I had the following question waiting for me today at the ask the experts forum at www.bplans.com:
I’ve been trying to write a business plan for about four months now and have come across some points that I don’t quite understand. What exactly is capital? I’ve asked around people I know and they all give me different answers, and I have searched on the net, but I’m still unsure about it. Is it Venture Capital? For my proposed business plan I’m not sure on cash flow and long-term assets in the start-up costs section, whether I place the computer systems, fridges,coffee machine, etc. here or in start-up expenses. Any help would be appreciated.
There’s actually several questions there, and since they’re both similar to questions a lot of other people ask, I’m going to answer them here so others can see the answers.
By the way, I strongly recommend the ‘About Numbers’ and ‘Getting Financed’ chapters of the free online book on business planning at www.hurdlebook.com. Then read the ‘Cash is King’ chapter. All three of these are chapters show up in the table of contents in the left sidebar, so they’re easy to find and easy to read. Also, you might like the online basic business numbers, a slide show with voice. All of these are my work and available on the Web for free.
- You get many different answers to your question about capital because, in fact, the word means different things in different contexts.
- You can calculate your capital by subtracting the value of your liabilities from the value of your assets. What’s left over is capital. Sorry, those are accounting terms, I know, but read on.
- People use the word capital to refer to money invested in the company. In conversations, people talk about needing capital when they mean you need to have money on hand to pay for things like equipment and such as you start the company, and money on hand to keep you from bouncing checks during the first phase of the business when it still doesn’t have enough income in sales to pay for its costs and expenses.
- Working capital, in informal conversation, is the money you need to have in the bank to pay obligations while waiting to get paid, peace of mind money. Technically, in accounting terms, you calculate working capital by subtracting the total balance of current liabilities (also called short-term liabilities) from the total balance of current assets.
- In standard business plan financials, you finance your startup costs with a combination of capital and liabilities. The assets you need on hand when you start, plus the expenses you’ve incurred in getting started before you start, are what make up your startup costs. Normally you need startup capital (that is, money invested) plus borrowed money to finance that.
And please do the reading and the multimedia I suggested up above. If you’re going to run a business you want to have a basic understanding of these core concepts.