Every business needs plenty of funds and working capital to grow and evolve. There are many ways to get more working capital, from bank loans to P2P lending. But how much more funding do you need, exactly? Calculating the loan amount you need requires precision. You may be tempted to apply for more loan money than you actually need, thinking it will help you in the long run to have some extra capital to fall back on. However, more funding means you have to work longer and harder to return the money to your lender – not to mention, you have to return more money over time. But how do you calculate the exact amount you need?
Define Your Goal
When creating a financial plan, make sure your goals are defined. Whether it is to build another brick-and-mortar shop or to create a new product, be as detailed as possible when you present your goals. This will help you focus on what you really need to purchase to reach your goals. Think of defined financial plans as a form of budget; it will provide you with clear guidelines on what to do.
Specify Your Planned Timeline
Financial plans should be accompanied by a planned timeline. Do your best to estimate deadlines for sub-goals you need to reach on the way to your main goal. Think of this as building tactics within long-term strategy.
Planning a timeline will also allow you to better calculate your capital needs. It will push you to look at periods when you will need extra funding. Look at time periods when you will need more capital to fund new projects or invent new products, then budget accordingly.
Calculate Your Financial Needs
After creating defined goals and a timeline, you are set to calculate your financial needs. List down everything you need to achieve your business vision. There are three forms of capital that can help you divide your needs into useful brackets; they are fixed capital, working capital, and human capital.
- Fixed capital is composed of durable producer goods, which are used in production again and again until it is worn out. Plants, tractors, and factories are examples of fixed capital. Typically, fixed capital is expensive and illiquid, but necessary for long-term business operations.
- Working capital is comprised of single-use producer goods, such as raw materials, goods in process, and fuel. Anything that is used up in a single act of production is considered working capital. Because of its characteristics, working capital can be more difficult to manage. So prepare well when you calculate how much capital you need.
- Human capital can easily be defined as the people working for your company and their individual skills, educational background, health, etc. Like fixed capital and working capital, spending for human capital needs to be as detailed as possible. Payroll costs, budget for more human resources, etc – note it all down and create an expense range.
Calculating the loan amount you need sounds time-consuming, but it will help you maintain working capital over time. Once you get the loan you need, you can also refer back to your calculations and projections to keep you on track. So be as detailed as you can be!