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Assessment of Capital Requirements

The basic aim of financial planning is the determination of capital requirements. If the premise is wrong upon which plan is based then one can easily predict the fate fo the plan. Thus, the capital requirements must be very carefully determined. The estimates of the following items should be taken into consideration:

(i)    Promotional Expenses. Promotional expenses are those expenses which are incurred before the incorporation of a company. These include expenses incurred on investigation, legal and technical advice, drafting and parting of serial documents and statements, and registration fees. They also include office expenses including remuneration paid to staff and promoters.

(ii)    Cost of Current Assets. Sufficient investment is required in the current assets like stock of goods, debtors and bills receivable.

(iii)    Cost of Fixed Assists. Large amount of funds is required for investment in assets needed permanently for the business. These assets include land and building, machinery, plant, furniture and fixture.

(iv)    Cost of Financing. It is not easy to raise finance form the public. A company has to insure certain expenses on advertisement, brokerage, commission and other charges to market it securities. Such expenses must be taken care of while determining the capital requirements.

(v)    Cost o Developing Business. Generally companies take a number of years to reach the break-even stage (i.e., no profit, no loss). During the initial years, it has to incurs losses. A good financial plan should also take this fact into consideration.

Promotional expenses and the cost of developing the business are relevant for new enterprises. These and the cost of financing must be added to the fixed capita requirements in which cost of fixed assets is the major ingredient. Cost of current assets depends upon the working capital requirements. Hence, we shall study the capital requirements under the two heads: (a) fixed capital and, (b) working capital.

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