New Share Capital for a Business Plan
New capital represents cash or cash equivalents invested by the founders and investors in the business. It is often referred to as equity or share capital.
It is important to realize that the amount of new capital will depend on many factors including the following.
- Availability of investors
- The level of debt provided by lenders into the business
- The amount of cash available from the business trading operations
In addition a business will need different amounts and types of equity capital depending on whether it is in its seed, startup, expansion or exit stage of development. Additionally we discuss this more fully discussed in our How to Finance a Business post.
There are various sources to consider when looking for new equity for a startup business. It is important to note that the more new equity you raise the more of your business you will need to give away.
Potential sources for new equity funding include:
- Personal savings
- Friends and family
- Crowd funding and peer to peer lending
- Angel investors
- Venture finance
Estimate New Capital in the Financial Projection
Having estimated the level of new capital required, it needs to be included in the financial projections template.
The cash flow statement includes new capital as a positive figure as it represents cash flowing into the business from investors. To illustrate suppose in year two the plan is to inject additional equity of 5,000 to help finance the purchase of new machinery. In this case include the figure of 5,000 in the cash flow statement on the proceeds from issue of share capital line. Repeat this process for each of the 5 years in the template.
Care should be taken not to include any capital already included as part of the capital opening balance. This would result in double counting.
Estimating the new equity finance is an art not a science, no one expects you to be able to predict the future. You are making educated guesses based on the information you have available to give a realistic estimate of what you think the new capital requirement will be. Make sure that the new capital is in line with the rest of the business model. Avoid too much detail in analyzing the types of equity you might have.
What’s the Next Step?
The process of entering the data is now complete. You should have the first draft from the financial projections template. Review the output and then make changes to see how they affect the projections. Repeat the process until the income statements, balance sheets, and cash flow statements represent your proposed business plan activity.
This is part of the How to Create Financial Projections Guide. The guide is a series of posts on how to use our template to produce simple financial projections for a business plan.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.