Capital requirement, what is it? The need for capital is precisely the amount of liquid funds that is required to realize a certain plan or project. In a company, a capital requirement arises from two factors:
- The deposits are less than the withdrawals.
This first case is typical of companies that have just started. They first have to invest in order to develop their products and markets and thus win customers.
- The deposits are made later than the withdrawals.
This case applies to practically every company. Among other things, liquidity planning can provide an overview here.
This means that the capital requirement is the target that the financing must raise. This can be done through internal financing, external financing , internal financing or external financing . This capital requirement for machines, goods and services can be determined by the capital requirement planning, also called capital requirement calculation. Such a capital requirement plan is created as part of a business plan that is presented to an investor in tabular form. As a rule, the financing requirement for the capital requirement is always determined using a financing plan. The financing plan is the counterpart to the capital requirement plan.
A practical example of capital requirements
The payments are made later than the payments: In this example, a tax advisor employed by a tax consultancy provides advice to a client in January. At the beginning of February, he bills for the consulting service and receives payment from his customer at the end of February. But the salary of the employed tax advisor is due at the end of January. This means that his salary is “pre-financed” by the law firm until the customer settles the invoice.
This process creates a capital requirement in January due to the pre-financing of the employee’s salary.
Capital requirement: how much capital is required?
When founding a company, the following applies: the gods made the investment before the first euro earned. After the investment phase, there is usually a start-up phase. In this, the new products or services must first establish themselves on the market. The young companies in particular are then at a point where costs for both ongoing business operations and the costs incurred in the private sector have to be covered. The problem: No sales have yet been generated to cover these costs. The important question then arises:
How much capital does it take to run the company?
The same applies to cases in which a company is acquired or expanded. In each of these cases, the capital requirement must be well thought out and seriously determined, because refinancing is usually difficult. This is especially true if public funding has been used. In this case, refinancing is excluded.
How is the capital requirement determined?
The following example of the capital requirement calculation deals with the investments before starting a business, so that it is ensured that the business founder can start his business activity at the specified time. The fixed operating expenses for the first month, such as rent, telephone and similar things, are also determined at the same time.
However, it is only possible to calculate a full capital requirement for a business start-up if a financial plan has been drawn up in which the monthly / annual income and expenses are entered. Only then is the entrepreneur in a position to recognize a capital surplus or deficit at any point in time of his business activity. The financing requirements then result from this list.
When a company is founded, the following expenses and investments arise. In our example, the total capital requirement is calculated as follows:
Capital requirements for fixed and current assets
- Cash required: 4,000 euros
- All material and goods: 30,000 euros
= Capital requirement, current assets: 34,000 euros
- Office equipment: 14,000 euros
- Machines / technology: 18,000 euros
= Capital requirement for fixed assets: 32,000 euros
Capital requirements for operating funds in the first month
- Rent including utilities: 560 euros
- Telephone: 80 euros
- Travel costs: 320 euros
- Office supplies: 60 euros
- Personnel costs: 2,100 euros
All this adds up to a capital requirement for operating expenses of 3,120 euros
The private expenses for the first month
- Rent and utilities: 860 euros
- Installment loan for private cars: 300 euros
- Food and drinks: 450 euros
- Health insurance: 350 euros
- Other private insurance: 500 euros
- Other expenses: 350 euros
This results in a capital requirement for private spending of 2,810 euros
The total capital requirement is therefore 71,930 euros.
This means that the capital requirement for the time of foundation and the first month is 71,930 euros. At this point it will not be discussed where the money for this capital requirement ultimately comes from. Because that is the topic of financing .
A note on capital requirements
If it is assumed that the company will make its first profits after one year, then the capital requirement planning should definitely be carried out for the first year. To be on the safe side, the capital requirement planning is also created for the following financial year.
However, the mistake should never be made of leaving the calculation completely in the hands of an external consultant or business angel . You always have to be fully and comprehensively informed about what he calculates and which numbers he uses. Because we’re talking about our own company. Only the entrepreneur himself knows the realistic figures, the business transactions and his own intentions. Only then is it possible to adapt the capital requirement planning to the expected reality. An external consultant – as competent as he may be – can only provide support here.
After all, such planning is ultimately about avoiding financial shortfalls and, consequently, expensive external financing.