new business module

FINANCING A BUSINESS 103
Starting entrepreneurs have to be cautious before making
large investments because there is always the risk that the
business will not work out. A good way to limit the initial
investment is to rent part of the equipment instead of buying
it and to keep the initial inventory only just as high as needed.
The amount of capital needed to cover these investments is
easy to calculate: just identify them and add up the costs. Starting
entrepreneurs should be very cost-conscious. They should
ask themselves which of these investments are really necessary
and how their costs can be kept to a minimum while maintaining
the required standard of quality.
1.2 Working capital
Every business generates costs before it generates profit. The
capital required to cover initial recurring operational costs is
called working capital. It is the capital needed to keep the business
running until it generates sufficient income to cover all
the costs of running it. Such costs include:
• materials and replacement materials
• maintenance costs
• the salaries of any employees
• rent for business premises
• electricity bills
• advertising and promotion costs.
This is what people mean when they say, “It takes money to
make money.” Having enough capital to start a business is critical
for long-term success. The best business idea cannot work
if there are not sufficient funds to bring it to the point where
the income it generates starts covering costs.
The question for entrepreneurs is, “How much money do I need
to start my business?” When determining the amount required,
they must also include personal needs. After all, the entire
family needs to be able to make it to the point where the business
starts to provide for them.
Determining the amount of capital needed to run a business
requires several calculations and estimates. It depends on