Capital requirement

Capital requirements in the economy , the name given to the needs of economic entities on production factor capital .

General

The capital requirement is of central importance in the context of corporate finance . Capital in the form of equity and debt capital for each company is required to make it its operational purpose and its business objectives to fulfill. While the operational purpose may consist of the production of goods or the provision of services and their distribution , the formal objective is linked to the intention to generate profits or to maximize profits . Even public companies / public utility companies need capital, and its formal target more the economy is. Capital requirements arise functionally when investments in fixed or current assets are to be made in the company and in terms of liquidity when there is an asynchronous course between payments and payments .

Determinants of capital requirements

The realization of the chronologically shifted payment and payment series as the basis of origin goes back to Erich Gutenberg , who developed an analytical instrument for analyzing the capital requirement. In 1938 Gutenberg defined the capital requirement as the "sum of the financial resources that a company needs to carry out a certain project." According to Gutenberg, the capital requirement of a company depends on the following main determinants:

• Process arrangement (arrangement of the production process ),
• Process speed (speed of the production process)
• Employment and its fluctuations
• Production program and its changes
• Company size and its changes
• Price level and its changes.

He assumed a constant price level and subjected the remaining 5 determinants to a detailed analysis.

Depending on where the determinants of capital requirements occur, there are internal and external determinants.

• Internal determinants : The internal determinants from which capital requirements can result result from decisions about the company's purpose , company objective , legal form , company size, location factor , production processes and technology.
• External determinants : The external factors include determining structure and price level of the procurement markets , markets , interest rates on the money and capital markets and changes in production technologies .

species

The first capital requirement arises when the company is founded . The initial capital is equity be because when corporations a statutory minimum capital ( share capital in the GmbH , share capital in the AG ) as share capital must be present and at the entry of the company in the commercial register the registration court must be demonstrated. With this, the shareholders finance the first company assets, which mostly consist of operating and office equipment ; the capital for building up and starting up the business is mainly used to finance the fixed assets. Instead of this cash contribution , capital contributions are also possible under certain conditions as contributions in kind . For partnerships , however, no minimum capital is provided that at least one natural person as a general partner for the debts of the company with his private assets liable .

During the day-to-day business activities of the company, there is a need for operational capital, which can consist of external financing in addition to internal financing. This is divided into fixed and working capital requirements , depending on whether investments are to be made in fixed or current assets.

Capital requirement

The amount of capital required depends - in addition to the selected legal form - also on the planned size of a company. Large companies and investment-intensive companies have a high investment capital requirement, small companies a comparatively lower one. The investment capital requirement specifically serves to finance land , land rights , company buildings , company acquisitions , investments and the financing of machines . Also, maintenance , repair and replacement investments trigger investment capital needed. Through depreciation released in the cash flow , part of the investment capital requirement can be financed internally. The turnover of capital is of particular importance in fixed assets because the fixed assets only turn over very slowly. The time of issue (acquisition) and the time of receipt (return of the depreciation amounts through the proceeds of the sold products) are far apart, so that the capital turnover is minimal.

Working capital requirement

The determination of the working capital requirement is more difficult than with the fixed capital requirement, since it depends on the turnover rate of the manufactured products or provided services . This starts with the acquisition to be financed and the subsequent storage period of raw materials , consumables and supplies for the production process and ends with the shelf life of the finished products . Their sale generates sales that can cover part of the operational capital requirements within the framework of self-financing . Due to their long production times, construction companies or plant construction have particularly low turnover rates and therefore have a particularly high production-related capital requirement, which they typically finance entirely or partially through customer loans ( advance payments , down payments , payments on account ). Companies with a high turnover rate ( food retailers , just-in-time production ) have correspondingly lower capital requirements . The faster and the more often the capital tied up in the company flows back through sales, the lower the capital requirement.

