If you are entering the wilds of entrepreneurship for the first time and starting your own business, finances are an essential part of your business plan. If you have the necessary savings, you have solved a large part of the problem. In several articles in a row, we will look at the basic steps that will help you navigate and make the right decision for you.
INITIAL FINANCING OPTIONS
The main types of financing are: personal funds, bank loan, investments from partners. Here we are not talking about large corporations and shareholders, but about small and medium-sized enterprises. Funding may be mixed, it turns out. Part with personal funds and part with external income.
Personal funds are the equity capital of the partner/partners, and all other external means of financing are called borrowed capital. All of them together form the capital of an enterprise. The difference between a bank loan and investments from a partner is generally as follows: with a bank loan, you have a certain period in which you have to pay back the loan and you are charged interest. Usually, the payment is made monthly in equal installments, which include principal and interest on the loan. When part of the capital is in the form of an investment by a partner, the firm owes that partner a part of the profit in the form of dividends. These dividends may of course not be paid every year. By decision of the general meeting of the company, the profit, if any, can remain in the company account and be used for new investments. Here is a brief example of your company's capital structure (it is not necessary to include all the listed elements): the capital of the enterprise can be classified according to various signs, but one of the most important is its distinction according to the ownership of own and borrowed:
- Equity are the funds that the partners provide to the enterprise for carrying out its activities. It is divided into:
- The main capital of the enterprise is an expression of ownership;
- The additional capital is formed in accordance with the articles of association of the enterprise from cash contributions of the owners, but is temporary and subject to return;
- Reservations are formed from the deductions from the profit and their purpose is to cover losses, stimulation of the collective, risk projects, sponsorship, social assistance, dividends;
- Financial result – undistributed profit or uncovered loss from previous or current year.
- Raised capital are the funds raised by external financing. It is divided into:
- Long-term liabilities - lending from banks or other companies for more than 12 months;
- Current liabilities – lending from banks or other companies for less than 12 months, unpaid salaries and insurance, unpaid obligations to counterparties, etc.;
- Funded – external investments by individuals or legal entities;
There is also another way of financing – the financing programs with European funds. It is not the purpose of our book to study in detail how Euro funds are handled, so we will only mention them briefly. The EU supports and finances enterprises, regardless of whether they are small, medium or large businesses. Companies with venture capital can also receive financial support from Euro funds. The EU can give support in the form of guarantees to such companies and thus make it easier for the company to obtain bank loans or interest from investors. There are various programs that you can apply for if you meet certain conditions. For example, if you start an innovative enterprise or need funding for a research project, your program is InnovFin, and if you need a loan for activities such as culture and creativity, you will be directed to the terms of the Creative Europe program.
CALCULATION OF INITIAL COSTS
In order to successfully launch your new venture, you need to predict the start-up costs as well as possible. This way you will estimate what initial amount you need and whether you will be able to cover it yourself or you will need credit, a partner, etc. Each activity is specific and has different needs. Some companies need large investments because they have to buy inventory, for others the initial costs are not big at all. Here are the main sectors you should budget for when starting out:
Location. It is of primary importance here whether the premises in which you will develop your activity is yours or rented. It is also important whether you will have to repair the place. If the room is your own, you will probably need to refresh it slightly - the costs will be minimal. The second option is to rent a room. Here, in addition to possible one-off costs for repairs or refreshments, you need to anticipate ongoing rental costs. You also have a third option – to buy the premises through a mortgage loan, which is also a constant expense, but for a certain period of time. What you will choose already depends on many factors: the price of the premises, the location, the type of business (will you need a loan for other start-up activities), etc.
Equipment and supplies. Here we have two main types of expenditure: for permanent equipment (ovens, counters, showcases if it is for a bakery, cabinets and a special chair and tools for a hair salon, etc.) and expenditure for consumables. It is important to consider the equipment whether you will buy it - with your own funds or a loan, or whether you will rent it. Often, young restaurateurs prefer to rent premises and equipment when starting such a business. Another type of equipment, depending on the type of business, can be a one-time purchase of a computer, printer, office furniture, telephones, etc.
Products (goods and services). If you've decided to become a merchant, a large part of your expenses will be buying the products you're going to sell, unless they're on consignment (where you pick them up from a manufacturer and pay for them after they're sold). There are different options here as well. Let's say you're going to sell furniture. Option one is to buy samples to display in a room - a sample room and, upon a purchase request from a customer, to order them from a manufacturer. Option two – you buy several units of each model and, in addition to a sample room, you also provide a storage room. If you are a manufacturer, it depends on whether you will market your goods to the end customer yourself or sell to wholesalers. In both cases, however, you will need storage. These are the costs if you are commodity oriented. In the case of services, the main costs will be related to travel (own transport or hired), mobile services (communication with customers), etc.
Employee expenses. First of all, you need to decide whether you will have employees and how many, and then calculate their salaries and insurance. It is important to decide whether you will also receive a salary if you are the manager of your company (you may not set yourself a salary, at least at first). As we already mentioned in the description of the business plan, the next step is the accountant. This person will be permanently employed (i.e. receiving a salary) or you will pay a monthly rent to a specialized company for this service. From there, it depends on the number of employees, their qualifications and duties to determine their salary. Here's how the salary is calculated in a nutshell. First of all, you have a basic gross salary, say BGN 1,300. If your employees and workers perform night work or work on holidays, this is also paid additionally. If, on the other hand, the worker/employee has experience in the profession he will practice with you, it is appropriate to charge him a class of time served, which is 0.6% for each year served on the gross amount formed up to this point (basic salary plus the additional remuneration we mentioned) . Example:
- basic gross salary: BGN 1,300 and 1 year of experience
– payment for additional work (say some hours per month): BGN 50.
