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What Is Capital in Business, and How Does it Work?

Whether you’re a new startup or you’ve been in business for decades, your company needs capital to grow and thrive. And, having a solid understanding of capital and how it can benefit your company can help you regardless of what stage your business is in. So, what is capital?

Capital definition:

So, what does capital mean? Capital is anything that increases your ability to generate value. You can use capital to increase value in your business’s financial assets. Generally, business capital includes financial assets held by your company that you can use to leverage growth and build financial stability. 

Capital and cash are not one and the same. Capital can be stronger than cash because you can use it to produce something and generate revenue and income (e.g., investments). But because you can use capital to make money, it is considered an asset in your books (i.e., something that adds value to your business). 

So, how does capital work? Companies can use capital to invest in anything to create value for their business. The more value it creates, the better the return for the business. 

Capital examples

So, what does capital include? Capital can expand to a variety of things in business, both tangible and intangible. Here are a few examples of capital:

• Company cars
• Brand names
• Bank accounts

There are also different types of capital in business, including:

• Use this capital to pay for day-to-day business operations
• Converts into cash more quickly than other investments (e.g., a new oven at a bakery)
• Capital a business earns from taking out loans and debt
• Comes in several forms, including public equity and private equity (e.g., shares of stock in the company)
• Amount of money available to a company for purchasing and selling assets

Capital gains and losses

When you make an investment, the goal is to generate wealth for your business to help it grow and expand. And as your investments grow your business , the capital itself can increase in value, which can result in capital gains. 

Capital gains

When your capital’s worth increases, you see a capital gain. A capital gain occurs when your investment is worth more than its purchase price.

For example, say you buy a machine for $1,500. The machine needs work, but you fix it without needing any new parts. You then turn around and sell it for $2,000 because you gave it a higher value by fixing it. 

To calculate the gain in your business accounting records, take the final sale price of the machine ($2,000) and subtract the initial purchase price ($1,500). Your accounting records should reflect a gain of $500.

Capital losses

Not every investment is going to be worth it in the end. This is where capital losses come into play. With a capital loss, your investment is worth less than its initial purchase price. 

Let’s take a look at the machine example again. You purchase the machine for $1,500, but you spend $600 on new parts to fix the machine before you sell it for $2,000. Between the cost of the machine and its new parts, you spend $2,100. This is considered a capital loss of $100 because you spent more money on the total investment ($2,100) than you received for the sale ($2,000). In your books, record a capital loss of $100.

How to grow capital

So, how do you go about growing capital? There are a number of ways you can increase your capital, including:

• Apply for a small business loan
• Find an angel investor
• Ask friends and family for a loan 
• Use crowdfunding
• Look into SBA loans and programs 

Growing your capital can take time and a whole lot of dedication. To ensure you have a good shot at growing your capital, develop and refine your business plan . And, practice pitching why investors and lenders should invest in your business. 

Once you establish your company and get it off the ground, you can typically gain funding from other sources. You should gain capital primarily from your profits. And as you gain equipment, property, and other assets, your capital grows. When it grows, the financial worth of your business grows.

Capital in accounting

Business owners can use their capital records to make savvy investments and help make smart financial decisions. But in order to do that, your accounting records need to be as accurate as possible.

To easily track capital, make smart financial moves, and avoid major mistakes, record your investments in your books regularly. And, be sure to examine them to see what’s working and what isn’t. 

To easily track capital in your books, you can opt to use accounting software. That way, you can record your capital quickly and avoid making accounting mistakes yourself. Plus, you can access numerous reports and financial statements to help make investments and decisions. 

To determine if an investment was worth it, examine your books and ask yourself the following questions:

• Did the capital I invested in help grow my company? 
• Am I in a good place financially that I can invest more in my company? 
• Which investments were not worth it?

When your capital is growing, so is your business. So to keep your business prospering, build a solid strategy for tracking, using, and gaining investments.

Want to spare yourself the time and frustration involved in keeping track of your business capital and other transactions? Give Patriot’s online accounting a whirl to keep your books in order. Try it free for 30 days today!

This article has been updated from its original publication date of January 15, 2016.

This is not intended as legal advice; for more information, please click here.

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What is Start up Capital in Business: Insights and Strategies for Entrepreneurs

Pradeep bhanot.

• February 29, 2024

Introduction

Embarking on a new business journey? You’re brimming with innovative ideas and the drive to make waves. Yet, one common hurdle stands in your way: securing business startup capital.

Table of Contents

Welcome to the quest for startup capital, the vital spark for your new business engine. As startup founders of this is a critical requirement to fuel growth, so a critical element in the business plan.

My first startup was in the Silicon Valley as the CEO of DevPort. The founder, Shiraz, and I pitched many VCs and Angels to secure funding for our business venture. Our coach from Sequoia Capital which is one of the leading venture capital firms, educated us on different types of startup capital. This article covers much of what we learned.

What in the World is Startup Capital in Business?

In plain English, startup capital in business is the cash you need to cover startup costs. It’s the lifeline that pays for the company’s major initial costs – think office space, market research, and those first few rounds of caffeine that keep the dream alive.

For a software startup business, it is particularly useful to have a running prototype service. Funding will provide the ability to scale development, capture some early adopters, and marketing to get your revenue stream kick started.

Types of Startup Capital

Venturing into entrepreneurship without grasping startup capital types for external investment is like sailing without a compass: progress is possible, but directionless.

Let’s examine the options to ensure the best fit for your business’s growth.

1. Equity Financing

What it is : Equity financing involves selling a piece of your company (equity) in exchange for capital. This means investors get a share of your business and, typically, a say in how things are run.

Pros : The biggest perk? You’re not required to pay back the funds if your business goes under. Plus, it often comes with valuable mentorship and industry connections.

Cons : The downside is the dilution of your ownership and control over your company. Every investor gets a slice of the pie, potentially reducing your piece.

2. Debt Financing

What it is : Debt financing means taking out a business loan from financial institutions that you’ll need to repay over time, with interest. Business loans can come from banks, credit unions, or online lenders in the form of a business loan or credit line.

Pros : You retain full control and ownership of your business. Interest payments are also tax-deductible.

Cons : Repayment obligations for a business loan can be heavy, especially if your business doesn’t generate the expected cash flow. Plus, it usually requires collateral.

3. Angel Investors

What it is : Angel investors are wealthy individuals who provide capital for a business start-up, usually in exchange for convertible debt or ownership equity. They’re often retired entrepreneurs or executives, who may be interested in angel investing for reasons beyond pure monetary return.

Pros : In addition to funds, angel investors can offer invaluable advice, mentorship, and industry contacts. They may also be more willing to take risks on early-stage start ups.

Cons : Like venture capital, accepting angel investment often means giving up a share of your business. Angel investors may also seek involvement in business decisions.

4. Venture Capital

What it is : Venture capital funding is given to start ups and new businesses with perceived long-term growth potential by the venture capital firm. Venture capitalists provide startup capital with the intension of providing advice, so it is more like a partnership.

Pros : Significant capital injection, mentorship, and networking opportunities. Venture capitalists also bring expertise and resources to scale your business rapidly.

Cons : Highly competitive and not easily accessible for all start ups. It involves giving up a significant equity stake and, often, some degree of control over your company.

5. Personal Savings and Bootstrapping

What it is : Providing your own startup capital using your savings or generating business revenue that’s reinvested back into the business. Bootstrapping means raising capital without external help.

Pros : Full control over your business without any dilution of equity. You make all the decisions without needing approval from outside investors.

Cons : Limited by the amount of personal funds available, which can restrict growth. The financial risk is all on you, which can be a heavy burden.

6. Crowdfunding

What it is : Crowdfunding platforms allow you to raise small amounts of startup funding from a large number of people, typically via the Internet. This can be in exchange for rewards, equity, or even new products.

Pros : Great way to validate your product or new businesses idea while simultaneously funding it. It also engages a community of supporters.

Cons : Requires a significant marketing effort when raising capital. Not reaching your startup capital funding goal can mean you get nothing (depending on the platform’s policies).

What it is : Grants are non-repayable funds or products disbursed by grant makers, often a government department, corporation, foundation, or trust, to a recipient. These are typically awarded to businesses that meet specific criteria, such as innovation in certain fields.

Pros : It’s free money that doesn’t need to be repaid and doesn’t dilute your ownership.

Cons : The application process can be complex, competitive, and time-consuming. Grants are also usually very specific about what the funds can be used for.

Seed Capital vs. Startup Capital: What Is the Difference?

Delineating the early financial phases of a venture is essential. This section contrasts seed capital with startup capital, the pivotal funds that nurture a business’s inception and generate revenue.

Seed Capital: Planting the First Financial Seed

Definition and Purpose : Funds from seed investors is often the very first investment a new business secures, aimed at validating the business idea, conducting market research, and covering initial operational costs. It’s about proving the concept can work.

Amounts and Expectations : The seed round for young companies is usually smaller than later rounds of financing. This is early-stage investment used to fund feasibility and conceptual work.

Startup Capital: Fueling the Business Launch

Definition and Purpose : Startup capital refers to the funds needed to launch the business operations fully. This capital is used for initial product development, marketing, and hiring key staff to bring the business idea to market.

Amounts and Expectations : When you raise startup capital rounds, the amounts are generally larger than the seed capital round, reflecting the increased valuation of the business and the move toward market entry and future growth.

How To Choose the Ideal Startup Capital for Your Business?

Deciding on the best type of startup capital for your business isn’t just about weighing the pros and cons.

It’s about introspection, understanding your business’s unique needs, and aligning your startup capital funding strategy with your long-term vision. Here’s how you can navigate this decision-making process:

1. Assess Your Business Stage and Needs

Early Stage vs. Growth Stage : Early-stage companies might find more value in angel investors or crowdfunding to get off the ground, while growth-stage businesses could be more attractive to venture capital firms looking to scale.

Financial Requirements : Quantify how much startup capital you need to reach your next business milestone. This helps in choosing funding sources that can meet these requirements without over-diluting equity or accruing unmanageable debt.

2. Consider Your Tolerance for Risk Personal

Financial Risk : Using personal savings or assets for bootstrapping involves significant personal financial risk. Ensure you’re comfortable with the potential outcomes.

Debt Risk : Debt financing requires confidence in your business’s revenue generation capabilities. Defaulting on loans can have serious consequences, so consider the stability and predictability of your cash flow.

