So, You Want to Become an Entrepreneur 2: Building Your Own Money

Financial/ Investment institutions or banks do not finance dreams or ideas. Before we even think about running an idea or starting a business you have to finance it from the start. The fastest way to build capital or assets is to get employment or come up with a reasonable scheme to get income in on a regular basis. Financing our business for the first 3 years shows the investor that we are serious and believe in our own dream.

The idea can manifest today but it takes up to 3 or 4 years to come into realization. The problem with the common entrepreneur is that they want instant results. Instant results usually spell disaster. That which we have learned from inexperienced Tenderpreneurs. Experience and your own resources play a big role in fully appreciating your business structure. It is because you put in the time and sweat into building your assets and capital, you’re most likely to be less reckless. Building an enterprise takes discipline and sometimes discipline can mean leaving like a pauper. Knock on wood – no life-threatening disasters may occur before you realize your full potential. It’s always worth the wait if you’re slowly building up the resources to get to that stage.

In the previous blog I talked about Historical Financial Records. I would like to expand on this topic and talk about Net Asset Values Versus Cash Flows. Net Asset Value = Total Assets – Total Liabilities. A more expanded equation that would work better in your quest for resources would be Net Capital Value.  NCV= Share Capital + Total Assets – Total Liabilities.  We have added the share capital component because we would like to view it as a contribution to the business. Although share capital can easily fall under the asset category when it comes to establishing the business.

The bank finances Cash Flows against Assets. Your cash flows have to be greater or equal to the asset’s probable economic benefits. Assets need to produce economic benefits in the form of cashflows. If you want a loan of let’s R1 000 000.00 with a 10 % interest rate over a period of 12 months (short term loan). Your asset has to produce cashflow inflows of about R110 000.00 per month after expenses and taxes on a monthly basis or the total value of your asset minus any outstanding liabilities has to equal R 1700 000.00. A normal financial institution finances on a 50 /50 basis. A R1 for R1. An investment institution can give you 70% / 30 % or 60% /40 % if you’re lucky, meaning R7debt for every R3 of your equity or R6 debt for every R4 of your equity.

 If the project or business is large and scalable enough the bank can even put-up equity (bank share capital). This is called mezzanine finance; instances like these are rare but do exist. 

Assets are resources controlled by the entity which will result in an inflow of economic benefits. Liabilities are present obligations as a result of past activity which will result in an outflow of economic benefits. The asset either has to produce cash flows inflows or be of greater value than the amount that needs to be leveraged. The asset either has to produce R110 000.00 per month after expenses or be greater than R1 500 000.00 for a 12month R1 000 000.00 short term loan with a 10% interest rate. This ensues that should you fail to meet your obligations the bank can either take possession of the said asset. The key to growing an entity should be to keep liabilities (debt) as low as possible that way should you require access to debt, it is readily available.

Share Capital is resources and economic benefits retained by the entity due to past events. In terms of building your own money, you should think of yourself as business first before even establishing the business. This could mean increasing your personal income statement and personal balance sheet. Share capital could be in the form of savings (cash and cash equivalents) or investments.   

Let’s Build

Let’s say we kept our careers and we kept working for the next 3 or 4 years, until we built enough capital to enter into business. We would obviously have to cut back on a few things. Trade in the E300 for a Toyota Corolla, it’s temporary until we have enough to go back to the E300 or even a better model. The Corolla can give us Bolt, Uber and Mr D income. We must use our vehicle as an income builder when it drops us off at work. This can bring in a take home of R3500.00 per week or per two weeks to be prudent after expenses if the driver is in a desired location. Let’s put it at R7000.00 per month assuming all expenses are paid including the contribution to the vehicle payments.

Assuming our career gives us R25 000.00, we can put away R11 500.00. This R11 500.00 can go towards building the share capital. Our household now produces a grand total of R18 500.00 per month after living expenses. These figures are on the assumption that we are bachelors and bachelorettes without family to take care of. Hypothetically speaking let’s say children are already around and other family members we would take it down to R4 500.00 per month since we hold a lot of responsibility in our hands.

Our Savings Compounded

Option 1

If we then have R18 500.00 in savings, one of the following two can happen. We can go for a normal fixed deposit account which can pay us 9% per annum over 3 or 4 years. Our financial calculation will look as follows:

·        (N) being the Number of Periods = 12 months multiplied by 4 years = 48 months

·        (I) being the interest rate apportioned over 12 months to give us the appropriate rate = 9% / 12months = 0.75 %

·        (PMT) being the contributions we put away every month = R18 500.00  

·        (FV) being the future value of savings at the end of 4 years = R 1064 133.15

A million rand should be a sufficient amount to start a Small Bricks and Mortar business or for Office Rental or Factory Equipment or Stocking up an online shop with a warehouse rental covered. This would be small-sized before we can even start growing big. The key in business is to always niche, start small and then grow big.

Option 2:

We will correlate our savings of R18500.00 to an investment driven vehicle (Stock, CFD, Mutual Fund, Future, etc.)  After the investor or brokerage fees will return a whooping 35 % per annum.

Our Financial Calculation will look as follows:

·         N being the Number of Periods = 12 months multiplied by 4 years = 48 months

·        I being the interest rate apportioned over 12 months to give us the appropriate rate = 35% / 12months = 2.92 %

·        PMT being the contributions we put away every month = R18 500.00  

·        FV being the future value of savings at the end of 4 years = R 1888 630.68

If we invest and save smarter, we would then have almost R2 million rand to invest our small to medium enterprise. We can even do more with R 2 million as compared to R1 million.