Funds required and their sources
Funding is the fuel on which a company runs. This company will require funds from equity financing, debt financing, and grants. Equity financing refers to the process of raising capital by selling the shares of the company to institutional investors, public, or financial institutions (Eckmann, 2016). Sources of equity financing are angel investors, venture capitalists, and money from family and friends. The company will give up a portion of itself to the venture capitalists who will be interested in the business. Furthermore, there will be a representative of the venture capital agency on the Board of directors. Angel investors are also fundamental to the company since they will provide second-tier financing.
Debt financing refers to the process of obtaining funds from external sources. Funds from debt financing will be in the form of both secured and unsecured loans. With these loans, the organization is guaranteed the funds for a certain period usually three- ten years. One of the main forms of debt financing which the company will embrace is the venture debt. Venture debt is a clinical form of debt financing which will give the business greater flexibility compared to traditional debt financing. Some of the main sources of debt financing include banks and individual investors.
Finally, the organization will also solicit for grants from the government, sponsors, corporations and nonprofit foundations. The company understands that each of these sources has its standard for funding eligibility. Therefore the business will mainly solicit for soft funding especially from the government. In addition to grants, the company will also use the revenues it generates to finance its operations.
Current funding requirements
The company requires funds for purchasing materials, assets, and employing people. It also requires the capital to cover the running costs. It is crucial to know that this organization will need new technology and higher capacity as it grows to minimize unit costs and keep up with its competitors. Implementation of the new technology and expansion of the company's capacity will require more capital inputs since it is both long-term investments.
Food and beverage market is a fast-moving market where competitors are regularly updating their products. Therefore food and beverage distribution companies such as this organization require funds for conducting marketing research and testing new products. These expenses are not usually covered by sales of the products. The organization will also need money for paying for simple expenses such as rents for satellite warehouses, installation of machinery, and the transportation of company's products.
Since the organization will base its operations in the Southern California region, the company will need funds to widen its operations. The money will be required for advertisement campaigns and promotional adverts. Finally, funds will also be needed to pay for the daily operations of the company such as paying the suppliers for the products and paying salaries and wages.
c) Startup Expenses XYZ Company Sources of Capital Owners' Investment (name and percent ownership) XXX (55%) $2,000,000 - Total Investment $ 2,000,000 Bank Loans Bank of America $ 3,000,000 Wells Fargo 5,000,000 Total Bank Loans $ 8,000,000 Startup Expenses Buildings/Real Estate Construction Expenses $ 8,000,000 Partitioning building 200,000 Total Buildings/Real Estate $ 8,200,000 Leasehold Improvements Interior walls $ 300,000 Electric and Plumbing additions $350,000 Item 3 - Total Leasehold Improvements $ 650,000 Capital Equipment List Furniture $ 500,000 Refrigeration Equipment 500,000 Fixtures 100,000 Transportation trucks 4,500,000 Other - Total Capital Equipment $ 5,600,000 Location and Admin Expenses Rent & Related Costs $ 70,000 Utility deposits 60,000 Legal and accounting fees 120,000 Prepaid insurance 54,000 Pre-opening salaries 160,000 Other - Total Location and Admin Expenses $ 464,000 Opening Inventory Local suppliers $ 3,000,000 International Suppliers 4,000,000 Total Inventory $ 7,000,000 Advertising and Promotional Expenses Advertising $10,500,000 Signage 20,000 Printing 12,000 Travel/entertainment 3,000,000 Total Advertising/Promotional Expenses $ 13,532,000 Reserve for Contingencies $ 2,000,000 Working Capital $ 10,000,000 Summary Statement Sources of Capital Owners' and other investments $ 2,000,000 Bank loans 8,000,000 Other loans - Total Source of Funds $ 10,000,000 Startup Expenses Buildings/real estate $ 8,200,000 Leasehold improvements 650,000 Capital equipment 5,600,000 Location/administration expenses 464,000 Opening inventory 7,000,000 Advertising/promotional expenses 13,532,000 Other expenses - Contingency fund 2,000,000 Working capital 10,000,000 Total Startup Expenses $ 47,446,000
Start-up expenses will be incurred on three different sectors of the company, i.e., on marketing, on the management of the company, and on the operations of the company.
1) Start-up expenses incurred on marketing operations of the company
A total of $13, 532,000 will be used in marketing activities where approximately $ 10, 500,000 will be used in advertising processes. The Company also plans to stage shows and exhibitions to ensure that the people from California know about the products which the company distributes. As a result of these shows and exhibitions, the organization will incur about $ 3,000,000 on traveling and entertainment.
