It is no secret that adequate capital is an important ingredient to the success of a business. Whether you are starting up or growing a business, you will at all times require ready access to money. Your success as a businessman in addition to proper management depends on your ability to identify your capital needs and looking for the right source of financing for your business.
These obligations can regularly bring about dissatisfaction and distractions if you do not have a genuine financial plan laid out for the business. Since most businesses incur losses in the first few months of operation, be set to cover these latter costs for no less than three to six months while the business is given an opportunity to become self-sustaining.
Before we delve into how you can identify your capital needs for your business, remember that you may wish to consult an accountant or an attorney, both of whom can be valuable in assisting you with a written business plan that defines your business, administrative and management team, market, products and services, competitive advantage, SWOT and PESTLE analysis, the money related forecast and analysis that decides the best possible amount and source of financing that your business needs.
How much money do you need?
Before you ask someone or an institution for financial assistance, you need to, first of all, determine how much of it you really need. The first step in this search is to learn and understand the advantages and disadvantages of the various types of capital required by your enterprise (Read how to capitalize your business).
Next, you have to get familiar with the pros and cons of the different sources of financing available to your enterprise and how each source might cater your particular capital needs.
A well-written business plan will also enable you to determine how much you need by providing you with answers to questions which you need to provide answers to before inquiring about financing required by your enterprise.
Questions that will help you determine your financial need for a business
These questions include but are not limited to
- What is the nature of your business? Will it be product-oriented, service-oriented or both? A product-oriented business ordinarily requires more cash since it involves high material and equipment costs.
- Will you be hiring employees? If yes, how many of them are you hiring? Ideally, you will require less money if the labour force is small. The reverse will be the case if your business requires numerous employees.
- Will you invest your personal funds (Personal savings/ Owner's fund/ Owner's equity)? How much of it are you willing to invest? Lenders or investors may require that you show some level of seriousness by investing and risking your own money in the business. The amount you will invest will generally depend on how much you can afford and how much you are willing to invest.
- What will your startup expenses be? This question is usually provided in the financial plan section of a business plan. You need to estimate your startup expenses, which you will pay just once. You can do that by summing up the costs of business registration and agency fee, insurance, fixed assets (rent, buildings, machinery, equipment, land and furniture), start-up production capital, professional fee, starting inventory and others.
- What will be the cost of running your business expenses on a monthly bases? You must estimate your monthly operational expenses and extend it to three months. The sum obtained represents the amount of money you ought to deposit in a savings account for the underlying months of operation.
- Do you really need more capital for your business? Or should you manage your existing cash flow more effectively? In some situation, you do not actually need to borrow money. All you might need is effective and judicious management of your cash flow to solve the presumed need for money.
- How urgent is your need? Whenever possible, it is advisable to carefully plan your borrowing activities ahead of time rather than looking for money when you are under pressure. This will enable you to seek the right source of finance, obtain the best terms and secure capital in advance of a crisis.
- What exactly will you do with the money? You should be able to list the very specific need you will fulfil with the borrowed capital. By so doing you are assuring lenders that your business is promising and that their repayment is assured.
- How does your financial need fit with your business plan? A well-written business plan will enable you to define your business, what it intends to be over time and how you plan to get there. Make writing a business plan your first priority if you do not have one. Regardless of the stage of your business (starting up or growth phase) some capital sources will want to see your business plan before they lend you some capital.
- How much do you have? You need to determine the amount of cash available for investment after you must have calculated the financial need of your business.
- How much do you need to borrow or get from debt/equity investors? This is calculated by subtracting your available net worth from the sum of your startup costs and the cost of running your business for three-month.
With a specific end goal to stay away from common mistakes in borrowing money, for example, securing the wrong type of financing, underestimating or overestimating the sum required and the cost of borrowing money, it's essential that you manage your existing capital wisely. Identifying the capital needs for your business should be your first step in looking for financing options for your business. This can sometimes get confusing and complicated even with proper planning.
The title of this article is How to Identify Your Capital Needs for a Business