Case Five: Busdgeting for A Small Business

CASE FIVE: Budgeting for A Small Business

By Mike McLoughlin,
Youth With A Mission, Marketplace Mission
Visit the Scruples Small Business Forum at www.scruples.net for more information.

With the unexpected turn of events, DJ & Marlene recruited their accountant friend Mark as a partner in their new enlarged poultry business. Mrs. Muleko had set a rental fee of $100.00 per month for the rental of the pens of her late husband Mr. Muleko. Six months rent was due up front and then the rent was to be paid quarterly. Mrs. Muleko had sold the finished and nearly finished batches of broiler chickens to cover the cost of the expenses of the elaborate funeral for Mr. Muleko and the large family gathering.

However, she offered to sell to DJ at a discounted price the present batch of 1,000 birds for $0.50 each to cover the costs of feed and immunization. The birds were 50% of broiler weight and would cost about another $0.70 each to bring to their finished weight. DJ had a standing order for the birds of $2.00 each on the wholesale market, but he had to make a decision on the 15% cash commission payment that Mr. Muleko paid to the purchasing agent of each grocery store and the weekly commitment t supply 1,000 live birds.

Fortunately, a Treasury note that Mark had purchased a year earlier for $1,000 at an annual rate of 100% had just matured. Mark was willing to make a capital investment into the business as long as he was able to receive a similar return on his investment as he had been receiving from the bank.

Case Problem:

Make the necessary assumptions and develop a simple start up budget to finance the start up of the newly expanded broiler chicken business.

1. How much money will DJ need to start his new operation?

a. Gather the information

b. Make the necessary assumptions

c. Prepare the budget!

2. How is he going to raise these finances?

3. What steps can he take to minimize the risks that he is undertaking in his business?

CASE FIVE SOLUTION
1. How much money will DJ need?
Answer A: (to cover just one batch.)
i. $600.00 for Rent
ii. $500.00 for Chicken Purchase
iii. $700.00 for Chickens to finish
Minimum $1,800
Answer B. (to cover all 4 batches)
i. $1,800 to cover current batch and rent.
ii. plus 3,000 Chickens * $1.40 per chicken = $4,200
Maximum $6,000.
Note: Different Assumptions imply Different Solutions
2. How is he going to raise these finances?
Use savings from previous business.
Mark will loan him $2,000
Register Limited Company & sell shares.
Make his family silent financial partners.
Go to the Bank? (But he has no security!)
Perhaps Mrs. Muleko can finance the rent.
3. What can he do to minimize his risk?
Sell Chickens on cash deposit only.
Avoid selling on credit. Cash Sales only policy.
Have a Budget, watch the cash flow!
Have a Business Bank Account
Register a Limited Liability Company.
Purchase production insurance.
Get family involved as shareholders.
Provide a quality product with a reliable service.
Prepare a proper written business plan.
Do some contingency planning. What if?
Sign Lease Agreement with Mrs. Muleko.
Make sure premise is secure.
Draft Partnership Agreement with Mark
Purchase general business and auto insurance.
Be "hands on" in managing the operation.
Be prepared! Don't be idle until the last moment.
Have a written legal Will that is registered.
Have a good Record Keeping System.
Have a regular meeting of the Directors.

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