How to Calculate Capital Requirement

by Eric Bank ; Updated July 27, 2017
Businesses need capital to spend and invest.

Capital is the money and other assets a company uses to fund current operations and make more money. Many businesses need long-term capital in the form of plant, property and equipment. All businesses must have short-term working capital, including assets such as cash, inventory, accounts receivable and supplies. Working capital is short-term assets minus short-term liabilities, such as payables and unearned income. Calculate your total capital requirement by adding together your expected expenditures in the next year for working capital, long-term capital and other expenses.

Potential Needs

To calculate your long-term capital needs, figure how much you'll spend in the next year on new buildings and facilities, major improvement to existing facilities and purchases of machinery, equipment, land and furnishings. You can predict your working capital requirements by reviewing your expenditures for short-term assets and liabilities over the previous several years and projecting the numbers forward. You may need to adjust your historical data to account for trends and predicted business conditions. Cash, the most liquid working-capital component, is required not only to buy other forms of capital, but also to pay your bills. Therefore, add in your projected cash expenditures for non-capital items the next year to arrive at your total capital requirement.

About the Author

Based in Chicago, Eric Bank has been writing business-related articles since 1985, and science articles since 2010. His articles have appeared in "PC Magazine" and on numerous websites. He holds a B.S. in biology and an M.B.A. from New York University. He also holds an M.S. in finance from DePaul University.

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