Capital requirement calculation

The capital requirement is determined in the capital requirement calculation. Here, a distinction must first be made between the gross capital requirement and the net capital requirement . While the gross capital requirement reflects the total capital requirement regardless of the coverage available, the existing financing is taken into account in the net capital requirement. The following table determines the capital requirements for current assets, which only consist of two balance sheet items (amounts in thousands of euros):

Balance sheet item	Sales process	Length of stay in days	Length of stay in years	Capital requirement
Inventories (raw materials, consumables and supplies)	100	219	0.6	60
+ Customer requirements	210	26th	0.07	14.7
= Gross capital requirement current assets				74.7
- Supplier liabilities	100	91	0.25	25th
= Net capital requirement current assets				49.7

The net capital requirement of 49,700 euros is not yet covered and has to be financed as working capital requirement.

Key figures

The relationship between capital requirements, capital turnover and capital commitment is illustrated by two key business figures . The capital requirement results from the quotient of sales revenues and turnover rate: It therefore has not only an amount (amount of capital requirement), but also a time dimension (duration of capital commitment):

${\displaystyle {\text{Kapitalbedarf}}={\frac {\text{Umsatzerlöse}}{\text{Umschlagshäufigkeit}}}}$

The higher the sales at a given turnover rate, the lower the net capital requirement and vice versa. A long capital turnover in turn leads to a higher net capital requirement for given sales revenues and vice versa. There is a summary relationship between the capital requirement, the capital commitment and the capital release :

${\displaystyle {\text{Kapitalbedarf durch Außenfinanzierung}}={{\text{Kapitalbindung}}>{\text{Kapitalfreisetzung}}}}$

A capital requirement through external financing can only arise if the capital commitment exceeds the capital release.

Capital requirement plan

The capital requirement planning is a component of the long-term financial planning , the capital requirement plan ( investment financing plan) is accordingly a partial plan of the financial plan of a company. In contrast to the liquidity plan, it contains medium and long-term planning bases for covering the capital requirements of intended investments in the current and future periods. The capital requirement plan is therefore regularly based on the investment planning. Because of the close connection, it also takes into account the duration of the capital commitment. In the case of active capital requirement planning, the financial sphere can become a bottleneck factor (e.g. for start-ups who have little or no access to bank loans or in the event of credit crunch ), while passive capital requirement planning is intended to meet the financing requirements for upcoming investments. The financial sector does not become a bottleneck here. As a secondary condition, the capital requirement planning also ensures liquidity is secured , since payments and payments are harmonized.

Individual evidence

1. ^ Franz-Joseph Busse, Fundamentals of operational finance , 2003, p. 26.
2. ↑ Petra Kellner, The internal target agreement dialogue , 1997, p. 28.
3. ^ Hans Büschgen , Capital Requirement , in: Friedrich Wilhelm Christians , Financing Handbook , 1988, p. 161
4. ↑ Erich Gutenberg, Fundamentals of Business Administration , Volume 3: The Finances , 1980, pp. 123 ff.
5. ↑ Erich Gutenberg, financing and renovation , in: Handwortbuch der Betriebswirtschaft , 1938, columns 1745/1746
6. ↑ Erich Gutenberg, Fundamentals of Business Administration , Volume 3: The Finances , 1980, p. 13 f.
7. ^ Franz-Joseph Busse, Fundamentals of operational finance , 2003, p. 43.
8. ↑ ^{a b c} Wolfgang Schinköth / Alfred Jahresig, The capital requirement and its coverage , 1980, p. 4 ff.
9. ↑ P. Keppler-Verlag, Druck-Print , Volume 106, Part 2, 1969, p. 542.
10. ^ Franz-Joseph Busse, Fundamentals of operational finance , 2003, p. 54.
11. ↑ after: Florian Böhmdorfer / Günter Kralicek / Peter Kralicik, key figures for managing directors , 2008, p. 105.
12. ↑ Roger Zantow / Josef Dinauer, Finanzwirtschaft des Unternehmens , 2016, p. 28 ff.
13. ↑ Alexander Philipp Mrzyk, income value-oriented credit check at start-ups , 1999, p 113th
14. ↑ Horst Albach , Capital commitment and optimal cash management , in: Hans Janberg, Financing Handbook , 1970, p. 381 f.