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Estimating your financing needs involves translating the development of your business in terms of investments, operating expenses, and payment terms. At the start, you need to study your market, strengthen intellectual property, develop and test your offer, then commercialize and continuously improve it. Your main financial needs are related to investments, changes in your working capital requirements, your self-financing capacity when it is negative, loan repayments, and the payment of potential dividends.
E. Krieger
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Estimating your financing needs is the translation of a development trajectory, with solid assumptions about investments, operating margins, and payment terms.
When launching a project, you will primarily survey the market and potential uses of your technology. You will then strengthen intellectual property and develop and test the offer corresponding to the primary needs you have identified. Then you will commercialize this offer and gradually improve it to reach an increasingly broad customer base.
What Growth Trajectory?
From a financial perspective, this will require investments, hiring, and various commercial, technical, and administrative expenses.
More prosaically, an entrepreneur’s dilemma is often knowing what they can develop with the resources they have at the beginning and when they will need to raise funds to continue the venture.
Without intending to give a finance lesson, we must nonetheless review the main financing needs to avoid omissions or misjudgments.
Don’t Limit Yourself to Operating Expenses!
The approach mentioned here applies to all business creators and leaders. However, the nature of financing needs and the resources to cover them will vary considerably depending on your sector, your company’s development stage, and your business model.
The main financing needs of a company concern:
- Investments (Capex),
- Changes in Working Capital Requirements,
- Self-financing capacity (Cash Flow) when it is negative,
- Loan and public advance repayments,
- Potential dividend payments.
It goes without saying that these needs are closely linked to the objectives and action plan you and your associates have defined. This brings us to the formulation of the business plan, whose financial forecasts are simply the translation.
The Different Types of Financial Needs:
- Investments mainly concern patent filing, equipment acquisition, construction and improvements, IT equipment, furniture, and vehicles.
- Changes in Working Capital Requirements: Working capital requirement (WCR) mainly results from your inventory and cash flow gaps between customer receipts and supplier payments. WCR is often underestimated or entirely overlooked by entrepreneurs, although it can be significant for companies whose clients pay late and whose growth will consume substantial capital. Conversely, some entrepreneurs manage to get their clients to pay in advance, benefiting from a negative WCR and abundant cash flow when margins are also favorable. Remember, it is always in your best interest to get paid as quickly as possible to avoid constantly juggling a tight cash flow.
- Self-Financing Capacity (Cash Flow): This is a need when it is negative, which is often the case for a young, innovative company. It measures the potential cash flow generated by your current operations, a flow you would see if there were no gaps in receipts and disbursements. The main expenses impacting your self-financing capacity are:
- The cost of sales, consisting of purchases of materials and merchandise and production costs.
- Research and development (R&D) expenses: mainly the payroll costs of your R&D team and subcontracting certain tasks.
- Commercial costs: primarily the payroll costs of your marketing and sales teams as well as advertising and promotion expenses.
- Administrative costs: these expenses include the salaries of general management and administrative teams, rents, fees, and other general expenses.
- Financial expenses related to interest on any loans you may have taken out.
- Loan and Public Advance Repayments: This involves the principal amount recorded on the balance sheet and not the financial expenses, which reduce the accounting result. For example, a €100,000 loan over 5 years will result in an annual repayment of €20,000 plus financial expenses on the remaining balance. When your company receives zero-interest repayable advances, the repayment of these public advances must also be considered according to the scheduled plan. Entrepreneurs whose activities do not yet generate sufficient cash are often caught off guard by these repayment deadlines, which are difficult to renegotiate.
- Dividend Payments: These dividends are taken from the net profit of the fiscal year or the company’s reserves. Therefore, dividends are out of the question as long as your company is unprofitable, and they are rarely paid in the case of growth companies that reinvest all their profits to develop as quickly as possible.
What Resources to Cover These Different Needs?
We see that you need to finance investments, R&D costs, marketing costs, and payment gaps. Therefore, you need to raise enough money to smoothly navigate the development stages that separate you from self-financing.
If self-financing is not enough to balance your financing plan and fund your company’s development, you will need to combine different resources, whose costs and conditions vary significantly.