2) Start-up expenses incurred on operations of the company
Start-up expenses incurred on the operations of the company include buildings expenses, opening inventory costs, capital and equipment expenses, and leasehold improvements costs. The company plans to construct a building measuring 200 meters by 150 meters which will be partitioned into three different spaces that are the executive space, the workspace, and the warehouse. The total costs of constructing such a building are projected to be about $ 8,000,000 and $200,000 will be used to partition the building into these three sections. The organization will acquire three transportation trucks costing about $4,500,000. These transportation trucks and warehouses will be fitted refrigeration equipment costing $500,000. The company is also planning on buying furniture such as office chairs and desks which will costs the company about $500,000.
3) Start-up expenses incurred on the management of the company
These expenses include pre-opening salaries, utility deposits, prepaid insurance, and legal and accounting fees. The company is expected to own seven satellite warehouses where it will pay rent for each of them. The total amount of rent to be paid by the business is $70,000. Moreover, the company will be required to pay its employees after the first month of business. These payments will be categorized as pre-opening salaries and will cost the organization about $160,000. Finally, the company will spend $54,000 on prepaid insurance. This is because the company pays $ 1500 for each employee and there are 36 employees working in the business.
Opening day Balance Sheet
This balance sheet shows the financial position of the organization on the opening day. The total assets which the company owns are worth $34,950,000. These total assets consist of both current and fixed assets. Some of the fixed assets which the company possesses include transportation trucks, furniture and fixtures, the company's buildings, leasehold improvements, and refrigeration equipment which is worth $14, 450,000. Current assets, on the other hand, consist of cash in the bank, inventory, and prepaid expenses which is worth 20,500,000. It is important to know that the cash in the bank which the company possesses is from different financial sources including the angel investors, venture capitalists, and revenue from the business. The company's inventory is a full list of items such as goods in stock and property which the organization owns. In this case, the company plans to order supplies worth $7,000,000 on an opening day. This means that the goods in stock on an opening day will be worth $7,000,000.
There are also current liabilities including the taxes payable, accounts payable, notes payable, and current portion long-term debt which the company should settle with the end of the first year. The taxes payable includes the taxes which is charged on all functions of the company including on sales, on salaries and wages, and on transportation costs and it is estimated to be approximately $2,000,000. Accounts payable comprises of all short-term debts which the organization should settle within the next twelve months. These short-term debts will be accrued from the goods which the company will purchase on credit. It is projected that the accounts payable on the opening will be about $6,000,000. The business will also have notes payable of $4,950,000 which is due within twelve months. This is because Wells Fargo Bank accepted the company's request to lend money to it. However, with the condition that the business should pay the money within a year.
Long-term liabilities present on the opening day include bank loans and notes payable to stockholders. The company has made agreements with other banks such as Wells Fargo, JPMorgan Chase, and the Bank of America for long-term loans which will be payable within 3- 5 years of business. Wells Fargo will lend the business $9,000,000, JP Morgan will provide $4,000,000, and the Bank of America will give the organization $4,000,000. Therefore, the total long-term liabilities which the company will incur is $17,000,000.
Total liabilities= Short term liabilities + Long term liabilities
$32, 950,000 = $15, 950,000 + $17,000,000
Projected Balance Sheet
Balance Sheet (Projected) XYZ company Beginning Projected 1/7/2018 1/7/2019 Assets Current Assets Cash in bank $10,000,000 $25,000,000 Inventory $7,000,000 $14,000,000 Prepaid expenses 3,500,000 5,000,000 Total Current Assets $20,500,000 $44,000,000 Fixed Assets
Transportation trucks $4,500,000 $7,000,000 Furniture & fixtures $600,000 $1,000,000 Leasehold improvements $650,000 $950,000 Real Estate/ Buildings $8,200,000 $11,200,000 Refrigeration Equipment $500,000 $1,000,000 Total Fixed Assets (net of depreciation) $ 14,450,000 $21,150,000 TOTAL Assets $ 34,950,000 $65,150,000 Liabilities and Equity Current Liabilities Accounts payable $6,000,000 $14,000,000 Taxes payable 2,000,000 5,000,000 Notes, short-term (due within 12 months) 4,950,000 5,000,000 Current part, long-term debt 3,000,000 4,000,000 Total Current Liabilities $15,950,000 $28,000,000 Long-term Debt Bank loans payable $17,000,000 $28,000,000 Notes payable to stockholders 3,000,000 4,150,000 LESS: Short-term portion (3,000,000) 3,000,000 Total Long-term Debt $17,000,000 $35,150,000 Total Liabilities $32,950,000 $63,150,000 Total Owners' Equity $ 2,000,000 $ 2,000,000 Total Liabilities & Equity $ 34,950,000 $65,150,000 This projected balance sheet shows the financial position of the company after the first year. From this balance sheet, it is evident that the net worth of the company's total assets will increase from $34,950,000 to 65,150,000. Th...
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