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Estimating Capital Requirements

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44 views26 pages

Estimating Capital Requirements

Uploaded by

Sanjib Das
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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WELCOME

Arun Jaitley National Institute of Financial


Management
On the topic
Estimating Capital Requirements

December 12, 2024 1


Capital
Total capital, which refers to funds invested into the firm
by both owners and debtors. For the more accountant-
minded, this is total equity plus total debt. These funds are
used to generate income for the business, through current
operations or allowing for implementation of large projects,
such as a new facility or production line. Examples of
capital would include money in a bank account, a loan to
purchase new production equipment, or cash received from
selling ownership in the company.
December 12, 2024 2

Capital refers to anything that can be used for productive
purposes by a firm or individual.

Economic or Financial Capital entails monetary funds
and investments like equity, debt, or real estate.

Human capital and social capital augment the purely
economic rationale behind capital and together better
explain how business and economic growth really
work.
December 12, 2024 3
December 12, 2024 4
 Start of business..
 In which field?
 In which country?
 Type of company do you want?
 You struggle most with?
December 12, 2024 5
Capital
Requirements
The capital requirement is the sum of funds that your company
needs to achieve its goals.
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.

December 12, 2024 6


Points to be kept in mind
while estimating the capital
requirements
1.Promotional Expenses
2.Cost of Fixed Assets
3.Cost of Current Assets
4.Cost of Capital Procurement
5.Cost of Future Development and Expansion.

December 12, 2024 7


Potential capital outlays
can include
BUILDINGS AND FACILITIES
MAJOR EQUIPMENT
OFFICE EQUIPMENT AND
FURNISHINGS
MATERIALS
SUPPLIES AND PARTS
December 12, 2024 8
To open a restaurant and you
estimate the following capital
costs
Heads Cost in Rs
Facility Building & Land) 5,00,000
Equipment's ( stoves, freezers etc. ) 1,50,000
Furnishings ( tables, chairs etc. ) 75,000
Other items ( silverware, plates etc.) 20,000

Total 7,45,000
December 12, 2024 9
You determine you need
Rs.745,000 to open your
restaurant . But you also need
working capital to keep the
operation going while the
restaurant gains popularity. So,
next estimate working capital
needs for the first 12 months of
business
December 12, 2024 10
Head Cost in Rs
Salaries 4,00,000
Utilities 25,000
Supplies 50,000
Advertising 15,000
Total 4,90,000
December 12, 2024 11
The sum of your capital and working capital requirements, Rs.12,35,000,
is what you will need to cover the first year of business expenses.
On the other hand, your successful restaurant will generate cash, so develop
best and worst case scenarios.
Let’s say best case you expected to generate Rs. 8,00,000 in sales in that first
year. Out of : Rs.1,235,000 – Rs. 800,000 = Rs. 4,35,000.
You need Rs. 4,35,000 in capital to open the restaurant under the best
circumstances.
Something else to consider: Your projected Rs. 8,00,000 in sales won’t be
spread evenly across 12 months. The first few months are likely to be lean
until customers discover your restaurant.
December 12, 2024 12
To prepare for the unexpected, you might estimate that you need an
additional Rs. 2,00,000. Under-capitalization is the number one
cause of business failure, so this cash buffer is a “must-have.”
Add that buffer amount to your initial capital requirements and
you’ll need Rs. 14,35,000 during the first year of operation.
To present the best, most transparent picture to investors and
lenders, prepare a statement of capital needs on a month-by-month
basis, showing working capital requirements and projected business
income. Show them what you need, justify those needs based on
solid projections, and clearly demonstrate how you’ll pay back
borrowed funds.
December 12, 2024 13
The total capital requirement including fixed
capital and working capital is estimated at
Rs.1.70 lakhs as follows. Of this, the project
cost comprising fixed capital and margin money
on working capital is Rs.1.55 lakhs

December 12, 2024 14


Working Capital

December 12, 2024 15


Note : Working capital May be financed
Bank Finance (65%)---------------------Rs. 0.45 lakh
Margin Money (35%)---------------------Rs. 0.25 lakh.
Total :Rs.0.70 lakh.

Fixed Cost Rs. 1.30 lakh


Margin Money for Capital.----Rs. .25 lakh
Total : Rs. 1.55 lakh.

December 12, 2024 16


Sales Realization

December 12, 2024 17


Promoter’s contribution (35%)-0.55 lakh
Term Loan (65%)-1.00
lakh.
Total :1.55 lakh

December 12, 2024 18


Determine Required Working
Capital
Factors Description
A significantly high sales volume generates high revenue which means the working capital required is not
Sales
much.

Duration of Operating The longer it takes a business to convert current assets into cash and cash equivalents, the more will be the
Cycle required working capital.

Type of Business Trading businesses require relatively high working capital when compared to manufacturing businesses.

Terms of credit Businesses that extend longer terms of credit to customers are often in need of more working capital

Inventory turnover Stagnant or slow turnover of extensive inventories results in a higher working capital requirement.

Seasonal variation Businesses that are dependent on specific seasons may need more working capital.

Production technology Usually, labour-intensive businesses require more capital than a business which needs the use of machines.

Contingencies A provision to meet the changes in demand and products’ price.


December 12, 2024 19
Principles of Working Capital
Management
Principle of Optimization
Principle of Risk Variation.
Principle of Cost of Capital
Principle of Maturity of Payment
Principle of Equity Position
December 12, 2024 20
December 12, 2024 21
December 12, 2024 22
Smart Business Plan Tips

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.

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.

December 12, 2024 23



Do not forget to consider interest expenses and repayments in your
capital requirement.

Satisfy both your operating costs and mortgage payments. Smart
Business Plan 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
December 12, 2024 24
December 12, 2024 25
Thank you
Bimal Anjum
[email protected]

December 12, 2024 26

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