3. Evaluate Your Willingness to Share Control and Profits

Equity Financing : Taking on investors means sharing decision-making power and future profits. If you’re open to collaboration and mentorship, and willing to share the pie for the sake of growth, equity financing could be beneficial.

Private Equity companies typically have a 5-year horizon when they provide startup capital which should be enough to be cashflow positive.

Independence : If retaining control and independence is paramount, look towards bootstrapping, loans, or crowdfunding models that allow you to retain full ownership.

4. Reflect on the Level of Support and Networks You Need

Beyond Capital : Some forms of raising startup capital come with mentorship, industry contacts, and operational support. Venture capital and angel investors often provide strategic guidance that can be invaluable for navigating early challenges.

Solo Journey : If you prefer to lean on your own expertise or have a strong support network, want to maintain your ownership stake, less intrusive forms of capital might be more suitable.

5. Long-Term Business Goals and Vision

Growth Trajectory : A high-growth startup aiming for rapid expansion may benefit from venture capital or angel investment to fuel their ambitions.

Sustainable Growth : Businesses aiming for steady, sustainable growth might find debt financing or bootstrapping more aligned with their goals, avoiding the pressure to scale at an aggressive pace.

6. Compliance with Funding Requirements and Obligations

Grants and Crowdfunding : Understand the specific requirements and obligations of less traditional funding sources. Some grants may restrict how funds can be used, and crowdfunding campaigns often require rewards or returns to backers.

7. Conduct a Reality Check

Market Validation : Ensure there’s a market demand for your product or service. This not only affects your ability to raise capital but also determines the most receptive source of funding.

The technology market is particularly subject to trends. My startup get to market as technology exchanges where cooling, so we missed the market trend that would have made us cool. Monitoring industry analyst hype-cycles can be useful for timing market entry. Your product or service could be before its time. Investors want to see pull from a market or customer segment to feel good about their bet on you.

Investor Appeal : Be honest about your business’s appeal to investors. High-risk, high-reward ventures might attract venture capitalists, while niche or lifestyle businesses might not.

Angels want to see that you have a path to profitability. This can be as little as a year. Make sure you have a clear idea of your planned milestones so they can see you have executed against your plan when you review your progress.

Final Thoughts on Choosing Your Path

Choosing the right startup capital is crucial, blending financial strategy with your business’s vision and goals.

Seek advice from mentors and advisors to navigate financing options to raise capital. Ensure your choice aligns with your growth ambitions outlined in a solid business plan.

Raising Startup Capital: Preparing Your Pitch

Crafting a pitch that sticks: the elevator pitch.

In a world where attention spans are shorter than ever, your elevator pitch needs to be sharp, engaging, and memorable. Tell your story in a way that leaves them wanting more – because first impressions are everything.

The Devil’s in the Details: What Investors Are Really Looking For

Also, beyond the flash and flair, investors are digging for substance. They want to see a strong business idea backed by market research, a clear path to generating revenue, and a team that can execute the vision. Don’t just sell them on the dream – show them the blueprint.

Common Pitfalls and How to Dodge Them

Entrepreneurial paths often include missteps like underestimating needed startup capital, leading to early financial strain. Equally damaging is overpromising to investors—transparency is key to long-term partnerships. I have worked with executives who over promise to the board, creating stress for everyone.

Be wary in negotiations; excitement can overshadow critical terms in agreements. Scrutinize equity stakes and repayment terms to ensure they align with your startup’s goals and capabilities. Securing the right capital on favorable terms is crucial for success.

Wrapping It Up: Key Takeaways and Your Next Steps

Finding the right startup capital is vital, yet varies for each business. It’s about adaptability, resilience, and focus on your goal.

With a robust business plan and understanding of your financial needs, you’re set to turn dreams into realities. Keep in mind that 10 out of 11 startups fail.

Start laying your empire’s foundation brick by brick, refine your pitch, and embark on your entrepreneurial path with confidence.

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• Capital Planning

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on July 12, 2023

Get Any Financial Question Answered

Table of contents, what is capital planning.

Capital planning is a critical process that businesses undertake to allocate financial resources to long-term investments and projects, such as acquiring new equipment, launching new products, or expanding operations.

The primary aim of capital planning is to ensure that a company's investments generate the highest possible return, contribute to its long-term growth and success, and minimize financial risks.

A well-designed capital plan can help a company identify the most beneficial investment opportunities, create a balanced portfolio of projects, and allocate resources strategically.

Effective capital planning is crucial for a business's long-term success and financial stability.

It allows organizations to make strategic decisions about where to invest resources to achieve their growth objectives, maximize shareholder value, and maintain a competitive edge in the marketplace.

By carefully evaluating potential investments, companies can ensure that they are putting their money into projects that align with their overall strategy and have the potential to deliver significant returns.

Furthermore, capital planning helps businesses minimize investment risks by identifying potential threats and developing strategies to mitigate them.

Capital Planning Process

Identifying capital needs.

This step involves assessing a company’s current assets , forecasting future growth, and analyzing industry trends.

It includes evaluating the organization's existing infrastructure, equipment, and technology to determine if they are adequate to meet its short and long-term objectives.

Additionally, companies should assess their growth potential by analyzing market trends, customer demand, and competition to identify areas where investment may be required.

Forecasting future growth is critical to identifying capital needs, as it provides valuable insights into the company's potential revenue streams and resource requirements.

Companies should utilize historical data, market research, and industry analysis to create accurate growth projections.

Understanding industry trends is essential for identifying opportunities for investment and potential challenges that may impact the organization's financial performance.

Evaluating Capital Projects

Evaluating a company’s potential capital projects is done to determine their financial feasibility, strategic alignment, and associated risks. Financial feasibility refers to the project's ability to generate a return on investment (ROI) that exceeds its cost of capital .

This can be assessed using various capital budgeting techniques , such as net present value (NPV) , internal rate of return (IRR) , and payback period.

Strategic alignment is essential in the evaluation process, as it ensures that the proposed project aligns with the company's overall business strategy and objectives.

This may involve analyzing the project's potential impact on market share , competitive positioning, and long-term growth potential.

Risk assessment is another critical aspect of project evaluation, as it involves identifying potential risks associated with the investment and developing strategies to mitigate them.

Prioritizing Capital Investments

This involves ranking projects according to their potential for financial return, considering factors such as projected cash flows, payback period, and NPV. Balancing risk and reward is also a critical aspect of prioritizing investments.

Companies should aim to create a balanced portfolio of projects that offers an optimal mix of potential returns and risk exposure.

Resource availability is another important factor to consider when prioritizing capital investments.

Companies must ensure they have the financial, human, and technological resources to support the successful implementation of their chosen projects. This may require reallocating resources from other business areas or seeking external financing to fund the investment.

Budgeting Techniques for Capital Planning

Payback period.

The payback period is a simple capital budgeting technique that calculates the amount of time it takes for an investment to recoup its initial cost through cash inflows.

It is calculated by dividing the initial investment cost by the annual cash inflow generated by the project.

The payback period is useful for comparing investment options with similar risk profiles , as it provides a straightforward measure of how quickly an investment will start generating positive returns.

However, the payback period must account for the time value of money or cash flows generated after the initial investment has been recouped, which may limit its usefulness in evaluating long-term projects.

Net Present Value

NPV is a more sophisticated capital budgeting technique that accounts for the time value of money by discounting future cash flows to their present value.

The NPV is calculated by subtracting the present value of cash outflows (initial investment) from the present value of cash inflows generated by the project over its life.

A positive NPV indicates that the project is expected to generate a return greater than the cost of capital, making it a potentially worthwhile investment.

In contrast, a negative NPV suggests that the project's returns are unlikely to cover its costs. NPV is widely used by businesses to compare investment opportunities and determine their financial viability.

Internal Rate of Return

The IRR calculates the discount rate at which the net present value of a project's cash flows becomes zero. In other words, the IRR represents the annualized rate of return at which the investment breaks even.

The IRR can be used to compare the profitability of different investment options, with higher IRRs generally indicating more attractive opportunities.

It is important to note that the IRR assumes that all future cash flows are reinvested at the same rate, which may only sometimes be the case in practice.

Profitability Index (PI)

The profitability index measures the relative profitability of an investment by dividing the present value of its future cash flows by the initial investment cost.

A PI greater than 1 indicates that the project is expected to generate a positive net present value. In contrast, a PI of less than 1 suggests that the investment may not be financially viable.

The PI is useful for comparing the relative profitability of different investment options, as it takes into account both the size of the investment and the potential returns.

Modified Internal Rate of Return (MIRR)

The modified internal rate of return (MIRR) is a variation of the IRR that addresses some of its limitations by considering the cost of capital and the reinvestment rate of cash flows separately.

The MIRR calculates the annualized rate of return at which the present value of a project's cash inflows, discounted at the reinvestment rate, equals the present value of its cash outflows, discounted at the cost of capital.

The MIRR provides a more realistic measure of a project's profitability, accounting for the actual reinvestment opportunities available to the company.

Risk Management in Capital Planning

Risk identification and assessment.

Risk management is a critical aspect of capital planning, as it helps businesses identify and assess potential risks associated with their investments.

This involves analyzing various factors, such as market conditions, economic trends, competitive dynamics, and regulatory developments, to determine the likelihood and potential impact of various risks on the company's financial performance.

Risk assessment should be an ongoing process, as new risks may emerge over time, or existing risks may change in magnitude or probability.

Risk Mitigation Strategies

Once risks have been identified and assessed, businesses should develop strategies to mitigate their potential impact on capital investments. This can involve a range of approaches, such as diversification, hedging , and insurance.

Diversification is spreading investments across a range of projects or asset classes to reduce the portfolio's overall risk exposure. Hedging involves using financial instruments, such as options or futures contracts , to offset potential losses from an investment.

Insurance can be used to transfer certain types of risk to a third party, such as property and casualty insurers or credit risk insurers, in exchange for a premium.

Contingency Planning

Contingency planning is an essential component of risk management. It involves developing alternative plans or strategies to address potential risks that may materialize during a capital investment.

This can include identifying backup suppliers or contractors, establishing alternative financing arrangements, or developing plans to scale back or modify the project if necessary.

Contingency planning helps businesses to be better prepared for unexpected events and to minimize the potential impact of risks on their capital investments.

Capital Planning Best Practices

Involving stakeholders.

One of the best practices in capital planning is involving all relevant stakeholders in the process. This includes the company's management and financial teams and employees, shareholders, customers, and suppliers.

