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Small business working capital example

g0nt4du

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Hello people! I've been having some discussions and thought I'd rather post here for the community. I'm by no means from finance, so open to feedback and edits that can be made here. Just want to help - NOT FINANCIAL ADVICE.

Typical problem: Profitable idea i.e. item can be sold for more than it costs to buy from source, ship, etc. BUT money comes in later. Therefore, working capital needed.

Assumptions:
1. Sales = R 10k per month, received on average 3 months later (for whatever reason)
2. Costs of the goods + cost of shipping to client, etc. = R 8k per month. (therefore potential monthly profit of 2k, but don't have the 8k to begin with)

Usually, this problem is solved by taking debt which can come from:
1. Friends and family (generally low or 0 interest) - BEST option if you plan to repay them.
2. Extra money that's in your home loan - next best given the lower interest rate on home loans.
2. Personal loans (fixed term and revolving) - EXPENSIVE on interest rate and fees.
3. Credit cards - lower interest rate compared to personal loan, but higher repayments per month.

For the sake of this example, I am going to assume credit card as the source of financing at rates of 20% p.a. But you'd replace with whatever source of debt you have.

Here's what you'd do in practice:
1. MONTH 1: Given 8k needed, borrow R 8k from your credit card.
2. MONTH 1: Buy what you need, and ship out.
3. Wait 3 months, get paid, and pay off the credit card debt of 8k + interest. (i.e. MONTH 4)
4. Do the same in MONTHS 2 and 3, take on fresh 8k each month that is repaid in MONTHS 5 and 6.

On an ongoing basis, this would mean a max debt of R 24k. (8k, then 16k and then 24k, after which every new 8k you borrow is offset by 8k you pay in). BUT make sure you do pay in.

What does this cost:
1. 20% for a year means 5% for 3 months. 5% of 8k = R 400 of interest over 3 months i.e. R 133 per month.
2. Let's assume another R 100 of fees for your credit card per month.
3. Therefore, total costs of R 233 per month for financing.

Your new maths:
1. Costs = R 8000 + R 233 = R 8233
2. Sales = R 10000
3. Profit = R 10000 - R 8233 = R 1767.

In practice, credit cards need also a little bit more than the interest paid off each month. Typically 5-10% of what you borrowed. That means in this case R 800 (assuming 10%).

What this says is: If you are able to set aside R 800 for your business, you might be able to borrow the rest, make the sales, repay and make a profit of R 1767 per month.

Return on investment:
1. Investment = R 800
2. Return = R 1767
3. Return on Investment = R 1767 - R 800 = R 967 meaning 120% (i.e. you more than doubled your money)

Eventually, because you make the profits, you get to borrow less and less on your credit card. That saves you on interest costs meaning more goes to your pocket.
 
One worry in timing alone would be at this point there's a major backlog at customs and if they do pull your shipment it can be delayed just about indefinitely at this point and they're going to charge you for the honour of going through the stuff, which might not be repacked properly afterwards either.
 
One worry in timing alone would be at this point there's a major backlog at customs and if they do pull your shipment it can be delayed just about indefinitely at this point and they're going to charge you for the honour of going through the stuff, which might not be repacked properly afterwards either.

Can confirm. Not even goods, but mail. Still waiting on post from January. Either the post office or customs at fault
 
Nearly R 100k worth of cases and PSUs were written off by one supplier in March because of this.

Oh, and that was after a four month shipping delay.
I've seen what the fucks got right with partially disassembled electric bikes/scooters packed into couple mm steel frames for easy shipping and handling. So I absolutely believe that maar goeie f. So much stock... probably no way to even claim that back from them because they're "immune"
 
I've seen what the fucks got right with partially disassembled electric bikes/scooters packed into couple mm steel frames for easy shipping and handling. So I absolutely believe that maar goeie f. So much stock... probably no way to even claim that back from them because they're "immune"
Several of the case boxes had shoe prints on them. They clearly used them as a step ladder.

The internet has ruined me. Try thinking "my step ladder is stuck under the bed" without your mind going down the toilet. FFS.
 
Several of the case boxes had shoe prints on them. They clearly used them as a step ladder.
I'm intending to import stuff - you're scaring the shit out of me!

Luckily the supplier offers insurance/warranty from them to our port.
After the port they take no responsibility (so this I need to make sure I have a solid plan for)
 
I'm horrified by the inbound stories. I suppose we are safer with the likes of DHL that handle door to door? That said, do we have any insurers that handle end to end 😂 let's just pass on the risk since nobody really wants to fix the mess.
 
I'm horrified by the inbound stories. I suppose we are safer with the likes of DHL that handle door to door? That said, do we have any insurers that handle end to end 😂 let's just pass on the risk since nobody really wants to fix the mess.
DHL quote wasn't too bad but they were too expensive for a start
Also they didn't offer shipping by sea (only by air) - so the price is largely dependent upon the size/volumetric weight of the package

I will check them out at a later stage once I can afford it
The fantastic thing is they did offer handling all the customs everything. Which is cool cos it cuts out any incompetence we would have locally and lets DHL handle what they do best

I formatted my backup drive lol end-to-end insurance has a name. I don't know what it is right now but I will let you know once I figure it out again
 

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