Investment Requirements and Production or Servicing Costs

Now comes the challenging part, the entrepreneur needs to determine how much money is needed to start the business opportunity with consideration to the technologies and operating levels required. In this respect, there are three investments that need to be funded:

1. Pre-Operating Costs.

These are the costs related to the preparation for the launch of the business. These include the pre-feasibility study, in-depth feasibility study, market research, product development, organizational development, and initial promotional costs.

2. Production/Service Facilities Investment.

This refers to the long-term investment for the actual business establishment, including investment in land, buildings, machinery, equipment, computers, software, furniture, vehicles, etc. If the business would be renting or leasing space, the leasehold improvement (or renovation) would also be part of the facilities investment.

3. Working Capital Investment.

This includes the investment needed to operationalize the business, composed of cash, accounts receivable, and inventories (raw materials, work-in-process, and finished goods). The entrepreneur must see to it that he or she has enough cash to cover the inventories to be purchased (or manufactured), the accounts receivable to accommodate customers, and the operating expenses to be incurred. These operating expenses would include the following:

  • Employee salaries, wages, and benefits
  • Rent and lease expenses
  • Utilities
  • Transportation
  • Fees and licenses
  • Commissions
  • Office supplies, etc.

In effect, this part of the pre-feasibility study asks two questions:

  1. Do I have enough resources to cover the necessary investments?
  2. Would my sales estimates be significantly higher than my monthly production/ service costs in order to produce profits?