When planning to put up a food cart, consider location first. It makes all the difference, cash-wise and otherwise.
Q: I plan to put up a food cart, and locate it either in a public market or a community shopping center. How much money should I have in the bank before putting up this business?
A: Before you start counting how much money you need to put up a business, you need first to decide where you plan to locate your food cart. Choosing between a public market and a community shopping center for a location could spell a big difference in your capital budgeting.
If you are in a public market, you may be targeting a highly demanding market where low pricing can be your best strategy. When you have low pricing, you have lower margins. When margins are low, you tend to cut costs in every area of your operations to keep your prices competitive. You may have to source cheaper ingredients, reduce the amount of your servings, or hire unskilled staff to keep your costs low. If you choose to locate in a public market, your initial capital or investment outlay should be comparatively low. But then, if your risk is low due to lower cash outlay, your returns on investment must be lower, too.
Now, if you locate in a shopping center, you may face a discriminating market composed mostly of professionals and young people who will get attracted to food carts with stylish branding and design, or products with nice packaging. To compete, you may have to spend some amount on marketing. You may even have to use ingredients that are considered healthier than what is typically used, and train your staff to provide good customer service to be competitive.
While of all of these may require you to spend a higher budget, your profitability may be larger because you can charge higher prices.
Your “risk appetite” will determine which location, with its corresponding capital requirements, will be right for you. If you are more aggressive, you will choose the shopping center—but if you fail, you will lose a lot. If you are conservative and protective of your money, you will try the public market so that if you ventured in the wrong business, you still have some savings to keep.
Now, once you have decided to choose your location, the next step is to estimate the amount of cash you need to start up the business. This amount will depend on the amount of sales the business will generate. For example, if you project your sales to increase largely in the first six months of the year, then your inventory levels should also increase, which will call for higher cash investment. Perhaps, the increase may also require you to hire additional staff to help fill customer orders, which will also require additional cash support.
Normally, in order to see for yourself the magnitude of capital you need to put up (and subsequently the risks that you need to take), drawing up a business plan with financial projections will help. You can do this by estimating your monthly sales over the next six months to one year; from there, project the corresponding assets that you need to support the sales.
For example, you can benchmark from the competition that the average sales-to-inventory ratio in the industry is four times. Using this ratio to your own business, assuming your sales projection for the first half of the year is P750,000, your inventory requirement would then be P187,500. This is computed simply by dividing your sales (P750,000) with turnover ratio of four.
With your inventory amount as starting point, you can project your other working capital requirements as a percentage of it. Let’s say you may gather from similar businesses in your industry that your working capital represents 40 percent of your inventory. You can use this percentage to project your working capital (also called operating capital). Once you have projected your current assets, you simply add your fixed assets, which is the cost of your food cart, to get your total assets.
The cost of total assets is the amount of money you need to have in the bank to finance your business. If you are short of cash to finance it, you may borrow from your relatives or friends to complete the budget, so that the remainder will be your actual cash investment.
Using a spreadsheet, you can project your sales through the next 12 months. When you project, don’t assume that your sales will grow consistently. Try to make it more realistic by assuming some ups and downs following the normal retail cycle. As you project, also provide an allowance for your monthly personal expenses into the business to ensure that you are paid for your time and effort.—Henry C. Ong
Henry C. Ong, CMA, RFP, is president and COO of Business Sense Inc., a financial advisory and consulting firm that helps small and medium businesses. Business Sense is affiliated with INPACT International Network of Certified Public Accountants. He may reached at hong@businesssense.com.ph or www.businesssense.com.ph.