By engaging stakeholders in the planning process, businesses can gain valuable insights, identify potential risks and opportunities, and build a shared understanding of the company's strategic objectives and investment priorities.

Aligning With Overall Business Strategy

Capital planning should be closely aligned with a company's overall business strategy, ensuring investments are directed toward projects supporting the organization's long-term goals and objectives.

To achieve this alignment, businesses should regularly review and update their strategic plans and ensure that capital planning is integral to their strategic decision-making process.

Regularly Reviewing and Updating the Plan

Capital planning is an ongoing process that requires regular review and updating to reflect changes in the company's financial position, market conditions, and strategic priorities.

By periodically revisiting their capital plan, businesses can ensure that their investment decisions remain aligned with their objectives, respond to new opportunities or risks, and adapt to changing circumstances.

Ensuring Transparency and Accountability

Transparency and accountability are essential for effective capital planning, as they help build trust among stakeholders and ensure that investment decisions are made in the company's best interests.

Businesses should establish clear processes for evaluating and prioritizing capital projects, involve stakeholders in decision-making, and regularly report on the progress and outcomes of their investments.

Capital planning is an essential process that drives a company's long-term growth and financial success.

It involves identifying capital needs by assessing current assets and forecasting future growth, evaluating potential investments using capital budgeting techniques like NPV and IRR, and prioritizing projects based on expected returns , risks, and resource availability.

Effective capital planning also incorporates risk management strategies, such as risk identification, mitigation, and contingency planning, to minimize potential investment threats.

Adhering to best practices, such as involving stakeholders, aligning capital planning with overall business strategy, regularly reviewing and updating plans, and ensuring transparency and accountability, further enhances the effectiveness of capital planning.

By adopting a comprehensive and strategic approach to capital planning, businesses can maximize shareholder value and secure long-term success in a competitive market.

Capital Planning FAQs

What is capital planning.

Capital planning is the process of determining how an organization will allocate and invest its financial resources to fund long-term projects, acquisitions, or expansions.

Why is capital planning important?

Capital planning is essential because it helps organizations prioritize and make informed decisions about allocating funds to projects that will generate the most significant returns or strategic advantages.

How does capital planning support financial stability?

Capital planning helps organizations maintain financial stability by ensuring that sufficient funds are available for strategic investments, managing debt and equity ratios, and minimizing the risk of financial distress.

What role does risk assessment play in capital planning?

Risk assessment is a crucial component of capital planning as it helps identify potential risks associated with investment projects. By evaluating risks, organizations can make informed decisions, develop mitigation strategies, and allocate resources more effectively.

How often should capital planning be reviewed and updated?

Capital planning should be reviewed and updated regularly to account for changes in market conditions, business priorities, and financial goals. Typically, organizations conduct annual or periodic reviews to ensure the relevance and accuracy of their capital plans.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Starting a Business | How To

How to Write a Business Plan in 7 Steps

Published February 2, 2024

Published Feb 2, 2024

WRITTEN BY: Mary King

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This article is part of a larger series on Starting a Business .

Starting A Business?

Step 1: Gather Your Information

Step 2: outline your business plan, step 3: write each section, step 4: organize your appendix, step 5: add final details, step 6: add a table of contents, step 7: get feedback, bottom line.

A solid business plan helps you forecast your future business and is a critical tool for raising money or attracting key employees or business partners. A business plan is also an opportunity to show why and how your business will become a success. Learning how to write a business plan successfully requires planning ahead and conducting financial and market research.

How to write a business plan step-by-step:

• Gather your information
• Outline your business plan
• Write each section
• Organize your appendix
• Add final details
• Add a table of contents
• Get feedback.

Your first step is to get organized by gathering all your relevant business information. This will save you time completing the various sections of your business plan. At a minimum, you’ll want to have the following handy:

• Business name, contact information, and address
• Owner(s) names, contact information, and addresses
• Names, contact information, and addresses of any business partners (if you will be working with partners)
• Resume and relevant work history for yourself and any key partners or employees
• Any significant sales, commerce, traffic, and financial data and forecasts
• Customer data (if applicable)
• Any significant data about your nearest competitors’ commerce, traffic, or finances

Now it’s time to outline your business plan, making note of the sections you need to include and what data you want to include in each section. You can create an outline on your own or use a business plan template to help. Whichever route you choose, it is common to include these sections in your business plan outline:

• Introduction
• Executive summary
• Company overview
• Products and services
• Market and industry analysis
• Marketing strategy
• Sales strategy
• Management and organization
• Financial data, analysis, and forecasts

Connect the data you gathered in step one to specific sections of your outline. Make a note if you need to convert some information into charts or images to make them more compelling for potential investors. For example, you’ll want to include relevant work history in your management section and convert your sales forecasts into charts for your financial data section.

Now it’s time to write your business plan. Attack this one section at a time, adding the relevant data as you go.

Executive Summary

The executive summary is an overview of the business plan and should ideally be one, but no more than two, pages in length. Some investors actually only request the executive summary. So make it an informative, persuasive, and concise version of your business plan.

It can be easier to write the executive summary last, after the other sections. Then you can more clearly understand which sections of your business plan are the most important to highlight in the executive summary.

When learning how to write an executive summary for a business plan, remember to include the following:

• Business objectives : Your business objectives are specific and attainable goals for your business. Create at least four business objectives organized by bullet point. If you’re not sure how to phrase your objectives, read our SMART goals examples to understand how to do so.
• Mission statement: The mission statement discusses the aim, purpose, and values of your business. It’s typically a short statement from one sentence to several sentences in length. You may find that your mission statement evolves as your business grows. Learn more on how to write your mission statement in our guide.

Consider also including the following in your executive summary:

• Business description : Similar to a 30-second pitch, describing your business and what makes it unique
• Products and services : The type of products and services you’re providing and their costs
• Competitors : Your biggest competitors and why your business will succeed despite them
• Management and organization : The owners’ backgrounds and how they will help the business succeed; management structure within the business
• Business location (or facility) : Location benefits and the surrounding area
• Target market and ideal customer : Who your ideal customers are and why they’re going to purchase your products or services
• Financial data and projections : Provide brief financial data and projections relevant to your business, such as startup costs, at what month the business will be profitable, and forecasted sales data
• Financing needed : Explanation of the startup funding sources and the amount of financing being requested

The bullets above can be combined into several paragraphs. You can add or remove sections based on your business’ needs. For example, if you don’t have a physical location, you might remove that piece of information. Or, if a web presence is crucial to your success, include two to three sentences about your online strategy .

Company Overview

The company overview (sometimes also called a “business overview”) section highlights your company successes (if you’re already in business) or why it will be successful (if you’re a startup). In the opening paragraph or paragraphs, provide information like location, owners, hours of operation, products, and services.

How you structure this section depends on whether you’re a startup or an established business. A startup will discuss the general expenses and steps needed to open the business, such as permits, build-outs, rent, and marketing. An established business will briefly discuss the company’s financial performance over the past three years.

If you’re trying to raise capital from an investor or bank, include a chart listing the items your business will acquire with the capital. For example, if you’re purchasing equipment with the additional funding, list each piece of equipment and the associated cost. At the bottom of the chart, show the total of all expenses, which should be the requested amount of funding.

This startup cost table for a pizza restaurant separates startup expenses from startup assets.

Your company overview should cover the following:

• Location & Facilities : If you have a brick-and-mortar location or a facility, like a warehouse, describe it here. Detail the benefits of your location and the surrounding areas. Write about square footage, leases or ownership, the surrounding area, and a brief description of the population.
• Ownership : Briefly mention the company ownership team and their backgrounds. Show why these owners are likely to be successful in operating this business by providing certain details, such as each owner’s industry experience, previous employers, education, and awards. This will be discussed more in-depth in the management and organization section below.
• Competitive advantage : Ideally, your competitive advantage is what your business can do that your competitors cannot. It’s the one big differentiator that will make your company successful. Many investors are looking for specific competitive advantages, such as patents, proprietary tech, data, and industry relationships. If you don’t have these, describe the top aspect in which your business will do better than competitors, such as quality of products, quality of services, relationships with vendors, or marketing strategy.

Products & Services

The products and services section is the most flexible section because its structure depends on what your business sells. Regardless of what you’re selling, include a description of your business model to explain how your business makes money. Also include future products or services your business could provide one, two, or five years down the road.

List and describe all physical and digital products you plan to sell, as well as any services the business provides. Services don’t necessarily have to be sold for a cost—your business might offer entertainment, like live music or bar games as a free service.

Whether you’re selling products, services, or both, it’s important to discuss fulfillment, or how each will be delivered. If you make or sell physical products, describe how products will be sold, assembled, packed, and shipped. If your business is service-based, describe how a service, such as a window installation, will be ordered and completed. Where will the glass be purchased from and acquired, how will customers place orders, and how will the window be installed?

Market & Industry Analysis

The market and industry analysis section is where you analyze potential customers and the forces that influence your industry. This section is where you make the case as to why your business should succeed, ideally backed by data. You’ll want to do a deep dive into your competitors and discuss their challenges and successes. Learn more about sales targeting to improve how you approach your sales strategy.

Market Segmentation

Market segmentation, or your target market, consists of the customers who are most likely to purchase your products or services. Describe these groups of customers based on demographics, including attributes like age, income, location, and buying habits. Additionally, if you’ll be operating with a business-to-business (B2B) model, use characteristics to describe the ideal businesses to which you’ll sell.

Once your target market is segmented into groups, use market research data to show that those customers are physically located near your business (or are likely to do business with you if you’re online). If you’re opening a daycare, for example, you’ll want to show the data on how many families are in a certain mile radius around your business. You can obtain this kind of data from a free resource, like the U.S. Census and ReferenceUSA .

Once you have at least three segments, briefly outline the strategy you’ll use to reach them. Most likely it will be a combination of marketing, pricing, networking, and sales.

Learn the best approach to product pricing in our guide.

Industry Analysis

Take a look at your business’s industry and explain why it’s a great idea to start a business in that niche. If you’re in a growing industry, a bank is more likely to lend your business capital because it’s predicted to be in demand and have additional customers. Learn about how to find a niche market .

Find industry statistics from a free tool, like the Bureau of Labor Statistics , or a paid tool like the Hoovers Industry Research , which provides professionally curated reports for over 1,000 industries.

