What is a capital requirements plan and how is it structured?

The capital requirement plan is an important part of any business plan. In contrast to the liquidity plan, a professionally drawn up capital requirement plan long-term information for covering capital requirements of the start-up project. This is intended to determine which investments are made and at what intervals the investments are made. However, expenses for operating resources such as personnel, marketing or sales are also calculated in order to draw a comprehensive picture of the project.

It is important not only to set up the capital requirements plan as a reporting date view, but also to expenses over time, which become necessary, for example, due to the initial growth of the company. A planning horizon of three full financial years is recommended; depending on the business model and conceivable development steps, five years in advance can also be planned. This gives both founders and entrepreneurs the opportunity to incorporate different stages of development of the company, external influences or internal changes into the planning and to play through different scenarios.

Basic structure of a capital requirements plan

The following expenditure are included in the capital requirements plan:

  • investments
  • operating resources
  • Initial equipment of the warehouse
  • Personal living expenses
  • liquidity reserve

In order to show a complete picture of the company in the capital requirements plan, it is important to determine all the necessary expenses and the associated dates.

Determining the initial investments needed seems easy for most business founders. In most cases, the required machines, equipment for office and business premises and vehicles can be well estimated or determined through offers from manufacturers and suppliers. However, it becomes more difficult with the investment plan if intangible goods have to be purchased. Costs for concessions, licenses or patents are also part of the investment block, as are expenses for research and development of our own products.

All expenses in the operating plan that are made for the ongoing operation of a company are summarized under the expenses for operating resources. This includes rent for the business premises, expenses for marketing and sales, but also, if necessary, the personnel costs incurred for employees. If a loan was taken out to finance a company in the past, the interest payments also count as working capital expenditures, while principal payments are not taken into account.

  • Initial equipment of the warehouse

The acquisition of the first stock of goods is a special item in the capital requirements planning as part of a company start-up. Normally, expenditure on goods is part of the working capital, but in the course of credit financing, the first order of goods can be counted in the investment block. This should give founders and young entrepreneurs easier access to start-up financing.

  • Personal living expenses

Another important point of the capital requirement planning is the founder’s personal living expenses. In addition to the expenses for private living expenses, the social security contributions must also be taken into account. Company founders in particular, who come from classic employee relationships, often underestimate the necessary funds, for example for private health insurance.

Finally, it is advisable to plan a buffer for unexpected expenses in addition to the expenses mentioned so far. The so-called liquidity reserve gives the founders the necessary freedom of action and financial security to cover costs that were not foreseeable at the beginning of the activity. Without a reserve, there can quickly be a liquidity bottleneck, which can cause difficulties for the company.

The timing of expenditures in the capital requirements plan is important

After the founders have calculated all expenses as best as possible, it is also important to put the individual expenses in a chronological order. In this way, the entrepreneur can, for example, take into account necessary advance payments to suppliers or make a decision as to whether a machine should be purchased or, for example, acquired via a leasing model. The breakdown of capital requirements over time therefore has a major impact on the company’s liquidity planning. In combination, the capital requirements plan and the liquidity plan represent two central parts of the business plan.

With a comprehensive and detailed capital requirement plan as an important part of a business and financial plan, it is possible for both founders and entrepreneurs to plan and evaluate their own investment and cost structure objectively. In addition, a corresponding forecast of requirements is essential for the acquisition of capital, for example to convince regional banks or national development institutes such as the Kreditanstalt für Wiederaufbau (KfW) of your own start-up project or company (tip: how KfW start-up loans work).

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