Cost of Raising Capital – What Price Will You Pay for Business Finance?
A business develops with innovative ideas. To start a business and implement your ideas you need to raise capital. Capital is the most important ingredient to start a business. A business cannot survive if there is a capital deficit. Most new businesses fail due to shortage of capital as they are not able to meet expenses. Is it easy to raise capital for a business? The answer is no. Each business needs enough capital to meet its expenses and pay for day to day activities. Therefore, a business owner needs to calculate the cost of raising capital and then raise enough capital to suffice needs. Before, businesses were not as concerned and calculative about the cost of raising capital. However, now the cost of raising capital is an important part of the success of a business venture. A business needs to calculate costs of raising capital for its success.
One of the main challenges faced by a business venture is to determine the exact cost of raising capital for their business. All business ventures have a difficult time calculating the exact cost of raising capital. Even the best of businesses can make mistakes, calculating the cost of capital and may go overboard with their budget or underestimate it.
A few factors need to be considered to calculate the cost of raising capital in a business. First a list of all the expenses should be make, which includes capital spent on infrastructure, payrolls, employees, taxes, insurances and material involved. For every task in hand, a timeline is placed and all work needs to be completed within the limited timeline, so that an exact estimate can be made to calculate cost of raising capital. So, if the work is not completed on time, the cost of raising capital increases as labour needs to be paid for every additional day. Business ventures have contingency funds to fill the gap in cost of raising expenses in case of accidents, earthquakes or any other natural disasters. A company allocates a certain amount as contingency fund value.
Taking all factors into consideration the cost of raising capital is estimated to the best value. Even for every project a company does, a cost for raising capital is prepared to the most accurate value. Large businesses have a difficult time estimating the cost for raising capital. Going overboard, by calculating incorrect cost of raising capital, may result in loss of several thousands in capital. The cost of raising capital in a big business venture is calculated as per the net worth of employees working plus the number of days one task is completed in. Even taxes and insurances are considered when calculating cost of raising capital.
When we write about the cost of raising capital for an industry or any business venture, we need to consider the infrastructure. The infrastructure in the company is a major component of the company’s budget. The things included in infrastructure are the salaries of employees, the insurance given, the equipment and the taxes paid. These things are most important for calculating the cost of raising capital for that company. Excluding one of these factors will give an incorrect cost of raising capital for that business.
Timelines play an important role to calculate cost of raising capital. Every task has to be completed at a given timeline. When cost of raising capital is calculated, a fix timeline has to be taken. If the timeline increases, the company may end up in losses. One should choose a realistic method to calculate the cost of raising capital in a company. The timeline in which the task needs to be completed is a very important part to calculate cost of raising capital. Every factor is dependent on the timeline given for task completion. All these factors contribute to efficiency of work in a business. Therefore, if a business takes a long time in achieving efficiency of completing the work in a given timeline, cost of raising capital becomes difficult to calculate. Such business ventures may end up in losses and will not be able to sustain for a long time if the cost of raising capital is calculated incorrectly.
There is one important factor which is considered invisible in a business, while calculating the cost of raising capital. This is called the contingency fund allocation. The contingency factor has to be taken in consideration while making a budget, and calculating the cost of raising capital for a business is essential for anything being budgeted. The contingency allocation fund is for emergencies and uncalculated factors like natural phenomenon’s (earthquakes, hurricanes etc), machinery defects, production delays and any other factor which would lead to incorrect cost of raising capital. Whenever an unforeseen situation takes place in a business, the contingency fund controls the losses of the business.
The cost of raising capital should be considered seriously while establishing a new business or when the business is already running. The amount of capital spent on employee payrolls, benefits, equipment, taxes, insurances and other production costs has to be calculated. Therefore, if there is less number of employees on a given day, the target per employee increases so that the business does not lag behind on the work allocated per day. The only way to raise enough capital is to calculate a budget of your expenses. Apart from unforeseen circumstances where production would stop or either slow down, the work done should be as per allocation. Every business has a budget and an exact budget leads to the maximum amount of profits.
When you open a new business you have a certain budget in mind to invest. Calculation in advance of the cost of raising capital will always help your business to grow. You will know what factors to consider while starting your own business. Large Corporations are successful as they have a budget for every project they undertake. If you calculate the cost of raising capital from the time you open the business, your business will certainly sustain itself hence giving you profits.