Competitor Research

Wrap up the market and industry analysis section by analyzing at least five competitors within a five-mile radius (expand the radius, if needed). Create a table with the five competitors and mention their distance from your business (if applicable), along with their challenges, and successes.

During your analysis, you’ll want to frame their challenges as something you can improve upon. Persuade your reader that your business will provide superior products and services than the competitors.

Marketing Strategy & Implementation Summary

In the opening paragraphs of your marketing strategy and implementation summary, give an overview of the subsections below.

Include any industry trends you may take advantage of. If applicable, include the advertising strategy and budget, stating specific channels. Mention who in the business will be responsible for overseeing the marketing.

Include any platforms and tools the business will use, like your website, social media, email marketing, and video. If you’re hiring a company to do any online work, like creating a website or managing social media, briefly describe them and the overall cost (you can elaborate more on costs in the financial data section ).

Don’t forget to include a subsection for your traditional marketing plan. Traditional marketing encompasses anything not online, such as business cards, flyers, local media, direct mail, magazine advertising, and signage.

Sales Strategy

If sales is an important component of your business, include a section about your sales strategy. Describe the role of the salesperson (or persons), strategies they’ll use to close the deal with clients, lead follow-up procedures, and networking they’ll attend. Also, list any training your sales staff will attend.

Sales Forecast Table

A sales forecast table gives a high-level summary of where you expect your sales and expenses to occur for each of the next three years in business. In the paragraph before the table, state where you expect growth to come from and include a growth percentage rate. The annual sales forecast chart will be broken down further in the financial projections section below.

The annual sales forecast for this restaurant summarizes sales, cost, and profit for the first three years in business.

Pricing Strategy

In the pricing strategy section, discuss product/service pricing, competitor pricing, sales promotions , and discounts—basically anything related to the pricing of what you sell. You should discuss pricing in relation to product and service quality as well. Consider including an overview of pricing for specific products, e.g., pizza price discounts when ordering a specific number of pizzas for catering.

Milestones in a business plan are typically displayed in a table. They outline important tasks to do before the business opens (or expands, if already in business). For each milestone, include the name, estimated start and completion date, cost, person responsible, and department responsible (or outside company responsible). List at least seven milestones.

Milestones for this commercial photography business include hiring staff and completing marketing campaigns.

Management & Organization Summary

The management and organization summary is an in-depth look at the ownership background and key personnel. This is an important section because many investors say they don’t invest in companies, they invest in people. In this section, make the case why you and your team have the experience and knowledge to make this business a success.

Ownership Background

Discuss the owners’ backgrounds and place an emphasis on why that background will ensure the business succeeds. If you don’t have experience managing a retail business, consider finding a co-owner who does. Typically, banks won’t lend to someone who doesn’t have experience in the type of business they’re trying to open.

Management Team Gaps

If there are any experience or knowledge gaps within the management team, state them. List the consultants or employees you will hire to cover the gaps. Investors who know your industry well may recognize gaps within your business plan, and it’s important to state the gaps without waiting for the investor to bring it up. This makes it appear that you know the industry well.

Personnel Plan

The personnel plan outlines every position within your business for at least the next three years. In the opening paragraph, discuss the roles within the company and who will report to whom. Include a table with at least three years of salary projections for each employee in your business. Include a total salary figure at the bottom. This table may be broken down further into salaries for each month in the financial projections or appendix.

This commercial photography business has the CEO at the same salary every year, with their employees’ salaries increasing year over year.

Financial Data & Analysis

The financial data and analysis section is the most difficult part of a business plan. This section requires you to forecast income and expenses for the next three years. You’ll need a working knowledge of common financial statements, like the profit and loss statement, balance sheet, and cash flow statement.

In the opening paragraphs of the financial data and analysis section, give an overview of the sections below. Discuss the break-even point and the projected profit at the first, second, and third year in business. State the assets and liabilities from the projected balance sheet as well.

If you’re getting a loan from a bank, say how long and from what source the loan will be repaid. One of the main pieces of information bankers want to ascertain from financial forecasting is if they will be paid back and how likely that is to happen.

You might also include the following financial reports:

• Break-even analysis : Break-even is when your business starts to make money. Break-even analysis is where you illustrate the point at which your revenue exceeds expenses and a profit occurs. In this section’s opening paragraph, state your monthly fixed costs and average percent variable costs (cost that changes with output, like labor or cost of goods). In the example below, variable costs increase 8% for every additional dollar made.

The break-even point for this document shredding business is $31,500 in a month.

• Projected profit & loss: The profit and loss table is a month-by-month breakdown of income and expenses (including startup expenses). Typically, you should expect your business to show a profit within the first year of operating and increase in years two and three. Be sure to show income and expenses month-by-month for the first two years in operation. Create a separate chart that shows income and expenses year-by-year for the first three years.
• Projected cash flow : The cash flow section shows your business’s monthly incoming and outgoing cash. It should cover the first two years in business. Mention what you plan to do with excess cash. See how to run a statement cash flow in QuickBooks Online .
• Projected balance sheet: The balance sheet shows the net worth of the business and the financial position of the company on a specific date. It focuses on the assets and liabilities of the business. Ideally, the balance sheet should show that the net worth of your business increases. Prepare a projected year-by-year balance sheet for the first three years.
• Business ratios: Also called financial ratios, these are a way to evaluate business performance. It’s helpful to compare your projected business ratios to the industry standard. Project your business ratios by year for the first three years.

The appendix is where you put information about the business that doesn’t fit in the above categories. What you put here largely depends on the type of business you’re creating. It’s a good idea to put any visual components in the appendix. A restaurant might add an image of the menu and an artist rendering of the interior and exterior, for example.

Consider including the following items in your business plan appendix:

• Artist mock-up of interior
• Building permits
• Equipment documentation
• Incorporation documents
• Leases and agreements
• Letters of recommendation
• Licenses and permits
• Marketing materials
• Media coverage
• Supplier agreements

An appendix isn’t required in a business plan, but it’s highly recommended for additional persuasion. Documents like media coverage, agreements, and equipment documentation show the investor and banker you’re serious about the business. If your appendix is more than 10 pages, consider creating a second table of contents just for the appendix.

Detailed Financial Projections

Put the more detailed projections in the appendix. The financial projections in the previous section is typically a year-by-year breakdown for three years in the future. But many bankers and investors want to see the first two years broken down month-by-month for at least the profit and loss statement, balance sheet, cash flow, and personnel plan.

Typically, you can print out the spreadsheet in smaller font and include it in the appendix. You don’t need to create additional charts for the appendix.

With all of your information organized, now it’s time to add the final details, like cover pages and a nondisclosure agreement (NDA).

• Cover Page: The cover page provides contact information about the business and its owner. The cover page should have the business name and who prepared it, including your name, address, phone number, and email address. Additionally, if the registered company name with the state is different from the business name, you may want to add that as a “company name.”
• Nondisclosure Agreement: An NDA ((also called a confidentiality agreement) is a legal document that safeguards business information. You’d want someone to sign it before reading your business plan if you believe they could use the information to their advantage and your disadvantage, such as to steal your business idea or marketing strategy.

Fit Small Business provides a free non-disclosure agreement.

Once your final details are added, proofread all the sections of your business plan, ensuring that the information is accurate and that all spelling and grammar are correct. If there are any illustrations, projections, or additional information you forgot to include, now is the time to add it.

The final step is adding a table of contents so that bankers and potential investors can easily navigate your business plan. A table of contents lists the sections and subsections of your business plan. All of the headers above (Executive Summary, Business Objectives, Company Overview, Products and Services, and so on) are considered sections of a business plan. You can number the sections for additional organization. For example, 1.0 is the executive summary, 1.1 is the business objectives, and 1.2 is the mission statement.

Editing and formatting can change the pagination of your business plan. So you’ll save yourself work if you finalize the business plan content first, then arrange the table of contents at the end.

Congratulations! You’ve captured your business idea and plan for profitability on paper. Before you send this business plan to loan officers and potential investors, ask friends, family, and other supportive business owners to read it and provide feedback. They may notice typos or other errors that you missed. They may also identify details you can add to make your business plan more persuasive.

Frequently Asked Questions (FAQs) About How to Write a Business Plan

These are the most common questions I hear about writing a business plan.

What needs to be in a business plan?

What you should put in a business plan depends on its purpose and your industry. If you’re seeking funding from a bank or investor, you’re going to need most of the sections above, with a strong focus on your financial projections. If you are using your business plan to attract key employees (like a chef for your restaurant), mock-ups and vendor agreements will be more useful. Think about the information that will help your target reader make a decision about whether to get involved with your business—whether that is a location, a business model, or product idea—and be sure your business plan includes that information.

How do you write a business plan for a startup?

The business plan for a startup is similar to a business plan for an established business. The startup business plan will include startup costs, which will be listed by item and factored into the financial projections. Additionally, since your business hasn’t proven it can be successful yet, you may need additional information about the ownership, business model, market, and industry to convince the reader your business will succeed.

How long does it take to write a business plan?

A simple business plan may only take a couple of hours. However, for the business plan provided with this template, which includes financial projections, it may take over 60 hours to research the income and costs associated with running your business. You also have to format those costs into a chart, because it’s best to showcase the data with easy-to-understand charts.

Is writing a business plan hard?

Creating a business plan for funding from a bank or investor is a detailed process. Unless you have a background in financial statements, the financial projections may be difficult for the average business owner. But you can ask for help; it is common to hire a bookkeeper or accountant to assist you with financial projects to ensure your math is correct. Outside of the projections, most other business plan sections are simple, though you’ll want to give yourself time to make each section persuasive.

Every type of business, whether it’s a side hustle or a multimillion-dollar business, should have a business plan. The industry analysis and market segmentation sections validate your business idea. Researching and forecasting financial projections helps you logically think through income and expenses, which lessens the risk of business failure. Remember to get feedback on your business plan from business employees and associates. If necessary, have them sign an NDA before they review the plan.

About the Author

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Mary King is an expert restaurant and small business contributor at Fit Small Business. With more than a decade of small business experience, Mary has worked with some of the best restaurants in the world, and some of the most forward-thinking hospitality programs in the country. Mary’s firsthand operational experience ranges from independent food trucks to the grand scale of Michelin-starred restaurants, from small trades-based businesses to cutting-edge co-working spaces.

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• Building Your Business

A Guide To Raising Capital for Startups

How To Fund Your Startup

What Are Your Options for Raising Capital?

How to get funded, consider the future, frequently asked questions (faqs).

