Capital requirement
Definition
Capital requirements refer to the total amount of funds a business needs to establish, grow, or maintain its operations. It is the difference between planned expenditures (investments, operating costs) and expected revenues.
Applications
Capital requirements play a crucial role in various business situations:
- Startup: To start a business, financial resources are needed for investments in fixed assets, working capital, and to bridge the startup phase.
- Expansion: When expanding a business, such as by opening new branches or introducing new products, additional capital is required.
- Investments: Investments in new technologies, machinery, or real estate often require a capital increase.
- Crisis Situations: In difficult economic times, a company may need additional capital to secure its liquidity or offset losses.
Types of Capital Requirements
Capital requirements can be divided into different categories:
- Initial Capital: The capital required to start a business, including all one-time costs.
- Operating Capital: The ongoing capital required to finance day-to-day business operations.
- Investment Capital: The capital required for investments in fixed assets to expand or modernize the business.
- Working Capital: The capital required to finance working capital, such as inventory or receivables.