Investments and Capital Requirements

Here, you calculate one-off investments that you have to make to start your business, as well as replacement or expansion investments. These investment costs are included in the subsequent calculation of your capital requirements, as are the results of your private withdrawal calculation, your liquidity forecast, and your profitability forecast. Ask yourself the following questions:

  • What investments will be necessary at the time I start my business?
  • What investments are planned within the next 1–3 years?
  • What is the overall capital requirement?

Calculate capital requirements carefully

Every second start-up requires entrepreneurs to draw on external financial sources in addition to their own capital. The amount of capital required depends not least on the type of business and the business equipment requirements. For example, the cost of setting up a translation agency is likely to be much lower than that of opening a locksmith's shop.

Accurate capital requirement planning is the basis for the successful development of your company. If it is calculated too tightly, it may be difficult to bridge the practically inevitable financial bottlenecks during the start-up phase. Excessive financing, on the other hand, would provide more room for manoeuvre, but would cost a lot of money, which is not necessarily earned easily in the start-up phase.

Therefore, always ask yourself critically what you need capital for: Use it to grant yourself the prerequisites to be active in your core business. Avoid subsidising “side issues” (e.g. letting commercial space that you do not use yourself). In the latter case, you should reconsider your decision to take out a loan. An ample loan is no better than a meagre one if it finances unprofitable activities. In general, loans should be used in a way that allows you to be productive in the area in which you are particularly skilled.

You will need money for very different purposes: Investments in tangible assets include, for instance, all the expenses necessary to set up your business, ranging from real estate, vehicles and machinery to office equipment. By contrast, start-up costs are those costs which arise directly from the start-up itself, i.e. which are incurred only once (notary costs, rent deposits, expenses for initial advertising, etc.).

You can already get an overview of how high your capital requirements will be at the start of your business on the basis of the investments in tangible assets and the start-up costs. However, there is another important item: operating materials. After all, you also have to constantly buy goods/material, pay rent, keep personnel on hand, etc. In addition, it is unlikely that your business will pay for itself right from the start. There is usually a certain “lead time” before revenue can be booked.

From liquidity planning to financial structuring

You can determine your concrete financial requirements using a very practical trick: Simply simulate the first 36 months of your account movements—i.e. everything that should be received in deposits on your account (above all own funds input and turnover) and all outflows incurred (investment expenditure, variable and fixed costs, own withdrawals). This allows you to see how low your account balance would “dip” if you were not to receive any financial assistance from the bank or a similar institution. The lowest monthly account balance shows you when the greatest financial burden occurs. This level is a very realistic indication of your capital needs. Your calculation can of course only be as good as the planning scenario from which you start. Nevertheless: Simulating the time frame makes it more accurate than the classic determination recommended in most manuals and banking documents. If you take the time to determine the most realistic values for turnover, costs, and investment projects, you will receive a high degree of planning certainty. Furthermore, this liquidity forecast means you are already creating an initial controlling instrument for your company, which you can continue to use immediately after the start and then compare with actual values.

Your calculated capital requirement now only needs a little fine-tuning: You should add a safety buffer of 10–20%—after all, your planning may still be too optimistic. Furthermore, you have taken into account your investment expenses. However, these should be financed long-term, while flexible (and therefore more expensive) forms of financing such as overdraft facilities are necessary for the working capital that flows through your company quickly. Therefore, divide your requirements (incl. buffer) into two parts—one that is to be financed on a long-term basis in the amount of your investment expenditure and a short-term part for the rest.

Take your time determining your financing needs; when it comes to bank financing it is very important to bear in mind: “The first shot must hit the target”. Of course you cannot anticipate every financial need that may arise (e.g. the unexpected failure of an expensive machine). But the following still applies: Supplementary financing is far more difficult to obtain than start-up financing. The rule of thumb is that it takes about two years before you can negotiate with the bank on the provision of further funds. The only exceptions are particularly successful companies whose strong growth makes supplementary financing attractive for the bank.

Tip: During the initial phase, your goal should be to keep borrowing to a minimum without foregoing a necessary “buffer amount” (10–20% of the loan amount)!