Tom Werner / Getty Images

Once you decide to start your own business, one of the most important factors is funding your idea. As a founder, fundraising—whether one-time or ongoing—is a key part of the job description. While many entrepreneurs believe they must save up and invest their own capital to make their dream a reality, or what is called bootstrapping their startups, there actually are many ways to raise money for your startup, even though it can sometimes be a lengthy and challenging process.

Most startups rely on a combination of fundraising options and by stages, starting with grants, microloans, angel investors, and ending with venture capital (VC) funding, as a way to seed the startup and allow it to grow at an exponential rate if the business model allows for it.

Before starting your fundraising journey, however, you must lay the groundwork by doing your research, leveraging your network, and thinking realistically about how much cash you will need. In this guide, we will go over assessing your startup costs, different types of cash sources to consider, and how to go about closing the deal.

Key Takeaways

• Before seeking outside capital, you must know your financial projections and capital needs inside and out, even if your product is not yet on the market.
• Don’t just consider what you need to get started—make sure you include what you’ll need to stay afloat when fundraising.
• There are many different avenues that founders use when seeking capital, so make sure to consider the pluses and minuses of each type of funding to assess which is right for your business.
• Craft a solid pitch deck, hone (and re-hone) your pitch, and take advantage of your network to connect with and win over the right investors for your company.

Startup Costs

Regardless of the size of your future company, the first step is to understand how much you’ll need to get off the ground. This exercise is necessary for founders, both as a way to understand the financial realities of their new business and because in order to raise funds, you will need to know how much your business needs on the first day as well as day 100. The quickest way to scare off an investor or a bank loan officer is by not being familiar with your own numbers.

Every business has different startup capital requirements . A brick-and-mortar operation might have licensing, inventory, and insurance burdens that an online startup may not. Most new business owners do not know all the detailed transactions that go into a business, so to calculate approximate startup costs for your company, you need to do research.

Speak to an accountant or bookkeeper in your chosen field, or employ an industry consultant and begin to think critically about everything that goes into running your proposed business.

If you’re at a loss as to how to figure the costs associated with your new business, connect with friendly founders who have done similar things. Finding a mentor or advisor for your business can be just as valuable as finding a source of capital.

Depending on your type of business, necessary costs might include:

• Web and app development
• Product design and prototype development
• Digital marketing
• Subscriptions to software as a service
• Cloud storage such as Amazon Web Services or Dropbox
• Outsourcing manpower and skills
• Licenses and permits
• Office space

Once you understand these costs, you can begin to formulate your initial capital needs and your revenue projections. Build a worksheet and itemize your startup financial burden. Don’t forget to leverage your own skills and experience to keep these costs down. Consider doing the marketing yourself, or lean on a handy friend to help with the build-out of a space.

There are many different ways to fundraise for your new business, but there is no one-size-fits-all approach, even within the same industry. Before beginning your fundraising journey, consider how much equity you’re willing to part with (if any), and how much input you’re willing to hear from outside voices. Regardless of the size of your future business, having a plan can help you understand how you might piece together funding from different sources to meet your goals.

Bank Loans and Lines of Credit

Although it may seem like an obvious choice, traditional bank loans and business lines of credit are very hard to secure for businesses with less than two years of tax records. If they are an option, they often set steep collateral requirements.

The best avenue for debt financing is likely through U.S. Small Business Administration (SBA) microloans, which are loans less than $50,000 given to help businesses get started and expand. They are available through certified intermediaries and likely require some personal collateral or guarantees from the owner.

Alternative lending, which takes place outside of a banking institution, may be better suited to a new small business. Consider the SBA’s Lender Match program, or check your state’s division of small business for lists of lending alternatives.

Angel Investors or Friends and Family

Without an established business history, one way many founders start their fundraising is with friends and family or angel investors. This type of capital is usually unique to each individual deal, meaning there is more flexibility with deal terms. You may be able to raise debt capital , meaning borrowed money, from one family member and take an investment from another.

Angel investors are non-institutional investors who may be entrepreneurs themselves and often have a passion for helping small businesses and startups. They may agree to offer capital in exchange for debt or equity. Extending your network can help you connect with individuals who are willing to invest, often without interfering too much with your business. Look for local angel groups, where like-minded individuals pool resources to make a more sizable investment as a group.

Crowdfunding

Some startups find success through crowdfunding platforms. With this route, money is raised via the internet through different platforms, often in exchange for a “gift,” depending on the level of investment. The traditional method of crowdfunding allows founders to raise small amounts from a large number of people, with no obligation of repayment or equity disbursement. This type of funding usually requires some basic marketing, as well as a robust network of friends and family in order to succeed.

Recently, the U.S. Securities and Exchange Commission (SEC) approved equity crowdfunding, which allows for companies to sell securities to the public via a registered broker, although there are limits to how much a business can raise and to how much one can invest.

Accelerators and Incubators

Depending on your industry, applying to accelerators or incubators may be a good path to consider. These programs can support early-stage companies with mentorship, operations, marketing, and access to capital. Startups enter one of these programs for a fixed period of time and often work alongside other emerging brands in their industry.

Acceptance is often very competitive and may require founders to travel to partake in educational programming. Many are focused on growth-driven startups, so it’s worth considering whether your business is the right fit.

Venture Capital

Venture capital funding often is used to take a startup to the next stage once the idea has been commercialized. Venture funds are intended to be a short-term cash infusion to enhance a startup's growth. These funds are useful when a business has a viable idea but may not have many hard assets that a bank can use as collateral for a loan.

Because venture capitalists are investing in a balance sheet with the expectation of a profitable exit in the not-too-distant future, they often take a large equity stake and can be very involved in the operations of the business. VCs are usually industry-specific, and they usually invest in industries where they see massive potential for growth.

Family Offices

Family offices are entities established by wealthy families to manage their assets and provide tax and estate planning services to family members. They often participate in mission-driven investment and fall somewhere between a VC and an angel investor. Investments from family offices have variable deal structures, but their involvement in a business is often more similar to an angel investor than to a VC.

Many founders believe that grant money will be an easy source of capital, but the reality is that they are very hard to access. Most grant money has stringent requirements for distribution. The best chance at winning grant money is by seeking out highly localized opportunities rather than through the national SBA, but do thorough research on this option before building it into your plan.

Once you’ve identified the capital sources you’ll be targeting for your startup, the next step is to set yourself up for success. Whether you’re seeking a microloan, $10,000 from a friend, or a large investment from a VC, preparation is key to securing funding.

Know Your Financials

A founder must know their financials inside and out. In addition to startup costs, you should have a pro forma with at least three years of projections, a balance sheet, and a cash-flow statement .

You should also know how to discuss your projected earnings before interest, tax, and amortization, known as EBITA; cost of goods sold (CoGs), gross profit, and gross margin. Friends and family may not need as much financial detail, but banks, VCs, and some angel investors will want to fully understand the financials of their potential investment.

Hone Your Pitch

Having a strong and persuasive pitch is important regardless of which funding route you pursue. A good place to start is with a solid pitch deck, which should clearly explain your idea, your background, your potential market share, and in some cases, your exit strategy. Look for open-source templates , and remember to keep things straightforward and data-driven.

From your deck, craft and practice your two- to 10-minute pitch about why your idea has value in the market. Although loan officers and family may not want to see your pitch deck, they will certainly want to be “sold” on why they should trust you with their funds.

Activate Your Network

The best way to get funded is by using your network of friends and family. Not only will they be your first stop for early investment, loans, or crowdfunding, they also may have someone in their extended circle who could be useful. Most early-stage money is gathered via a “warm introduction,” especially when it comes to venture capital, so always look for ways to make a connection. Instead of outright asking for money or connections, asking for advice and feedback on your pitch is often a good way to start.

Following Up

Regardless of the outcome of your pitch, you’ll want to follow up. Don’t be afraid to reach out, ask for feedback, and stay in contact with everyone on your list. Plan to follow up with contacts three times; even if you don’t receive funding, it’s always good to keep potential investors in the loop on how your business is growing.

Beyond the basics of starting up, however, you need to keep your new business going. In addition to raising what you need on the first day, don’t forget to factor in what you’ll spend on a monthly basis.

Use your financial projections to assess how long it will take before your revenue can sustain your business and build any gaps into your capital search. A good rule of thumb is to seek six months of operating expenses.

Beyond that, consider how you see your business growing 12 to 18 months in the future. If you’re able to gain traction with investors or lenders, try to build those goals into your initial raise so that you have a longer time before needing to seek capital again.

Depending on your track record, some fundraising avenues, such as venture capital, might be better suited for later, when your business has established success and gained market share. You’ll have more leverage and may be able to negotiate more favorable deals at that point.

What kind of business is best suited for raising capital?

Businesses of all sizes raise capital at different stages. Startup capital is perfect for early- or idea-stage businesses. You may not need capital if your business can be sustained on revenue alone.

What is the difference between equity and convertible debt?

An investor may require a percentage of your company or equity, in exchange for funding. Another format often employed by angel investors is for the funds to act as a “loan” for a set time period, after which they convert that amount to equity shares in the company.

Within a business, who is primarily responsible for raising capital?

Generally, the founder or CEO is responsible for raising capital for the new business. As a business grows, other C-suite employees will likely join the fundraising team.

U.S. Small Business Administration. " Calculate Your Startup Costs ."

Michigan.gov. " Guide to Starting a Small Business ." Page 10.

U.S. Small Business Administration. " Loans ."

U.S. Securities and Exchange Commission. " Updated Investor Bulletin: Crowdfunding for Investors ."

State University of New York. " Grants & Small Business Financing ."

How to Plan Your Business’s Working Capital Requirements

Managing working capital is the biggest challenge faced by businesses while running their operations. Many business owners feel that acquiring clients or increasing revenue can only help their business flourish. While it is partly true, what is equally important for a business to grow is how well it manages and strikes a balance between cash inflows and outflows. 

The level of existing working capital available to a business is measured by comparing its current assets against current liabilities. It tells the business the short-term liquid assets remaining after paying short-term liabilities. 

Working capital requirements might differ from business to business, but it is an important metric to assess the long-term financial health of a business. Effective working capital management also ensures that a business always maintains sufficient cash to meet its short-term commitments.

When working capital requirements are not managed efficiently, the business can suffer from cash flow problems, in turn, affecting its ability to expand, improve processes or even operate its operations. Therefore, a business owner needs to know how to plan his or her business’s working capital requirements effectively. 

