“Working Capital” is the amount of money you will want on hand if you dominate the company.
Many small company buyers make the mistake of putting every last penny of these savings into the purchase of the company.
It is irrelevant whether you utilize your savings simply for the advance payment or if you pay the value completely beforehand. You will need to keep a significant cash reserve to help you cover initial business operating expenses plus your daily living expenses.
To determine the amount of cash you ought to have in reserve marriage ceremony you take over, you will want to carry out some planning. I suggest you begin by conservatively projected sales and expense for that first six months you use the business.
To project sales for your first six months go ahead and take average sales to figure the business has generated over the past two years. I know you might be enthusiastic about a new business and can need to project figures based on a best-case scenario. But for now, be conservative. Assume that this average monthly revenue from your past 2 yrs is all you may generate within the first 6 months and you will not get involved over your head.
Once you determine the typical sales
you will want to calculate all of the fixed costs that you need to cover inside the first half a year. These are each of the expenses that the business may have it doesn’t matter what happens with sales. Rent will probably be your biggest fixed expense. Other fixed expenses include utilities, payroll, insurance, taxes, etc.
Next, give a cushion with a minimum of 10% to cover miscellaneous, and unexpected costs very often appear to arise.
This should supply you with a realistic – and incredibly conservative – the concept of what kind of money you will have to assist the very first half a year. Knowing this beforehand will eliminate most of the guesswork, fear, and mistakes a large number of new business buyers make.
Here are three more things to consider that are specifically important in the first few weeks that you own the company.
The first issue to take into account is: how can customers pay you?
If you’re inside retail or restaurant business customers will pay out straight away and you’ll have some immediate earnings.
But if you are in a business where customers get 30 or 60-day terms, you should be prepared to go this period without any cash coming in.
The next item to think about is inventory. In retail and wholesale businesses inventory is an ongoing expense. Even in cases where the owner has turned the business over to you with a fully stocked warehouse, it certainly won’t be a long time before you may have to replenish your stock. And if you happen to be heading in a busy season you’ll have to invest in additional inventory before the rise in sales volume. And if your visitors have 30 days before they must purchase from you, you might need to spend money on additional inventory before the first dollar in revenue also comes in.
Lastly, be prepared for a little dip in sales if you immediately take over. This is not an expression on you or perhaps your abilities; it’s just a truth of life whenever you obtain a business. When a new owner also comes in, customers often have a wait to see attitude and employees may be distracted or fearful for his or her jobs. So as you decide to go through your projections, I suggest you consider this question: If sales dip 10-15 % for the first 3 months, do I have enough money accessible to survive?