The Importance of Calculating Initial Capital! Here

Have you ever heard the story of a business going bankrupt even though it has only been running for a few months? One of the main causes is incorrect initial capital calculations. As a businessman, understanding how to calculate initial capital correctly is not only important, but mandatory. 

Initial capital is the foundation for your business. If the foundation is shaky, the risk of major losses could haunt your business at any time. Come on, let's discuss why this is so crucial for those of you who want your food business or other business to be successful.

What Is Initial Capital and Why Is It Important?

Initial capital is the funds you prepare to start a business. This covers all basic needs such as purchasing raw materials, renting a place, and starting operations. 

Without proper calculations, you could end up spending too much money or even lack funds for daily operations. For example, when starting a food business, many only focus on the cost of purchasing raw materials. 

In fact, there are other costs such as cooking equipment, packaging, and promotions that you shouldn't miss. That's why learning how to correctly calculate initial capital for a food business is very important. 

Don't just guess, because even a small mistake can make your business lose direction. Well, lThe first step is to make a list of all the needs to start your business, in this case a culinary business:

• Raw materials: Rice, meat, vegetables.
• Cooking equipment: Stove, pots, pans.
• Operational costs: Electricity, water, gas.
• Rent a place: If you don't have your own location.
• Promotion: Advertising costs on social media or print.
• Packaging: Food box, plastic, or label.

Once the list of requirements is complete, calculate the cost of each component and the total, for example:

From this table, the initial capital required is IDR 47,300,000.

Read Also: 7 Sources of Business Capital Assistance to Start a Business!

Common Mistakes in Calculating Initial Capital

That's how to measure initial capital, so why do people still calculate it wrong? Some common mistakes that business people often make when calculating initial capital include:

1. Ignoring Unexpected Costs

One of the most common mistakes is forgetting to include unexpected expenses. For example, equipment repair costs or other urgent needs that could arise at any time. 

If you don't include this in your calculations, your business's cash flow could be disrupted. Therefore, always add an emergency cost component when calculating initial capital. 

2. Miscalculating Cost of Goods Sold (COGS)

Calculating COGS is not just the total cost of raw materials. There are other factors such as labor costs and overhead that must be taken into account. Many food business people make a mistake here, so they set selling prices too low.

So, if you want to be practical, try adopting ERP software. With comprehensive data integration, this software helps calculate COGS accurately and efficiently. In fact, you can cut operational costs by up to 35%!

3. Not Separating Personal and Business Capital

This mistake happens very often, especially for small businesses. Personal capital and business capital are often mixed, making it difficult to track which expenses are for business and which are for personal needs.

Keep business and personal accounts separate from the start. Apart from being neater, this also makes it easier for you if one day you need a financial report to apply for a loan or investment.

How to Calculate Initial Capital Correctly

Here's the right way to calculate initial capital correctly: 

1. Identify all business needs

The first step is to make a list of your business needs. If it's a food business, you need to record raw materials, cooking utensils, packaging, and promotional costs. Don't forget to add rental costs if you don't have your own location.

2. Calculate the amount of capital in detail

Once the list of needs is complete, calculate the cost for each item. Make sure everything is recorded in detail, including small costs such as shipping costs for raw materials.

3. Add Emergency Cost Component

Include emergency costs in the initial capital calculation. Usually, allocate around 10-15% of total capital for unexpected needs.

4. Use software to make calculations easier

Calculating initial capital manually is complicated and prone to errors. Use software which has integrated financial management features.

Well, through this technology, all expenses are recorded automatically, so you can focus on developing your business without worrying about miscalculating your capital.

You may have heard the saying, "Prepare an umbrella before it rains." In the business world, this proverb is a reality that you have to face, not just a figure of speech, you know! 

Imagine you have just started the food business you have long dreamed of. You feel like everything has been calculated. From rental costs, raw materials, to promotions, everything looks neat on paper. 

However, suddenly the oven you rely on breaks down in the second week. You have to repair it or even buy a new one. The problem is, you don't have spare funds for that. 

Then, what happened? Your business is forced to stop temporarily. Things like this don't only happen in other people's stories. If you are not prepared, unexpected problems can happen to you at any time. 

That's why it's very important to include emergency costs in the initial capital calculation. Believe me, this small step can save your business from unwanted financial disaster.

Source: Freepik

Read Also: 5 Sources of F&B Business Capital in 2024 (You Must Know!)

Conclusion

Small mistakes in calculating initial capital can have a significant impact on your business. For instance, if the capital is too small, you might not have enough funds to purchase raw materials or pay employees.

Accurately calculating initial capital is a crucial step to ensure smooth business operations. One important element that should not be overlooked is managing Cost of Goods Sold (COGS), as it plays a significant role in determining pricing strategies and profitability.

With ESB POSLite, you can easily manage inventory and accurately calculate COGS. This feature is designed to help your culinary business control raw material costs and maximize operational efficiency.

Don’t stop at just calculating initial capital—manage your business better with ESB!