In this article, we will show you 6 steps that a business should follow to build a solid working capital plan. Meanwhile, if you’re interested in acquiring working capital for your businesses, click below: 

Assess future fund requirements 

An effective working capital plan should begin by evaluating the short-term funding needs of a business. These short-term funding needs include meeting payroll expenses, paying vendors, paying rent and taxes to the government. 

The due date of cash outflows may not correspond to cash inflows, so a business owner must assess future fund requirements in order to meet various financial obligations.

An organisation might have long-term fund requirements too like acquiring new land or building or upgrading manufacturing machines. A business should aim to secure requisite long-term funding before executing a large capital investment plan. 

Compute the working capital you will need 

Every business should determine whether its current working capital is adequate under various growth scenarios. 

To establish a reasonable expectation of growth opportunities available, the business has to consider the economy, its industry and competitions. For instance, how will the balance sheet get affected if current liabilities grew by 10%? Will the business still be able to pay salaries or rent on time? 

Also, the business can perform a shock analysis by running the growth numbers above or below the expected rates. This will help the stakeholders to make a sound contingency plan for their business.

Suggested Read: 6 Tips to Rebuild Your Small Business after COVID-19   

Evaluate your access to working capital and the alternatives

Businesses should review their current access to various funding sources, such as a line of credit , WC loan, account receivables, inventory, investment accounts and cash-in-hand. A business needs to ensure that these sources are sufficient to meet its strategic goals.  

Many medium and large business enterprises consider holding cash and investments with at least two separate institutions. This diversification helps businesses protect themselves from losing access to credit during uncertain times. 

Review your accounts receivables and payable processes

A business can employ several strategies and processes to maximise its working capital. 

On the receivables side, a business can offer direct debit to customers, so the payments arrive on the scheduled date. This approach is used by the companies providing services that call for periodic scheduled payments like a utility service provider. Also, accepting credit card payments can help businesses improve their cash inflow. 

While on the payable side, businesses can use controlled disbursement accounts to know every morning which issued cheques will hit its bank account that day. This will help the business maintain sufficient cash balance and maximise its working capital at the same time.

Don’t eat up cash, use borrowings or credit facilities

It is advisable for businesses to not use up the cash as they grow since a positive cash flow position improves the business’s access to capital and reduces its cost of capital as well. So, when the economy improves, and investments generate positive returns, the business will likely have access to credit at lower interest rates. 

Test and update the plan regularly

Ideally, a business should update its working capital plan annually, supplemented with a quarterly or monthly financial position review to see if adjustments are needed. 

For instance, if a business has downsized or has been merged with or taken over by another entity, its working capital requirements change drastically. This happens due to the changes in the level of current assets and current liabilities. 

Therefore, a business should regularly access the state of the economy to test their access to credit facilities and improvise its plan accordingly. 

Given the pandemic situation, many small and medium businesses are facing a lack of cash flow and are unable to manage their working capital requirements effectively.  They are willing to take a working capital loan or open up a line of credit with banks or other sources. But, challenges in raising funds from formal sources have increased in this new-normal situation.   

To disrupt the lending segment in India and provide capital to small businesses, Razorpay has built a product called Working Capital Loans . 

Now businesses can get collateral-free working capital loans within 24 hours. The loans can be rapid in daily, weekly or monthly instalments as per the borrower’s convenience. 

Just click on the ‘Loans’ tab to apply through our Razorpay dashboard, upload a few documents and receive a loan offer within 3 working days followed by a quick disbursal within a day. It’s that simple!

To summarise, while it is tough to predict the future, businesses must prepare their working capital plans and ensure access to capital when the economy bounces back to growth. 

Also read: Razorpay Disrupts Working Capital Loan Processes for MSMEs

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Raising Capital: The Best Ways to Raise Money for a Business

• 11 min read

Jaclyn Robinson, Senior Manager of Content Marketing at Crunchbase

Capital is the lifeblood of business. Without capital, you cannot continue to fund your daily operations. Raising money for a business is just the first step to get it off the ground. Beyond that, you’ll need to raise funds to keep it moving.

According to the U.S. Bureau of Labor Statistics , lack of capital is one of the leading reasons businesses fail to survive, with just 25 percent of businesses lasting past 15 years.

Raising capital for your new venture is the initial order of business, so let’s dive into what it means and how to do it.

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What is capital?

Capital is technically anything that can be quantified with a dollar figure within a business setup. A factory’s machinery counts as capital. Intellectual property could also be classified as a type of capital.

However, most people use the capital for business in terms of the money they have in the bank. Financial capital is often the difference between success and failure, so let’s talk about how to go about raising funds.

Types of capital for business

Raising capital begins with understanding your options for injecting that vital liquidity into your business.

Capital raising can come from a variety of sources. The right option for your company largely depends on your current circumstances and weighing the pros and cons of each option. Here are a few different types of capital.

Debt capital

Debt capital is the most common way startups get the money together to launch their businesses. The concept of debt capital is that you borrow money to raise the necessary funds.

Traditional bank loans, credit cards, online lenders and Federal loan programs are just some of the ways you can start raising capital via debt.

The average small business needs $10,000 to get started, but it depends on your industry and how ambitious you happen to be. Existing businesses will need to ensure they have a positive credit history to secure loans. In contrast, new business owners may use their personal credit scores to secure a loan.

The way debt capital is used depends on the size of the business. Although a small business may use debt capital by taking out a loan, corporations often choose to issue bonds, especially if national interest rates are low.

If looking at capital for business by taking out debt, watch your debt-to-income ratio to ensure you aren’t drowning in debt.

• It doesn’t dilute your ownership
• No lender claims on future profits
• Interest is tax-deductible
• Potentially higher interest rates
• May make it difficult to secure third-party equity investment

Equity capital

Equity capital comes in two forms: private and public equity capital.

Private and public equity capital comes in the form of shares in the company. The distinction is that a publicly traded company can be bought on the open market by anyone, whereas private equity is strictly traded among a closed group of investors.

When someone purchases a share in your company, they’re providing capital in the form of ownership. How much each share is worth depends on how many total shares you’ve got.

For example, if you have 100 shares and sell one share, each share is worth 1 percent of your company. Stock splits also allow you to create more shares to sell while diluting everyone’s ownership in the company.

It’s how small and growing companies can make a big splash.

• No repayment requirements
• Bring in partners with expertise and talent
• You no longer own 100 percent of your company
• Time and effort required to secure equity investors

Net earnings capital

The final way to raise the funds is by increasing your net earnings. In other words, rather than giving away part of your company or taking on debt, you’re working to improve your output and profitability.

Net earnings capital is harder to come by because it’s typically powered by raising money in other ways to up your capacity and increase your reach.

However, if you’ve already got money from investors and are looking to expand even further, net earnings capital is a great way to drive your business forward.

• No lost ownership
• Powered by genuine company growth
• Difficult to come by
• Higher taxes

How to raise money for a business

How do you go about raising capital if you are going into business for yourself? A complete understanding of capital raising is crucial to getting the funding needed to launch your new venture.

Determine your capital need

Before you can determine capital need, you’ll need to develop a long-term business plan and your company’s strategic goals. If you’re already operating, you have a leg up in understanding what it costs to run your business. If you’re just starting out, some of the expenses you need to take into account include:

• Office space
• Hiring new employees
• Purchasing technology/other hardware and software tools
• Marketing budget

You must strike a balance between having enough capital and not taking out too much capital. A lack of capital could indicate a broader weakness in your plan and the wider market. On the other hand, too much capital and you may find yourself giving away more equity than you intended or facing high monthly debt repayments.

Choose a funding type

You’ll almost certainly be choosing between equity capital and debt capital. When approaching venture capitalists, you will most likely need to give away a portion of the company, as well as a degree of control over business decisions.

With non-institutional investors, you’ll be taking on debt. Match up the potential debt repayments with your projected monthly revenue.

What works for one business may not work for another, so make sure you carefully think through your funding type.

Business valuation

The fundraising process begins with determining a rough value for the company. The entrepreneur needs to estimate how much their company is worth based on its potential. Equally, your assumptions need to be rational.

When seeking private equity or venture capital fundraising, you’ll need a pre-money and post-money valuation of the business. These estimates will determine how much of your company you’ll be giving away to investors.

Your post-money business valuation is the pre-money valuation plus any new money. Investors will ask probing questions regarding how you came to your pre-money valuation, so make sure you can show your rationale.

Connect with investors

It’s time to begin pitching your idea to investors. Keep this as condensed as possible because the more time you spend meeting with investors, the less time you have to manage the day-to-day operations of your business.

The easiest way to seek out investors is to leverage your professional network. Getting introductions in this way can be a launchpad for connecting with other interested parties.

The investor will present you with a term sheet if you receive an offer. This short document covers the primary points of the deal, such as how much is being invested, the amount of equity given in return, and any other high-level conditions.

You’ll have the opportunity to negotiate, but negotiation becomes significantly harder the moment you sign the term sheet.

Following funding rounds

Most successful companies don’t have just a single round of funding. A single round of funding may just be the jumping-off point for approaching more prominent investors.

Before embarking on your subsequent funding rounds, your pre-money value should be higher than the post-money value of the last round of funding. Why does this matter? New investors want to see that you’ve put your capital to good use and that this is a growing business.

Throughout each round of funding, you should be looking to fund anywhere from 12 to 18 months of operations before moving on to the next round.

Later rounds are traditionally more challenging to secure funding because investors who buy-in at later stages want to see proven business growth and momentum.

What’s the key to securing investment?

What investors want is simple: a positive (ideally outsized) return on their investment. Some may expect this return quickly, while others may be willing to stick it out for long-term growth.

Focus on the hard numbers and demonstrate that you’ve carried out meticulous research into your target market and the competition. Give accurate projections without exaggerating for effect. Experienced investors are well aware of business valuations, and being too ambitious could curtail your chance to raise money.

Condense your pitch and focus on the hard numbers that demonstrate to investors that they’re highly likely to see a positive return on their money.

9 things to know about raising capital

Figuring out how to raise funds can be intimidating the first time. There’s an art and a science to successful fundraising and a little bit of luck.

Follow these tips to increase your chances of securing the funding your new venture requires.

1. Get your material ready for investors

Focus not on what appeals to you but on what appeals to investors. All venture capitalists have a way they like to see businesses presented. Generally, your documentation should be well-structured and in an easy-to-read format.