– class 0.6 % on the sum of the above two: (1300+50) + 0.6 % = BGN 1358.10.
1300 + 50 = 1350 BGN 1350 x 0.6% = 8.10 BGN 1350 + 8.10 = 1358.10 BGN
This is the amount the employee will receive and on which personal insurance and income tax will be deducted. You as an employer also owe insurance pro rata, which should be charged on the amount received, which we can call FRZ or wage fund (not to be confused with basic gross salary, which is different). All of these details are primarily the concern of your accountant, but it's good to have some basic knowledge to plan your expenses in advance. Here is a table of the insurance rates deducted by the employee and the employer as of 2023:
| FEATHERS | Workman's Insurance 13.78 % | Workman's Insurance 18.92 % |
| State social insurance - LLC | 8,38% | 10,92% |
| Pension Fund | -6,58% | -8,22% |
| OZM Fund - general illness and maternity | -1,40% | -2,10% |
| Unemployment Fund | -0,40% | -0,60% |
| DZPO - additional mandatory pension insurance | 2,20% | 2,80% |
| Health insurance | 3,20% | 4,80% |
| Occupational accident and occupational disease | – | 0,40% |
| GST – Tax on total income | 10% | – |
– We received the sum of BGN 1,358.10. On top of this sum, we will charge a total of 18.92 % insurances, which actually come out of the employer's pocket. In numbers it looks like this:
1358.10 x 18.92 % = BGN 256.95 1358.10 + 256.95 = BGN 1,615.05 - this is the entire cost for one employee per month with the parameters set in this way.
You as the owner, regardless of whether you will receive a salary, also owe insurance. The total insurance for the employee is 13.78 %, which, as we explained above, are charged on the formed total gross salary. If he takes the same figures as an example:
– BGN 1,300 basic salary + BGN 50 additional work (any) = BGN 1,350.
– 1350 x 13.78 % = BGN 186.03 for insurance
– Remaining for the employee: 1350 – 186.03 = BGN 1163.97 – this amount is subject to VAT 10% or 1163.97 x 10% = BGN 116.40 for tax
- They remain for the employee: 1163.97 – 116.40 = BGN 1047.57 I.e. if you determine your salary according to the set parameters, you will receive this amount every month. If you have an internship, that 0.6 % before tax and insurance will be added to your salary. The length of service is proven by a document - an employment book, but to date all employment contracts are registered with the National Revenue Agency.
Here we have outlined only the most basic how to calculate how much a worker or employee will cost you per month. There are many more details regarding accounting that are beyond the scope of our topic.
The ad. This is the next feather cost that you need to budget for when starting your business. In the sixth chapter, in the section "Getting noticed in this noisy world", we will take a detailed look at how to do good marketing and highlight some advertising tricks. What you need to know as a budding businessman is that this pen swallows a lot of expenses. Advertising is expensive today. Depending on what type of ad you use will determine your costs. Television and radio are extremely expensive options, especially for a small business startup. One of the cheapest options is social networks. You must have a website and a Facebook page. The second is free, at least at this stage, and there you can make regular posts related to your business. Or advertise in buy-sell groups for their intended purpose, of course. It's annoying to post in a bookselling group that you're selling dairy products or clothes. As for the site - if you can't do it yourself, trust a specialist. The pleasure is expensive, but you will look more professional and somehow more collected as information.
In addition to the one-time investment of several thousand BGN for the creation of a site, every year you will pay a fee for a domain, which is under 100 BGN to date (this is the name of the site and the extension with which it will be registered, for example .com, .net and etc) and a hosting fee (this is the server your site is stored on). Other costs associated with advertising can be the production of business cards, flyers and brochures, calendars, pens and organizers. You can put banners with your logo on sites that are popular and visited or use celebrities to promote your business.
Operating costs/ overheads. These are the monthly costs for utilities (electricity, water, mobile services, internet), accounting (if you pay the firm and do not have a permanent employee), legal services (if required), transport costs and supplies of raw materials ( if you open a restaurant or a small shop these costs will be one of the highest), bank charges of any nature, etc.
Permissions and Licenses. First and foremost is the fire safety plan, which is a must no matter the business. You should at least have fire extinguishers, for the maintenance and charging of which you will pay periodic fees, exit signs (here the costs of purchase and installation are one-time). From there, you should find out what permits and licenses you may need by law to carry out your business. For example, if you want to open a translation agency, since 2012 this activity must meet certain ISO certifications. For a restaurant or cafe, you need a license from RIOKOZ (Regional Inspection for Protection and Control of Public Health). In order to carry out transport activities, there are other permits and documents. And all this costs money. Some of the permits are one-time, others you have to get them periodically, which means to anticipate the costs. If you have a company vehicle, every year you have costs for "GO" insurance, possibly "CASCO" insurance, annual tax and annual technical inspection.
To be continued…
© 2023 Iliana Dechkova
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