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Project Cost

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A financial plan translates into pesos and centavos all the assumptions developed with regard to the marketing, technical and organizational aspects of the business. The first step in creating a financial plan is to determine the project or business cost. How does one estimate this?

The items that constitute total project or business cost include the following:

  1. Fixed assets – these include all expenses covering:
    1. land
    2. land improvements
    3. building
    4. building improvements
    5. machinery and equipment
    6. office furniture and fixtures
    7. other equipment
  2. Organization and pre-operating expenses – these pertain to cash expenses which are incurred prior to the actual start of operations and may include:
    1. legal fees
    2. fees paid to local government unit, BIR, SEC, DTI, SSS, Philhealth, Pag-ibig
    3. incorporation expenses
    4. initial advertising
    5. costs of setting up sales network
    6. costs of personnel recruitment and training
    7. initial franchise cost
    8. one-time deposits with utility companies
    9. research and technical studies
    10. economic and marketing studies
    11. financial and profitability studies
    12. design studies
    13. consulting expenses
  3. Working capital – this amount is usually estimated as equivalent to three months’ cash operating expenses. As such, one must come up with estimates for such items as:
    1. beginning inventory – the amount of inventory to open business
    2. rent
    3. insurance
    4. salaries and wages
    5. office supplies
    6. utilities (telephone, water, electricity)
    7. gasoline and other transport-related expenses
    8. repairs and maintenance
    9. advertising and promotion
    10. taxes and licenses

Once you have come up with a total amount representing fixed assets, organization and pre-operating expenses, and working capital, the next step is to determine how each cost component will be financed.

Sources of Financing

Most small businesses start with cash raised by the entrepreneur either from savings or borrowings from family and friends. Bank loans can also be availed of by the entrepreneur, especially if the business has assets which can be offered as collateral, and also for entrepreneurs who have proven track record. Typically, sources of financing include the following:

  1. Equity contributions – these consist of personal assets of the entrepreneur. These may be in the form of savings, property or equipment.
  2. Loans – these may be in the form of bank loans or even loans from family and friends.
  3. Others – these may be in the form of suppliers’ credit, say beginning inventory for sale. Venture capital (or seed money lent by some individuals) can also be included as other sources of financing.
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