Never tell an investor to visit your website to check you out. Investors are busy people and don’t have time to look you up themselves.

Give them everything they need right in front of them during your initial round of fundraising.

2. Create a strong business plan

The most important part of your pitch is your business plan. It should be a complete roadmap to success and a blueprint for how your organization will make money.

Investors don’t just want to see the financial figures. They want to know how you intend on operating your business, your marketing studies, as well as risk management, investment offering, and even an exit strategy.

Think like a chess player. Show that you’ve thought four moves ahead and planned for every eventuality.

3. Be clear on your competitive edge

What makes your business special?

No equity investor is interested in investing in one of a thousand other businesses. They’re searching for the movers and shakers that are about to change the game. If you’re just starting an accountancy business, no venture capitalist will show any interest because it’s nothing special.

Equity capital is different because investors want a piece of the next big revolution within your industry.

4. Concentrate on investors with niche experience

Some investors will indeed have fingers in many industry pies, but investors often come with more than money. Experienced business owners provide expertise to younger entrepreneurs. Talent and expertise come with the package because you’re not just getting capital. You’re getting a new owner.

Look for investors with experience within your niche. If you’re also providing them with influence over business decisions, you need the confidence that they know what they’re doing.

You should be looking to bring on investors only in a nonexecutive role if they don’t.

5. Talk about your management team

Remember, investors don’t know who you are. They don’t know if you’re a great entrepreneur in the making or a kid with an inheritance from mommy and daddy. You need to show that you’ve got the chops to make it.

Venture capitalists pay massive attention to the management team running the company. They want to know about their experience and personalities. There’s a reason many investors admit they give money to the entrepreneur rather than the business idea itself.

Don’t underestimate the value of your human capital because even the best business idea in the world won’t get far if the management team doesn’t meet the appropriate standard.

6. Know what the investor brings to the table

Inexperienced entrepreneurs tend to make the mistake of assuming that an investor is just someone who’s going to give them money. Investors form a valuable part of where your business can go.

Some investors can help you scale by having connections in emerging markets. If you’re looking to expand your business into Europe, India or China in the future, it makes sense to look for an investor with these types of connections. Investors may also sit on your board, playing a huge part in critical business decisions and the direction of your company, so ensure you’re aligned with the investor’s long-term vision for your company.

As already mentioned, an investor with technical expertise in your industry can also be helpful. Not every investor is hands-off, so make sure you question what they can bring to your emerging company.

7. Get your valuation independently certified

Where does one start when it comes to certifying a business? Unless you’ve had specific training or experience, the chances are you don’t know how to value your business.

Some entrepreneurs will pluck a figure out of thin air and run with it using a convoluted explanation. That’s not good enough for raising capital. Any investor with a degree of experience will see right through it.

Show your professionalism and credibility by enlisting the help of a professional valuator who can comb through your business plan and provide a realistic valuation.

Do this as early as possible so you know how much capital to ask for and which investors to approach.

8. Pitch with two essential documents

There are two critical documents you need when securing funding for your company. They are:

• Investor Pitch Deck : These presentations are roughly 10 pages/slides in length. It’s your first impression, so make it count. Investors scan through your pitch deck and decide whether they want to look at your formal business plan.
• Business Plan : If an investor wants to see your business plan, they’ll ask for it. This document is where you get into the nuts and bolts of your company.

Maintain a copy of these documents at all times when looking for capital. If investors like what they see in these two documents, they will ask for a formal in-person meeting.

9. Be persistent

Remember that many investors won’t reply to you at all. It doesn’t mean there’s anything wrong with your pitch, venture capitalists are busy people and don’t have the time to reply to everybody.

As long as you’ve meticulously combed through your documentation, you’ll find the right investor match sooner or later. What’s important is patience and maintaining focus on the critical operations of your business.

Debt and equity capital are the two primary ways you’re going to get a significant injection of cash into your business. If you’re strategizing and researching how to find investors for a startup , be sure you can clearly articulate your business plan and support that plan with relevant market research before you reach out to investors.

Crunchbase enables you to conduct market research, find and connect with the right decision-makers all in one platform.

• Originally published February 26, 2022

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What is a business plan?

1. write an executive summary, 2. describe your company, 3. state your business goals, 4. describe your products and services, 5. do your market research, 6. outline your marketing and sales plan, 7. perform a business financial analysis, 8. make financial projections, 9. summarize how your company operates, 10. add any additional information to an appendix, business plan tips and resources.

A business plan outlines your business’s financial goals and explains how you’ll achieve them over the next three to five years. Here’s a step-by-step guide to writing a business plan that will offer a strong, detailed road map for your business.

ZenBusiness

A business plan is a document that explains what your business does, how it makes money and who its customers are. Internally, writing a business plan should help you clarify your vision and organize your operations. Externally, you can share it with potential lenders and investors to show them you’re on the right track.

Business plans are living documents; it’s OK for them to change over time. Startups may update their business plans often as they figure out who their customers are and what products and services fit them best. Mature companies might only revisit their business plan every few years. Regardless of your business’s age, brush up this document before you apply for a business loan .

» Need help writing? Learn about the best business plan software .

This is your elevator pitch. It should include a mission statement, a brief description of the products or services your business offers and a broad summary of your financial growth plans.

Though the executive summary is the first thing your investors will read, it can be easier to write it last. That way, you can highlight information you’ve identified while writing other sections that go into more detail.

» MORE: How to write an executive summary in 6 steps

Next up is your company description. This should contain basic information like:

Your business’s registered name.

Address of your business location .

Names of key people in the business. Make sure to highlight unique skills or technical expertise among members of your team.

Your company description should also define your business structure — such as a sole proprietorship, partnership or corporation — and include the percent ownership that each owner has and the extent of each owner’s involvement in the company.

Lastly, write a little about the history of your company and the nature of your business now. This prepares the reader to learn about your goals in the next section.

» MORE: How to write a company overview for a business plan

The third part of a business plan is an objective statement. This section spells out what you’d like to accomplish, both in the near term and over the coming years.

If you’re looking for a business loan or outside investment, you can use this section to explain how the financing will help your business grow and how you plan to achieve those growth targets. The key is to provide a clear explanation of the opportunity your business presents to the lender.

For example, if your business is launching a second product line, you might explain how the loan will help your company launch that new product and how much you think sales will increase over the next three years as a result.

» MORE: How to write a successful business plan for a loan

In this section, go into detail about the products or services you offer or plan to offer.

You should include the following:

An explanation of how your product or service works.

The pricing model for your product or service.

The typical customers you serve.

Your supply chain and order fulfillment strategy.

You can also discuss current or pending trademarks and patents associated with your product or service.

Lenders and investors will want to know what sets your product apart from your competition. In your market analysis section , explain who your competitors are. Discuss what they do well, and point out what you can do better. If you’re serving a different or underserved market, explain that.

Here, you can address how you plan to persuade customers to buy your products or services, or how you will develop customer loyalty that will lead to repeat business.

Include details about your sales and distribution strategies, including the costs involved in selling each product .

» MORE: R e a d our complete guide to small business marketing

If you’re a startup, you may not have much information on your business financials yet. However, if you’re an existing business, you’ll want to include income or profit-and-loss statements, a balance sheet that lists your assets and debts, and a cash flow statement that shows how cash comes into and goes out of the company.

Accounting software may be able to generate these reports for you. It may also help you calculate metrics such as:

Net profit margin: the percentage of revenue you keep as net income.

Current ratio: the measurement of your liquidity and ability to repay debts.

Accounts receivable turnover ratio: a measurement of how frequently you collect on receivables per year.

This is a great place to include charts and graphs that make it easy for those reading your plan to understand the financial health of your business.

This is a critical part of your business plan if you’re seeking financing or investors. It outlines how your business will generate enough profit to repay the loan or how you will earn a decent return for investors.

Here, you’ll provide your business’s monthly or quarterly sales, expenses and profit estimates over at least a three-year period — with the future numbers assuming you’ve obtained a new loan.

Accuracy is key, so carefully analyze your past financial statements before giving projections. Your goals may be aggressive, but they should also be realistic.

NerdWallet’s picks for setting up your business finances:

The best business checking accounts .

The best business credit cards .

The best accounting software .

Before the end of your business plan, summarize how your business is structured and outline each team’s responsibilities. This will help your readers understand who performs each of the functions you’ve described above — making and selling your products or services — and how much each of those functions cost.

If any of your employees have exceptional skills, you may want to include their resumes to help explain the competitive advantage they give you.

Finally, attach any supporting information or additional materials that you couldn’t fit in elsewhere. That might include:

Licenses and permits.

Equipment leases.

Bank statements.

Details of your personal and business credit history, if you’re seeking financing.

If the appendix is long, you may want to consider adding a table of contents at the beginning of this section.

How much do you need?

with Fundera by NerdWallet

We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

Here are some tips to write a detailed, convincing business plan:

Avoid over-optimism: If you’re applying for a business bank loan or professional investment, someone will be reading your business plan closely. Providing unreasonable sales estimates can hurt your chances of approval.

Proofread: Spelling, punctuation and grammatical errors can jump off the page and turn off lenders and prospective investors. If writing and editing aren't your strong suit, you may want to hire a professional business plan writer, copy editor or proofreader.

Use free resources: SCORE is a nonprofit association that offers a large network of volunteer business mentors and experts who can help you write or edit your business plan. The U.S. Small Business Administration’s Small Business Development Centers , which provide free business consulting and help with business plan development, can also be a resource.

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What Is Capital Investment?

• How It Works

Capital Investments for Business

• Advantages and Disadvantages

Accounting for Capital Investments

The bottom line.

• Investing Basics

Capital Investment: Types, Example, and How It Works

Capital investment is the acquisition of physical assets by a company for use in furthering its long-term business goals and objectives. Real estate, manufacturing plants, and machinery are among the assets that are purchased as capital investments.

The capital used may come from a wide range of sources from traditional bank loans to venture capital deals.

Key Takeaways

• Capital investment is the expenditure of money to fund a company's long-term growth.
• The term often refers to a company's acquisition of permanent fixed assets such as real estate and equipment.
• Capital assets are reported as non-current assets and most are depreciated.
• The funds for capital investment can come from a number of sources, including cash on hand, though big projects are most often financed through obtaining loans or issuing stock.
• Examples of capital investments are land, buildings, machinery, equipment, or software.

