be recovered.

5. Discuss how technology and the Internet will be used for banking and financial aspects of the start-up and operation of your business.

6. Discuss the issues and risks associated with processing financial transactions and records on the Internet, and explain how you plan to address them.

1. Banking and loan arrangements

Since this is a small business start-up with little financial requirement, we would opt to go for a microloan program since this will be easier to acquire and does not require too much collateral and will just require personal guarantee of the three of us, as the business owners. This will enable us acquire basic facilities for starting such as Machinery, furniture and fixtures, and working capital. Microloans will also facilitate flexibility on repayments as we plan to start repaying the loan after two years, monthly for approximately three years, since we expect the business to start generating profits within the first two years of operation. We would prefer to go for the Small Business Administration Loans since this will require us to pay within six years.

To ensure accuracy and sufficiency of funds, we shall first establish all the assets that will need to be acquired before the start-up, obtain the average cost listing from possible vendors and compute the total cost requirements for these assets. We shall also calculate the total overheads that shall be incurred for the period that the Business will not be expected to generate profits and sum them up. The totals of these will hint us on the total cost requirement, which has already been estimated at $50,000; the amount that we shall seek a microloan.

As observed, we shall obtain a loan of $50,000 and the repayments and interest shall be made as follows:

Principal amount borrowed= $50,000

No interest for the first 2 years; amount payable= Principle + interest for two years

Assuming interest rate=8%;

Amount payable=50,000+ (50,000*8%*2)

= $58,000

Repayment will start for the 3rd year, monthly for three years. We shall therefore compute the total interest payable at period end and discount it monthly from the first year and month of repayment.

Total interest payable= 58000*8%*3= 13,920

Total amount payable= 58000+13920

= $71,920

Monthly repayment= $71,920/ (3*12)

=$ 1,997.80

2. Taxes to be Collected, Paid and/or remitted

Payroll tax

The business shall be collecting and remitting income tax, especially the payroll tax on salaries of the three partners. This shall depend on the prevailing income tax rate to ensure compliance. Assuming the payroll tax rate shall be 7.65% and that the partners are each earning $800 monthly for the start, the amount of annual tax collected from the three partners shall be as follows:

7.65%*800*3*12

=$2,203.20

Sales Tax and Value Added Tax

This shall be calculated by multiplying the purchase price (for those taxable goods bought for sale) or Cost of production (for those taxable goods manufactured by our business), by the applicable tax rate. Assuming the tax rate is 8.5% and the cost of manufacturing or buying a unit of a product is $10, the sales tax for the same product shall be;

Sales tax= 8.5%*$10

=$0.85 per unit of that product.

3. Pricing, Commissions, Discounts, Mark-ups and markdowns

All these shall be strategically computed to ensure that in selling, the business at least meets the Average variable cost at worst, or the gross profit margins. This is geared towards ensuring business continuity and make it able to repay the loan, as it balances on expanding its customer base without compromising its objectives. The pricing policy to be developed must put into consideration all the competition, survival and wellbeing of the business financially.

Mark-ups shall be applied on those products that the entity has a comparative advantage in producing, compared with its competitors. This will cater for cost and profit margins of the business, and also take care of the discounts and commissions that will be advanced to some customers due to various reasons.

Commissions, discounts and markdowns shall also be advanced to lure customers and also aid in the establishment of a market penetrating strategy due to the low costs and incentives. This should also apply in cases where the entity want to dispose those products that have stayed in stores for long, or the perishable products.

In advancing these, the business will be able to lure more customers and stir more sales and hence increase the liquidity of the entity and thus improving its income. It will also lead to an established customer base which will ensure continued sales and income.

4. How to acquire inventory and computers

These items shall be acquired through a tendering process. As per the plan, out of the $50,000 capital, the costs to be used to acquire these items is $35,000. We shall advertise for invitation of tenders for the supply of each of the items, that is, Inventory and computers. Once we receive the tenders, we shall evaluate each one of them and critically examine each of the suppliers. We shall undertake a thorough research to establish and acquire more information on each of the suppliers to enable us make an informed decision. Afterwards, we shall then make a decision based on the quality and cost analysis of each of the suppliers. Our decision shall be arrived at by selecting the supplier with best quality at best price.

The costs for these items shall be recovered as follows:

Assuming we spend $35,000 ($25,000 for the inventory and $10,000 for the computers);

And that all inventory is bought for sale while computers are acquired to assist in data processing and online marketing, and the mark-up for sales is set at 25% of cost while computers improve efficiency of operations and thus generating a 15% minimum increase in sales;

Sales before computers= Cost + mark-up

=25,000+25%*25000

=$31,250

Sales after use of computers= 31250+ 15%*31250

=$35,937.50

This will lead to a full cost recovery and the business will even make profit.

5. Use of Internet and Technology in Banking and Financial aspects

This shall be done by accepting online purchases and payments receipts which will be aimed at achieving flexibility for the customers. The business shall also make multiple payments to suppliers in just one hit and this will help to save time.

Bills shall also be paid using the internet which will improve efficiency of operations. Technology in the use of plastic money will ensure security in transactions without having to walk with money. At the end of the day, the business can be able to deposit its money to the bank account through the internet.

6. Risks associated with processing financial transactions on the internet

The computers and systems will be subjected to virus when transacting through the internet. Most infected files are normally acquired from the Internet. On this risk, we plan to acquire a very strong antivirus software and maintain it up to date at all times to prevent and block entry of viruses.

Another risk common on the internet transactions is hacking and fraud. Some internet professionals have developed ways of hacking into systems of an entity and conducting fraudulent transactions for their own material benefits. On this, we plan to establish a comprehensive password policy that will periodically change to minimize the possibility of somebody accessing the systems with ease.