Capital Requirements

The capital requirement is the sum of funds that your company needs to achieve its goals. Plainly speaking: How much money do you need until your business is up and running? You can calculate the capital requirements by adding founding expenses, investments and start-up costs together. By subtracting your equity capital from the capital requirements, you calculate how much external capital you are going to need.

Capital requirements planning is closely linked with all other parts of your business plan, because its follow-up costs have to be considered in the planning.

The capital requirements should be calculated as accurately as possible. If you plan too conservatively, you may not be able to compensate for unforeseen financial problems. Subsequent funding is often difficult; some public investors even exclude it in their contracts. If you are calculating too generously, you will have more overall flexibility. It is however more expensive (if you fund your capital requirements with loans). In case of doubt: liquidity before profitability. In other words, it is better to apply for too much credit and return it, then to subsequently finance funds.

The dancing partner of capital requirement is the right financial plan and with it the right funding mix. The keyword is maturities. Read our glossary on funding and seek counsel from your financial partner.

• Investments can occur at different times e.g. if you expand your company due to rising sales volume or upgrade the machinery. Banks usually calculate your capital requirements for 3 years and give out an appropriate loan. They do that for simplicity and because funding a running company is very complicated. You would have to subsequently finance the company, which is always difficult. Inform yourself under what conditions the return of part of the funding is possible.
• The capital requirements include all investments you need, before you start. In practice, these are all expenses in the first month of your business. Classic examples would be notary, counseling or real estate brokerage costs.
• The startup expenses have to be considered. For most startups, revenue in the first few months is not sufficient to cover the cost. You are usually busy acquiring customers and processing orders, before you can finally write your first invoices and get paid. You still need to be able to compensate for expenses in these difficult first months. The capital requirement for the startup phase is equivalent to the minimum of the cumulative monthly cash surplus and cash loss.
• Do not forget to consider interest expenses and repayments in your capital requirement. If you are using SmartBusinessPlan, our computational logic automatically takes effective interest payments (profitability planning) and – more importantly – complete mortgage payments into account. You’ll be surprised at how starting to repay after the grace period effects your results. It could be necessary to plan for higher capital requirements, so you can satisfy both your operating costs and mortgage payments. SmartBusinessPlan does this automatically for you.
• Plan a reserve for contingencies, such as delayed orders, higher renovation expenses or new, unplanned assets. Calculate how much deviation a worst-case scenario would result in, for both the investment and the startup phase. If you need to make extensive modifications in your future store, the investment should include a decent buffer. If you are unsure of the initial revenue and cost development, think rather conservative and plan for higher capital requirements in the startup phase.