What is the capital requirement?
The capital requirement for a business start-up is the need for financial resources to build up a company, to open the business and to survive the start-up phase. In the financing planning, the capital requirement usually calculated for the first three years after the company was founded.
Which investments are part of the capital requirement?
The capital requirement is to be determined for three areas:
Fixed assets includes assets that are acquired or created for long-term use – for example, land, real estate, renovation measures, machines, devices, production facilities, furnishings, office equipment or vehicle fleets.
To current assets count values with variable costs such as material requirements (purchasing), operating costs, storage costs, wages or liquidity reserves for the periods up to the invoice payment by the customer. (For more detailed descriptions of fixed and current assets, see below).
The formation costs include those amounts that directly affect setting up a business. These include consulting costs, court and notary fees, costs for brand development, advertising concepts and introductory advertising as well as license acquisition and entry fees for franchise systems.
All necessary investment costs are included in the capital requirement plan. The cost of the company’s private living should also be taken into account.
The capital requirement adds up all costs. The founder’s existing equity is deducted. The difference results in the need for outside capital, which can mainly be covered in the form of loans or investments (see also: e-book alternative financing options).
How is the capital requirement determined?
Hardly any company can be brought onto the market without significant capital (exceptions can be start-ups by small businesses, freelancers in certain industries or part-time self-employed). Since the more restrictive lending regulations, including Basel III or Basel IV, bank advisors have generally required an equity ratio of around 15 to around 25 percent.
Most start-up bankruptcies are not caused by excessive debt due to over-financing. But – on the contrary – through underfunding. The underfunded self-employed often run out of money in the start-up phase, for example if they have to hire more employees to keep the business going. Or if the first expansion was necessary in order to survive the competition. Therefore, the capital requirement planning can be seen as the first and most important measure after developing the business model.
Where is the capital requirement?
As described above, the capital requirement is the sum of all funds that a company needs to implement an intention or to carry out a project. Examples are the “project” of company development and market launch or the “project” expansion, for example by setting up a franchise system.
The “project” can be divided into:
The operational purpose corresponds to the core business. For example, the production and sale of goods or goods or the provision of a service. The goal can be profit achievement (break-even, ROI) or profit maximization. The latter, for example, through expansion, business expansion, product innovations or opening up new markets.
What is the capital requirement for fixed asset investments?
The capital goods must be procured as described above. In addition, there are cost plans for maintenance, repairs, maintenance and spare parts. In the case of corporations, the share capital or share capital must also be deposited for liability (partnerships are liable with the private assets of the founders).
The raising of capital through external funds such as investment loans can be reduced by internal funds from sales proceeds and operating profits. Depreciation also enables partial internal financing.
What capital requirement for current assets?
There is a need for capital for all operating resources that have to be procured at variable costs. Examples are raw materials, goods, articles or components, but also wages and storage costs. Partial or, after break-even, complete self-financing is possible through sales or revenue.
There is a relatively low capital requirement for current assets in industries such as catering, retail or just-in-time production with fast revenues, for example through so-called fast-moving items in the food retail sector. The capital requirement for current assets is much greater in companies with long production times, large customer projects or long periods of time until payment is received, for example property developers or plant engineers. Companies in these sectors have a high level of capital tied up. (See also: Working Capital Loans).
Self-determined factors are not to be taken into account in the case of investment and current financing. These include fluctuations in credit interest rates, rising or falling purchase prices when purchasing goods, as well as volatile sales prices that can be achieved on the sales markets. Plus new technologies for production that make production more complex or leaner.
What is a capital requirement plan?
The capital requirement plan is part of a company’s financial plan and its basis. It must be determined before the financing planning, because the capital requirement minus the equity capital results in the necessary external financing as the difference.
In addition to the capital requirement plan, the finance plan also contains the investment plan, the liquidity plan and the sales and cost plan. First, however, the capital requirement plan must be drawn up, followed by the financing planning. The additional plans are used to calculate income, expenses and internal financing options, for example through profits and revenues. The financial plan flows into the business plan in a summarized form, which banks need to approve loans and subsidies.
Capital requirements in franchising
Franchisers fall back on the experience of the franchisor with many start-up projects. Your capital requirement plan is based on largely known parameters.