Finance & Grow Your New Business. Angie Mohr
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Название: Finance & Grow Your New Business
Автор: Angie Mohr
Издательство: Ingram
Жанр: Малый бизнес
Серия: 101 for Small Business Series
isbn: 9781770408784
isbn:
ROI = net cash flow ÷ investment ÷ # years
Therefore, your roi in this scenario will be:
ROI = 13,171 ÷ 50,000 ÷ 5 = 5.27%
Your average annual return on your initial investment is 5.27 percent. This calculation is helpful in deciding whether to invest the money in this business or another business or another type of investment altogether. It is important to realize, however, that after year five, the cash flow is in permanently better position as the company matures. Therefore, by the time year six rolls around, the business will be generating in excess of $46,000 in net profit; a much higher return for the initial investment. Return on investment analysis will change depending on the time frame used.
Considering a business purchase
Let’s look at the cash flows for the projected business purchase and see how they compare to the start-up business using the same analysis.
The purchase price for the business is $225,000. The bank is willing to lend $175,000 at 10 percent and you will have to invest $50,000 of your own money. This company has been in business for many years and therefore has mature cash flows already, similar to those in your projections for year five of the start-up company. The cash flow projections are shown in Sample 3.
Sample 3: Cash Flow Projection for a Business Purchase
There are a few important items to note here:
• The purchase of capital equipment is more regular than in the build scenario and of similar amounts from year to year. The company already owns its equipment (that’s part of what you’re buying) but some will need to be replaced every year as it wears out or becomes obsolete.
• The revenues are growing by a lesser percentage than with the start-up company. This company already has a mature market and grows at a slower pace than a business in its infancy.
• The net cash flow of the business operations is much higher than that of the start-up, but we have to figure in the payments of principal and interest on the bank loan before we can calculate the return on the owner’s investment.
• In both scenarios (start-up and purchase), the management salary is the same and therefore does not become a factor in the decision-making process. However, if the salaries in each were different, you would have to “normalize” them. This means that you would have to recast the numbers of one or the other (or both!) projections to reflect the amount of management salary that you intend to take from the business, otherwise you are not comparing apples to apples.
Take a look at the discounted cash flows for the purchased business in Sample 4.
Sample 4: Discounted Cash Flows for a Business Purchase
This tells us that the total discounted cash flows of $24,192 are higher than in the start-up scenario ($13,171). However, if the amount of the original investment had been more in the purchase scenario, this still may not be the better option. The only way to accurately compare between the two is to complete the roi calculation. In the purchase scenario, the calculation works out to:
ROI = net cash flow ÷ investment ÷ # years
ROI = 24,192 ÷ 50,000 ÷ 5 = 9.68%
The option to purchase the existing business yields a return on your $50,000 investment of 9.68 percent, while the start-up would only yield 5.27 percent. All other things being equal, purchasing the existing business makes more financial sense.
Just to reinforce the concepts, try calculating the roi analysis if all cash flows were the same but you had to invest $95,000 to purchase the existing business. Would this be the better option? The answer is no. If you have to invest $95,000 of your own money to purchase this business, the roi drops from 9.68 percent to 5 percent, thereby giving you less reward for a higher risk than starting a business from scratch.
What’s Right for You?
As we have discussed in this chapter, there are many considerations when you are deciding whether to start a business from scratch or to purchase an existing business. Many of those considerations relate back to your personal and business goals and will be determined by the reasons that you want to be a business owner in the first place. You will need to balance those goals with solid financial analysis to determine which option will give you the best opportunity for success.
Chapter Summary
• Building a business, managing a business, and working in a business are three very different activities and it is important that you analyze which ones are most important to you before you start any business.
• The two ways to become a business owner are to build a business from scratch or to buy an existing business. Each has its own pros and cons.
• Calculating the discounted cash flows of each business option will ensure that you are properly comparing future cash flows with each other.
• The return on investment is the amount of funds available to the owners of a business after all the expenses have been paid.
4
Getting Your Personal Finances in Order
Before you start your business, you need to make sure that the rest of your financial house is in order.
Introduction
One of your personal goals may be to make enough money out of your business to be wealthy, or at least be comfortable. You may see starting a small business as a way out of your current financial woes. This is a very dangerous way of thinking. You are likely to manage your business the same way you manage your personal life. If you have problems managing personal debt, that may be true in your business as well. If you don’t know how much insurance you need to cover off your personal assets, you may under-insure your business assets and unknowingly be exposed to risk.
It is important to clean up your own financial house before you start or buy a business. A bank will undoubtedly review your personal financial situation before lending the business any money. Suppliers who extend your business credit may also want to review your credit history and personal wealth. Your personal financial situation might end up crippling your business’s ability to attract investment capital. From a more practical perspective, if you don’t have your personal financial life under control now, where will you find the time to do so while building your business empire?
Integrating your personal financial planning into your business planning gives you a more holistic СКАЧАТЬ