Business

How to calculate start-up capital requirements for business

Venture capital

After determining Start-up costs and investments and Ongoing costs you can now calculate start-up capital requirements. Since many start-ups are too optimistic when assessing business development, we advise you to include a buffer in addition to the calculated capital requirements. 

After you calculate start-up capital requirements, you can create the profitability invoice. The profitability calculation indicates whether your project is also economically worthwhile

Capital requirements for your start-up

In the first chapter of the financial plan, you calculate start-up capital requirements for the start of the company. Following this, you could use the running costs identify a possible liquidity gap and thus further capital requirements.

These two calculations combine the essential elements for calculating the total capital requirement.

Since many start-ups are too optimistic about the development of the company, we advise you to add a buffer to the capital requirements.

If you have taken the normal case as the basis for calculating capital requirements, you should add a buffer of 25% to the capital requirement. If you take the pessimistic calculation as the basis, you do not need to include an additional buffer in the capital requirements, because you have already calculated very conservatively in this scenario.

Once you calculate start-up capital requirements, the crucial question is, of course, how you can finance the capital requirements of your foundation. But before you jump into the final chapter of the financial plan, read the remarks on profitability. 

Basis of profitability calculation: Planned result

In addition to the capital requirements, the question of the economic attractiveness of your start-up project is particularly relevant – the profitability calculation provides information on this.

The profitability calculation is important to you, because you can use the profitability calculation to find out whether your project is worthwhile. On the other hand, the profitability calculation also provides further information on the economic viability of your project, which is especially important for your donors. 

When you create the profitability calculation, it is best to do two steps. Since you have the result plan in the profitability calculation (depending on the other figures of the Plan Income statement) in relation to the capital employed, you must first draw up a plan for profit and flows and a plan balance sheet. 

The profitability calculation: is your project worth it?

Although the profit and loss account is an absolute figure, it only says a limited amount about actual profitability. Because: It is a significant difference whether you use 10,000 euros in equity and thus make 100 euros per year profit (return on equity 1%) or whether you earn 100 euros and use “only” 1,000 euros of equity (return on equity 10%). 

In addition to the return on equity, which investors pay particular attention to, the overall return on capital is also relevant. The total return on capital represents the profit earned plus interest (for debt capital) in relation to the company’s total capital (equity + debt capital).

Also in the profitability statement: the margin

Although this point does not belong directly to the profitability calculation, it is also a crucial relative measure. 

For example, the profit margin indicates how much of a euro earned can be recorded as a profit. In our opinion, this point of profitability is very important because the margin allows you to determine relatively easily how much room for manoeuvre you have, for example, for price reductions, or how increased costs affect your business model.

The goal is …

… that you first quantify the total capital requirements (foundation costs, investments, liquidity bottlenecks + buffers) in your business plan when it comes to capital requirements & profitability calculation. In your business plan, show how capital requirements differ in the pessimistic case from the calculated capital requirements of the normal scenario. The goal should be that you calculate a realistic capital requirement and that you are sufficiently capitalized for the first 12-18 months. 

Once you have identified the total capital requirement, you should include a meaningful profitability calculation in your business plan. Your profitability calculation, which is based on the plan and the plan balance sheet, provides information on the profitability and margins of your start-up. 

If you have worked through both topics, capital requirements and profitability calculation, you must answer the question of how you want to cover the calculated capital requirement. You will do this in the next part of the business plan – the Financing.