How Much Money to Borrow?

The amount of money you need to borrow depends on the purpose for which you need funds. Figuring the amount of money required for business construction, conversion, or expansion- term loans or equity capital- is relatively easy.

Equipment manufacturers, architects, and builders will readily supply you with cost estimates. On the other hand, the amount of working capital you need depends upon the type of business you're in.

While rule-of-thumb ratios may be helpful as a starting point, a detailed projection of sources and uses of funds over some future period of time- usually for 12 months- is a better approach.

In this way, the characteristics of the particular situation can be taken into account. Such a projection is developed through the combination of a predicted budget and cash forecast.

The budget is based on recent operating experience plus your best judgment of performance during the coming period. The cash forecast is your estimates of cash receipts and disbursements during the budget period.

Thus, the budget and the cash forecast together represent your plan for meeting your working capital requirements. To plan your working capital requirements, it is important to know the "cash flow" which your business will generate.

This involves simply a consideration of all elements of cash receipts and disbursements at the time they occur.
These elements are listed in the profit-and-loss statement which has been adapted to show cash flow. They should be projected for each month.