It is important for an entrepreneur to identify the required investment of the expected
business in advance. A total investment estimate is prepared for this purpose.
Sometimes this is known as “cost of the project” or project cost.
Contents of a total investment estimate
The total investment estimate of a business plan consists with the following elements.
Value of the fixed assets.
Expenses that should be incurred prior to business startup.
Initial funds required to conduct the day today business activities
(working capital).
Value of the fixed assets
Fixed assets like land, buildings, machineries, equipments, vehicles and furniture
are required to conduct business activities. These assets can be utilized for future
years in the business. Here all long-term assets and their values that are included in
the production, marketing and administrative plans mentioned earlier are considered
as fixed assets of the business.
Expenses that should be incurred prior to business startup
We have studied the expenses that should be incurred prior to business startup in the
section above. All those expenses are taken in to consideration when preparing
the total investment estimate.
Expenses required to conduct the day today business activities
Entrepreneur should possess an adequate amount of funds at the beginning of the
business in order to conduct the business activities continuously and smoothly. The
amount of cash required to conduct the day today business activities are also known
as working capital.
When deciding the initial working capital requirement of the business, it is necessary
to calculate the production, marketing and administrative expenses that are required
from the beginning of the business activities till cash flows in to the business.
Such working capital is estimated based on funds required for all expenses for
the above said period including materials, employee salaries, water, telephone,
advertising, distribution, rental and interest should be calculated.
It is unfavorable for a business to have an excessive working capital or a deficit and
should maintain on an optimum level. If adequate working capital is not within the
business, the smooth and continuous flow of business activities will be disrupted.
Examples :-
If enough cash is not available to buy the raw materials in due time,
the business will not be able to do their production. As a result, all the
business activities will be stagnated and delayed and business will
generate losses.
The risk of maintaining a working capital surplus is the loss of
income that can be earned by investing the money in another
investment.
Having to pay a higher interest or comply with disadvantageous
conditions when getting money instantly for a certain requirement
could arise due to a working capital deficit.
After deciding the value of fixed assets, pre-startup costs and working capital
requirement, it is necessary to decide whether the business is going to cover those
requirements through the owners’ investments or funds acquired from external parties.
