The Basics of a Start-Up- The Wash and Auto Detailing Industry

The Basics of a Start-Up- The Wash and Auto Detailing Industry

Financial Start-Up Needs

The start-up entails a wash and auto detailing business. In setting up the start-up, there will be different requirements that will consume finances. The requirements involve the initial setup of the business and its subsequent running. While operating an industry that indicates potential growth in the future, it will be important to set up the start-up string so that it can last for a relatively long period without incurring additional capital expenses in the future.

The initial financial requirement will be the lease of the business location centre. Notably, the land lease will run for ten years and is estimated to cost the start-up $500,000. The second start-up requirement will include the cost of setting up the premises of the wash and auto detailing. The estimated cost of the premises will be $100,000. The third financial need for the start-up will be the cost of legal formalities. Notably, this encompasses the cost of obtaining the local government’s permit to operate in the industry and registering the business. It is estimated that these legal formalities will cost the start-up $5,000. The fourth start-up cost will entail purchasing the operational equipment. The equipment covers the cost of purchasing a water pump, auto detailing accessories, and wash accessories. The estimated cost of equipment will be $400,000. Finally, the start-up will require finances to hire staff. Essentially, this cost covers expenses related to obtaining insurance for workers and their wages for the first three months. The hiring costs are estimated to be $80,000. The table below presents a summary of the costs.

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Financing Options for Obtaining the Needed Capital

Two options will be considered for financing the start-up. They include the personal contribution from the pocket and debt financing. The first option, which entails the pocket contribution, is assessed as follows. $300,000 will be raised from out-of-pocket for the start-up. The cost of this capital will be zero. Notably, this is the greatest advantage of this financing option. In case the start-up fails to work as planned, no external pressure will be expected from external parties due to this financing option. Also, this financing option entails faster closing, which means that there are no approvals or waiting that is required to use the capital. However, the pocket financing option may be limited to sustain the start-up, which is why the second option of debt financing is considered.

Accordingly, the debt financing option will entail obtaining a bank loan to support the start-up operation. The option is expected to raise the company a total of $785,000. Other forms of loans will be considered if the bank limits the start-up’s ability to get the total amount from single bank loans. The options will entail an equipment loan for the start-up loan and loans from family and friends. One advantage of using debt financing is the fact that the business owners will not be affected by the financing option. Throughout the loan repayment, the ownership will remain with the start-up entrepreneur (Cole & Sokolyk, 2018). Another reason behind acquiring this financing option is the tax deductions and allowances that are allowed against interest paid by entrepreneurs for their start-ups. The allowances will help in bringing down the cost of debt financing. In addition, the repayment of the debt finance will create a good credit history for the start-up and help it attract potential investors in the future, alongside acquiring relatively bigger debt for more investment. However, this financing option requires collateral, which is challenging to obtain and can affect the business’s reputation in the case of defaults in loan repayment.

Financial Ratios to Evaluate the Financial Health of the Business

The current ratio and return on investment (ROI) ratios will be used to evaluate the financial health of the start-up. Regarding the current ratio, the business’s financial health will be evaluated concerning liquidity. Notably, the current ratio is a liquidity metric that assesses a company’s ability to meet its short-term maturing obligations as and when they fall due (Mulyadi & Sihabudin, 2020). It is calculated by comparing an organization’s current assets and liabilities. Assessing the financial health of the start-up regarding liquidity will help to maintain sufficient cash in the working capital management. Also, it will help ensure that enough current assets are kept in the business’s portfolio that can be used to pay short-term liabilities of the business.

On the other hand, the return on investment (ROI) is a profitability metric that will be used to evaluate the start-up’s financial health. Essentially, this notable financial ratio is applied in evaluating an organization’s financial performance concerning investment. The investment for the start-up relates to assets obtained on equipment and the entire start-up. Thus, the profits generated from the business will be used to calculate the ROI and gain insight into whether the financial health of the start-up is good or bad.

References

Cole, R. A., & Sokolyk, T. (2018). Debt financing, survival, and growth of start-up firms. Journal of Corporate Finance, 50, 609-625.

Mulyadi, D., & Sihabudin, O. S. (2020). Analysis of Current Ratio, Net Profit Margin, and Good Corporate Governance against Company Value. Systematic Reviews in Pharmacy, 11(1), 588-600.

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Overview: (Please see attached previous assignments for reference)
Using the same business you started in the first assignment, Your Business Venture, you will continue to build a financial plan for the business.

The Basics of a Start-Up- The Wash and Auto Detailing Industry

Instructions
Write a 4–5 page paper in which you:

Prepare a pro forma balance sheet for the first 12 months of your business. Include the assumptions on which it is based. Justify your balance sheet.

Prepare a pro forma income statement for the first 12 months of your business. Include the assumptions on which it is based. Justify your income statement.

Prepare a pro forma cash budget for the first 12 months of your business. Include the assumptions that you have made when creating the budget. Justify your budget.

Scrutinize tangible and intangible costs of obtaining financial capital for your business start-up to determine whether the costs justify the implementation of the funding source.

Assume your business is five years old and running profitably and consider how you would grow your business over the next five years.
Determine the specific details that would make the equity approach to valuing your business worthwhile. Provide a rationale with your response.

This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.
The specific course learning outcome associated with this assignment is:

Assess whether the costs of obtaining capital for a business justify the use of the funding source and whether the equity-based valuation of the business is appropriate.