Investopedia / Theresa Chiechi

How Capital Investment Works

Capital investment is a broad term that can be defined in two distinct ways:

• An individual, a venture capital group or a financial institution may make a capital investment in a business. The money can be provided as a loan or a share of the profits down the road. In this sense of the word, capital means cash.
• The executives of a company may make a capital investment in the business. They buy long-term assets such as equipment that will help the company run more efficiently or grow faster. In this sense, capital means physical assets.

In either case, the money for capital investment must come from somewhere. A new company might seek capital investment from any number of sources, including venture capital firms, angel investors , or traditional financial institutions. When a new company goes public, it is acquiring capital investment on a large scale from many investors.

An established company might make a capital investment using its own cash reserves or seek a loan from a bank. It might issue bonds or stock shares in order to finance capital investment. There is no minimum or maximum capital investment. It can range from less than $100,000 in seed financing for a start-up to hundreds of millions of dollars for massive projects undertaken by companies in capital-intensive sectors such as mining, utilities, and infrastructure.

Capital investment is meant to benefit a company in the long run, but it nonetheless can have short-term downsides.

A decision by a business to make a capital investment is a long-term growth strategy. A company plans and implements capital investments in order to ensure future growth. Capital investments generally are made to increase operational capacity, capture a larger share of the market, and generate more revenue. The company may make a capital investment in the form of an equity stake in another company's complementary operations for the same purposes.

In many cases, capital investments are a necessary and normal part of an industry. Consider an oil-drilling company that relies on heavy machinery to extract raw materials to be processed. As opposed to a law firm that will have low-to-no capital investment requirements, capital-intensive businesses usually need specific assets in order to operate.

In addition, there are strategic components for a business to consider when deciding whether or not to invest in a capital asset. For instance, consider how certain heavy machinery such as a company vehicle could be leased. Should the company be willing to incur debt and tie up capital, the company may spend less money in the long-term by incurring a capital investment as opposed to a periodic "rental" expense.

Types of Capital Investments

Companies often acquire capital investments for diversification, modernization, or business expansion. This may mean buying capital investments different from existing aspects of its business or capital investments that simply do things better than before. Some specific types of capital investments include:

• Land: Companies may buy bare land to be used for development or expansion.
• Buildings: Companies may buy existing buildings for manufacturing, storage, production, or headquarter operations.
• Assets Under Development: Companies may incur spending over time to assemble assets that may be capitalized. For example, a company can build its own building; the accumulation of charges may be considered a capital investment.
• Furniture and Fixtures: Though furniture and fixtures may be more temporary in nature, certain aspects of accounting rules result in some overlap between FFE and capital investments.
• Machines: Companies that invest in the production elements of making goods are making capital investments.
• Software Development or Computing Devices: Companies more frequently invest capital to build software; these costs now commonly qualify for capitalization and amortization over time.

Because land does not deteriorate in a similar manner compared to other capital investments, it is not depreciated.

Advantages and Disadvantages of Capital Investments

Pros of capital investments.

The advantages of capital investments can vary depending on the specific situation. However, most companies embark on capital investments for productivity.  By investing in new equipment or technology, companies can improve their efficiency, thus lower costs and increasing output. These types of investments may also improve the quality of goods produced.

Capital investments can also lead to cost savings over time. For example, a new piece of equipment may be more energy-efficient than an older model, which can result in lower utility bills. Similarly, new technology may streamline processes and reduce the need for manual labor. Last, companies may decide the long-term discounted cash flow is favorable when comparing the upfront investment of a capital investment compared to the long-term, ongoing cash outlay of a recurring expense.

By investing in their long-term assets, companies can also gain a competitive advantage in the market. This can make it more difficult for competitors to catch up and can help the company to maintain its market position over the long term. If a company is willing to take a risk and incur a large investment to strengthen its business, this may create a barrier to entry that competitors can not overcome or compete against.

Cons of Capital Investment

The preferred option for capital investment is always a company's own operating cash flow, but that may not be sufficient to cover the anticipated costs. It is more likely the company will resort to outside financing. Therefore, there is usually a little more risk to capital investments. This is especially true for capital investments that are customized or hard to liquidate; once the company has bought the capital investment, it may be hard to exit the investment.

Capital investment is meant to benefit a company in the long run, but it nonetheless can have short-term downsides. Capital investments tends to reduce earnings growth in the short term, and that never pleases stockholders of a public company. This may be especially true for capital investments that also incur operating costs (i.e. the acquisition of land will be accompanied by a potentially hefty annual property tax assessment).

In addition, if a company does not have sufficient capital on hand to make a large investment, there are downsides to each of its financing options. Issuing additional stock shares, which is often the funding option for public companies, dilutes the value of its outstanding shares. Existing shareholders generally dislike finding that their stake in the company has been reduced. Alternatively, the total amount of debt a company has on the books is closely watched by stockholders and analysts . The payments on that debt can stifle the company's further growth.

May increase productivity if capital investment is more efficient than prior methods

May result in higher quality manufactured goods

May be cheaper in the long-run when compared against rented or monthly expensed solutions

May create a barrier to entry that yields a competitive advantage

May be too expensive for the company to outright purchase on their own.

May limit or restrict short-term profitability of the company

May be accompanied by additional operating expenses

May reduce the liquidity of the company should it be difficult to sell the capital asset

Accounting practices for capital investments involve recording the cost of the asset, allocating the cost over its useful life, and carrying the investment as the difference between cost and accumulated depreciation . The accounting treatment can vary depending on the type of asset, as land is not depreciated but many other capital investments are depreciated.

The cost of the asset should be recorded in the company's accounting records. This can include the purchase price of the asset as well as any additional costs related to the purchase such as installation or transportation costs. Companies may record the fair market value for certain capital investments under certain circumstances, but capital investments must initially be recorded at cost.

If the asset has a cost that meets the company's capitalization policy, the cost of the asset will be recorded as a capital asset on the balance sheet. This allows the company to spread the cost of the asset over its useful life and to recognize the expense over time. This is the primary difference between the assets mentioned earlier and normal operating costs, as operating costs are expensed in the period they are incurred while capital investment costs are spread over time.

The useful life of a capital investment is an estimate of the number of years that the asset will be used by the company. The depreciation method used will depend on the asset and the company's accounting policies, but commonly used methods include straight-line, declining balance, and sum-of-the-years'-digits. Companies may also record impairments to reduce the value of a capital investment should a loss be incurred. In addition, whereas operating expenses may simply be stopped, companies have a series of entries to post when a capital investment is disposed of.

Example of Capital Investment

As part of its year-end financial statements, Amazon.com reported the following assets it owned for fiscal year 2021 and 2022.

This format of the balance sheet is standard where assets are reported by liquidity starting with the most liquid assets. Because capital investments are not liquid, they are often reported lower in the list.

At year-end 2022, Amazon reported a net asset balance of $186.7 billion for property and equipment. This figure is net because capital investments, aside from land, are often depreciated and reported as their cost less any accumulated depreciation. Note that this $186.7 billion is also being excluded from current assets. Because of the long-term nature of capital investments, they are reported as noncurrent assets.

What Is an Example of a Capital Investment?

When a company buys land, that is often a capital investment. Because of the long-term nature of buying land and the illiquidity of the asset, a company usually needs to raise a lot of capital to buy the asset.

How Does a Capital Investment Work?

A capital investment works based on the benefits a company may receive over a long period of time compared to the short-term investment. In theory, a company will pay a large sum of money upfront (or over time). Then, the company will receive a benefit from the asset (potentially even after it has finished paying for it). The idea is a capital investment should provide better long-term value compared to a good or service that is being purchased and used in a single accounting period.

What Is the Largest Downside to a Capital Investment?

Companies must often make a long-term financial or legal commitment when buying capital investments. This means tying up cash, getting rid of flexibility, and taking a risk that may not pan out. Whereas a company can be more nimble by paying for something smaller, a company aims to leverage a single investment to scale growth or innovate. That growth or innovation may not materialize.

Companies may decide to make capital investments as a way to innovate, modernize, and capture a competitive advantage over its competitors. This investment often requires a large sum of money, and the company often receives an illiquid asset such as land, buildings, machinery, or equipment. The accounting treatment for capital investments if often different than operating outlays as capital investments are usually depreciated.

Amazon. " Form 10-K (2022) ."

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Zenith Bank to Transition Into Holdco, Announces Plan to Meet N500bn New Capital

• Zenith Bank realised massive profit as its year-on-year profit before tax rose by 180% to N796 billion
• Analysis showed that the year 2023 was a good one for the company that increased its interest income
• The bank also said it is working on transitioning into a holding company structure

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Legit.ng journalist Zainab Iwayemi has over three years of experience covering the Economy, Technology, and Capital Market .

Zenith Bank declared a massive profit after tax to the tune of N676 billion in 2023, according to its latest financial report.

The amount is a triple-fold jump from the N224 billion it declared the previous year.

Its profit before tax also rose by 180% to N796 billion from N284.7 billion in 2022.

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An analysis of the company's statement indicates that the bank enjoyed a good year as its interest and similar income doubled from N540 billion to N1.14 trillion owing to improvements in loans and customer advances, placement with banks and discount houses .

In addition, the company witnessed a massive gain from Treasury bills, commercial papers and promissory notes.

It, therefore, announced a final dividend of N3.50k for every share of 50k subject to approval withholding tax.

The big plan

In a recent report, it disclosed that it is taking urgent steps to meet the new N500 billion capitalisation requirement of the Central Bank of Nigeria.

The banking group, which is in the middle of transitioning to a holding company structure, said:

“In 2024, the group will complete the transition to a holding company structure, which is anticipated to position it advantageously for exploring emerging opportunities in the fintech space while bolstering its digital and retail banking initiatives.

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“Furthermore, the group is undertaking urgent necessary actions to meet the new minimum N500bn equity capital requirement to maintain its international authorisation within the timeframe stipulated by the Central Bank of Nigeria.

This will strengthen its presence in key markets to continue positioning for sustainable growth and value addition for stakeholders.”

CBN gives fresh orders to banks

Legit.ng reported that the use of foreign currency as collateral for naira loans has been banned by the CBN.

Dr Adetona Adedeji, the acting director of the CBN's Banking Supervision Department, stated this in a directive to Nigerian banks.

However, the CBN excluded any Eurobonds that the Federal Government of Nigeria issued or foreign bank guarantees, such as standby letters of credit, from the prohibition.

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Source: Legit.ng