Estimating Capital Requirements- Financial Planning and Administration, Business Economics & Finance | Business Economics & Finance - B Com PDF Download

This article throws light upon the five points to be kept in mind while estimating the capital requirements of a company. The points are: 1. Promotional Expenses 2. Cost of Fixed Assets 3. Cost of Current Assets 4. Cost of Capital Procurement 5. Cost of Future Development and Expansion.

1. Promotional Expenses:

A company is generally a big venture. To promote a company is expensive. Preliminary and other legal expenses are so heavy that even before the incorporation of a company; the promoters are to keep themselves ready for these expenses, of course, to be recovered from future income.

Without going into details of the expenditure at the promotional stage, we can say that these expanses are to be incurred before any receipt. Heavy expenditure of the capital nature may also enter into promotional stage. So, this needs initiative, alertness, foresightedness, boldness and team spirit to proceed further and to financially sound plan for the company to come up.

2. Cost of Fixed Assets:

Expenses for fixed assets should not be delinked from promo­tional expenses altogether. For instance, a workshop has to be set up, lands to be purchased and construction has to be made. These also involve colossal amount and these are promotional expenses.

Ma­chinery and other appliances may be purchased after incorporation/receipt of certificate of commencement but a little bit of structure may be necessary and land acquisition may also be necessary for ob­taining the certificate of incorporation and in case of a public com­pany for the permission of the Registrar to commence business.

Plants, machinery, land, building etc. are all fixed expenses. Their cost should be calculated on realistic basis; valuation is very much significant for correct calculation of capital requirements. Escalation feature and inflationary economic condition should guide the finan­cial management for a near-correct valuation of fixed assets which is a very important component of total capital requirements.

3. Cost of Current Assets:

Daily running expenses including cost of materials are included in current assets. Debtors, stock in trade, bills receivable, short term investment, cash in hand and at bank — all are considered current assets. In the estimation of capital requirements, these assets have to be revalued and adequate provision should be made for sundry debtors.

The realizable value of investment should be made on practical basis — both analytical and comparative methods of calculation should be applied. Cash available from current assets is available for repayment of liabilities. So, this has significance in the correct esti­mation of capital requirements of a company.

4. Cost of Capital Procurement:

From various sources, corporate finance can now be made avail­able, but all these sources are neither desirable nor suitable for a company in # particular position and situation and in the consider­ation of other factors that may influence the future of the company.

The usual sources of corporate finance are:

Shares, debentures, ploughing back of profits'(in case of existing companies), loans from financial institutions, public deposits etc. Unlike previous days, availability of finance today has become easier but the selection of the proper source of finance is not so easy.

It needs financial expertise to choose between equity capital and preference capital, share or debenture, (own or loan), loans from pub­lic financial institutions or ploughing back of profits or public depos­its.

Every source has its merits and demerits. The planners are to compare, scrutinize and then decide from which source the finance should be secured. The period for which the finance is needed, the constraints and conditions attached to a particular source are matters deserving very careful consideration.

Not only the rate of interest or the cost, as we say, is the only point that the financial management is to bother about but quite a host of other matters vitally affecting the company either at present or likely to affect the company in fu­ture needs be considered.

5. Cost of Future Development and Expansion:

‘Expansion is life and contraction is death’ —so says our Swami Vivekananda. It is equally true in the case of a company which has come up- It will carry on its business in such way that it can expand. More sales, more production, more expenditure — all are signs of life — a life dynamic enough.

A company remaining static and main­taining its existence and there is no Endeavour on the part of its man­agement personnel to develop or to expand, will ultimately meet death through decay. So, capital estimation leaving enough scope for expansion and development must be borne in the minds of the plan­ners.

To sum up, a host of factors act and react-to find out the capital’ requirements of a company. Not only present but also future play a very important role and the existing economic condition cannot be considered in isolation from the future economic condition.

This needs forecasting and sufficient prudence in financial observation. Ratio analysis, cash flow, funds flow and other financial tools are used to estimate capital requirements of a company