Practical tips for capital requirements planning

You earn money primarily by not spending it. This banal statement is enormously important for you as a founder, because your start-up risk grows disproportionately with increasing expenses. Saving costs is by far the cheapest form of financing!

Perhaps you are also fulfilling a long-cherished dream by taking the step into self-employment. It goes without saying that everything should be just right from the very start: from the office equipment to the central location of the company. However, the statistics show that around one in three newly founded enterprises has to give up in the first one to two years. Those who can take this step without great financial losses are the lucky few. You may not be able to prevent the failure of your business idea—but you can influence the financial consequences if you also approach your business start-up wisely in this respect. The key is: Start small and minimise risks. As soon as business is up and running, you can still pull your wish list of purchases out of the drawer and check them off bit by bit!

Put offers to the test

The consideration of whether the equipment one wants to purchase for the launch is actually necessary in its entirety does not necessarily require disappointing compromises. Well-preserved vehicles, machines or second-hand office furniture are frequently offered at bargain prices or can be leased instead of purchased.

Check and compare whether leasing can be an alternative. But be careful: For example, leasing a copier equipped with a wide range of functions can, at first glance, be an attractive and inexpensive offer. However, in these transactions you are often bound by long-term maintenance contracts, which cause immense costs in the long run and, in the event of your business doing badly, can quickly take away the financial room to manoeuvre.

Even when it comes to rental agreements, you should not be blinded by the fact that long-term agreements are common practice today. After all, what founder can say with certainty that their business will be successful in the long run? Committing oneself, for instance, to a five or ten-year lease entails considerable risk. Negotiate contracts with shorter terms and renewal options. It is also conceivable that a turnover-dependent share of the rent might be used. In view of the high vacancy rates for commercial real estate, your chances of success are far better than you might think!

Tip: Check exactly which purchases are really necessary for getting started. Avoid long-term contracts and try your hand at negotiating—the experience you gain might stand you in good stead when dealing with your customers!

Critically question investments

When planning purchases, it also helps to keep asking oneself what is actually necessary and what is perhaps just a “decorative accessory”. Things are actually necessary if you need them in order to be able to provide the service you offer in the desired quality and at the cost and effort you have calculated, and thus be able to present yourself respectably towards your customers. This right here is the crux of the matter: A respectable appearance is not to be equated with displaying status symbols. An accountant who thinks that he will only be taken seriously by his clients if he drives a fancy car is unfortunately mistaken. A reliable-looking vehicle in a lower price category is sufficient. Exaggerated status symbols can even have the opposite effect, as they can give the customer the impression that you are living beyond your means.

Save costs in an incubator

Depending on where you start your own business, you may be able to use a “business incubator”. These initiatives enable motivated founders to have access to a fully equipped office at reduced rents for a certain period of time. Coaching programs are often also integrated into the services on offer. A positive side effect is that you will meet many people in these business incubators who have also just started—with new suggestions and tips available just across the corridor. Find out about the range of business incubators in your area from local business development agencies.

Entrepreneurship with safety belt

You have calculated and determined that your business is not yet viable on its own. But you have a feeling that it will be worth it. In some cases, “part-time self-employment” can then be useful. This means that you earn a large part of your living as a dependent employee and build up your own business step by step in parallel. This approach is already taken by every second founder in Germany, and in fact: There is hardly a better way to get into business and explore your way into your market niche with little risk. But keep in mind that it takes some discipline to spend half a gruelling day in the office and then muster the energy and enthusiasm to drive your business forward.

Sample text: Capital expenditure and capital requirements
As we will be renting our business premises, no construction investment is necessary. For the handling and administration of a customer database it is necessary to develop software specifically for the company. As a result, operating and office equipment accounts for the largest share of capital expenditure on tangible assets. According to information provided by a friend who is an IT specialist, the development costs should be around EUR 5,000. For our services such as errands, shopping and laundry service, a company car is indispensable. A VW bus meets our requirements in terms of size and price/performance ratio. Apart from the required advertising (advertising materials, online presence), no further investments will be made. Our capital requirement is therefore EUR 60,000.