Capitalization | Sources and Uses of Funds

 

A summary of how much money will be required for startup expenses and operating capital, and where you expect that money to come from.

 

 

Capitalization and Use of Funds

The cliché is true: It takes money to make money. The various sections of your business plan spell out how you will go about finding new customers, creating products and services they need, and building your business. The details regarding the costs and revenues from your “word plan” make it to the “numbers plan” in the financial section. So what’s left?

This section on Capitalization and Use of Funds summarizes how much money will be required for startup expenses and operating capital, and where you expect that money to come from. Show your financial needs for a minimum of one year into the future, or until your business will become cash-flow positive, whichever is longer.

 

Business Plan Outline for Capitalization and Use of Funds Should Include:

  • Use of Funds
  • Startup Costs
  • Working Capital
  • Sources of Funds
  • List All Sources
  • Structure (Debt, Equity)

 

 

Important Considerations

This section of your business plan is intended to provide an overview of the funds your business will require. The specific details regarding terms for investing in your company must be in a separate document, which will be governed by specific legal guidelines. By law, securities can be offered for sale or solicited only by a private placement memorandum, which is a formal legal document.

Use of Funds

The Use of Funds section of your business plan must include all of the startup costs required as well as the working capital to sustain your business until it becomes cash-flow positive. The startup costs are those costs required to open the business. Working capital is the money it takes to pay your bills (including labor) until your business is generating sufficient cash to fund itself. Your financial projections (Section 9) will have taken you through the hard work required to arrive at these numbers.

A simple table or spreadsheet should be used to show your startup costs. Summarize costs into major categories. Customize the example below for your business. Most importantly, include all expenses that are listed on your financial statements.

For the working capital number, look at your cash flow statement. If you had no funding whatsoever, how much money would your business consume before it starts to turn a profit or become cash-flow positive? That’s how much working capital your business will need, plus a contingency fund.

 

Sample Start-up Costs

 

Facilities

Office Build-Out
$12,000
Prepaid Rent
$ 4,000
Office Equipment
$ 6,500

 

Marketing

Grand Opening
 $ 3,500
90-Day Ad Campaign
$ 5,100
Brochures
$  750

 

Administrative

Insurance
$1,200
Fees & Permits
$ 900

 

Total Startup Costs 
$33,950

 

Working Capital

12-Month w/c
$48,000
Contingency
$12,000
Total Working Capital
$60,000
Total Use of Funds
$93,950

 

 

Sources of Funds

Now that you have laid out the financial needs of the business, where will that money come from? Ideally, at least some of that will be coming directly from you. Perhaps you’ll even include a “family and friends” round of investment. The balance will be the amount you need to bring in either as loans or outside investments. Customize the example below to your business. Note that in this case, we are matching our needs to the “Use of Funds” example in the previous section.

 

Owner’s Cash Investment
$50,000
Family Investment (Equity)
$20,000
Loan Sought
$30,000
Total
$100,000

 

 

While you don’t have to include it in your business plan, you should be prepared to talk about your collateral, or how you will guarantee that the lender will be repaid. Most financial institutions require a primary and secondary source of collateral. This topic is covered in the section titled, Exit Strategy or Payback Analysis.

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