Cost of Raising Capital

A business requires much skill and hard work. As a business owner, your first and foremost priority is to introduce capital into your company. For which you need to identify different sources of funding and then determine how much you will need to spend to raise the amount of capital you need. The spending could be in the form of start-up fees, research and development costs, marketing costs, technological expenses, and employee payroll etc., all of which are necessary business expenditures. Apart from that, a lot of expenditure flows in the way of legal and professional fees, especially at the start of a business. The truth is, the initial years of a business always has expenses accumulating very rapidly. And unless you budget the cost of raising capital and plan accordingly, you will not be able to cope up with what your business has in store for you in the later years.

MAKING THE BUDGET

The first step into determining the cost of capital is to have a good estimate of the cost. The more realistic, the better. However, there are various key points that one must consider in order to garner the overall cost of raising capital.

To start with, when you draw out the budget, make sure you have it all put down in as detailed a manner as possible. Which means it must not just include equipment and wages, you should also account for heads like taxes and insurance because without any of these, your assessment of the cost of raising capital wouldn’t be accurate.

Secondly, it is always good to allocate a certain percentage of your budget towards contingencies. An important but invisible allocation in your costs should be for a contingency fund which is for any unforeseen calamities and unprecedented circumstances. Be it minor or outrageous, contingencies are contingencies. It could be a tsunami or a day long delay in business, both cost in raising the cost of raising capital. And it needs to be allocated if you don’t want to suffer a setback.

Also remember, the timeline of business operation is an important function to the cost of raising capital. The longer you take to get things in action, the more your cost of raising capital would be.

Though you don’t need to be much of an accountant to make allocations, it is always good to get a consultation with one to check if you’ve estimated right. You wouldn’t want to overestimate or underestimate and draw up an unrealistic budget, would you?

And one last thing, if you business is in its initial years, you should learn to accept the fact that expenses tend to accumulate very rapidly. The first years of the company are when you spend the most amount of money. From setting shop and office equipment to basic business survival and salaries – costs are bound to be high, so account for it all! Make sure it doesn’t discourage you. Ensure that you have a solid business plan, do your homework, get industry surveys, do funding research, talk to other business owners and get a realistic view on the cost of raising capital.

THE CHALLENGES

The biggest challenge faced by an entrepreneur while estimating the cost of raising capital is the determining the right figure. You could be specific about the idea, the business plan, the results, even the ROI, but when it comes to the cost of raising capital – it is extremely difficult to get to the perfect estimate. And as time goes, you will know that no matter how hard you tried, how much details you put into it – the amount you estimate is always a ballpark. If you are a start-up entrepreneur, it is going to be an even more difficult challenge for you. Because even the most experienced businessmen find this a challenging proposition. But they never stop estimating. Ask them how important it is and they will tell you what harm an erroneous estimate cost of raising capital can do.

Some might think that arriving at the right cost of raising capital might be an easier task for bigger companies than it is for small start ups. But contrary to the belief, both are equally difficult. On one hand, big organisations have so much going on, any kind of budgeting is a tough task, forget budgeting for cost of raising capital, so what they do is buffer a small percentage for erroneous budgeting to take care of things. On the other hand, start-ups may invest a lot of time and effort in getting at the right amount because they cannot really afford to go very wrong, but they definitely do not have experience on their side.

But here’s the truth – errors in estimating the cost of raising capital is something any business is capable of. You could be a big business, you could be experienced, a home-based venture or a big corporate with a huge contingency fund – an error isn’t something you anticipate while budgeting, because if you knew you had erred, you wouldn’t have a wrong budget right?

A FINAL WORD

With costs always mounting upwards in a business, it is good to have an accurate estimate of the cost of raising capital in hand. Reaching a realistic and holistic estimate is definitely the key. What happens is that with an aim to be prepared for the future course of expense, business owners often budget over the cost of raising capital and sometimes, as a newbie entrepreneur, they are not fully equipped to make the right estimation. When the cost of raising capital is raised or lowered, it affects other business head allocations.

What’s probably important is do everything possible not overshoot the estimate – make sure you meet your timeline and accomplish the milestones punctually, because delays could make you spend more than what you budgeted for, in the long run. With delays, incidentals also automatically go up and thereby increase the cost of raising capital.

Also, it is essential to factor in contingencies – uncontrolled delays, unforeseen circumstances, sudden malfunctions or who knows, maybe a natural phenomenon could slow down progress of the business.