Capitalization | Sources and Uses of Funds

 

What is a Sources and Uses of Funds Section in a Business Plan?

A summary of how much money will be required for startup expenses and operating capital, and where you expect that money to come from.

The sources and uses of funds section of a business plan is an important financial component that outlines where the funds for the business will come from and how they will be used. This section typically includes information on the business’s funding requirements, the sources of funding that have been secured or are being sought, and a detailed breakdown of how the funds will be used to support the business’s operations and growth. It is important for a business to have a clear understanding of its funding needs and how the funds will be used in order to attract investors and secure financing.

The level of detail in the sources and uses of funds section of a business plan can depend on the intended audience and purpose of the plan. For example, if the plan is being used to attract investors or secure financing, it may need to be more detailed and include specific numbers and projections. In this case, the section should include spreadsheets or tables that clearly show the funding requirements, sources of funding, and detailed breakdown of how the funds will be used.

If the plan is being used as an internal tool for current investors or the board, it may be more high-level and not include as much detail. It should still however, provide a clear overview of the funding needs, sources and usage of funds.

As a best practice, it’s always a good idea to include financial projections in the form of spreadsheets or tables, this way the audience can see the financial viability of the business, in a clear and easy-to-understand format.

Why the Sources of Uses of Funds Section is Vitally Important

Many entrepreneurs and business owners rely far too much on intuition and positive expectations. “I’m not an accountant” is not a good enough reason to forego having an understanding of the basics of cash flow. Of all the traditional financial statements including the balance sheet and income statement, a reliable cash flow statement is most important. The sources and uses of funds section of your business plan is in effect a high-level cash flow statement for investors. The primary purpose of fund statements is to demonstrate that the business will have sufficient capital to start, grow and thrive.

Your company’s financial health is critical to investors and the use of funds document is a simple financial statement they’ll expect to see.

If Charles Lindberg or Emelia Earhart came to a group of equity investors or providers of debt financing, they probably would have known very little about transatlantic flying, particularly since it had never been done. But the business minds would have quickly converged on the sources and uses of funds statement. The investors would want to know that the funds statement accounted for sufficient capital to build the plane and fly it across the ocean. After all, who would want to provide funding to get a plane halfway across the ocean?

 

Now, this a light-hearted way to talk about a funds statement, but it makes the point: Your sources and uses of funds statements will ensure that you have thought through the business requirements and are raising sufficient capital to get your business to the next investable milestone or profitability.

 

Creating Your Statement of Sources and Uses of Funds

The various sections of your business plan spell out how you will go about finding new customers, creating products and services they need, and building your business. The details regarding the costs and revenues from your “word plan” make it to the “numbers plan” in the financial section. So, what’s left?

This section on Capitalization and Use of Funds summarizes how much money will be required for startup expenses and operating capital, and where you expect that money to come from. Show your financial needs for a minimum of one year into the future, or until your business will become cash-flow positive, whichever is longer.

Business Plan Outline for Capitalization and Use of Funds Should Include:

  • Use of Funds

    • Startup Costs

    • Working Capital

  • Sources of Funds

    • Owner’s investment

    • Debt or senior debt (from lenders)

    • Equity (from investors)

Important Considerations

This section of your business plan is intended to provide an overview of the funds your business will require. The specific details regarding terms for investing in your company must be in a separate document, which will be governed by specific legal guidelines. By law, securities can be offered for sale or solicited only by a private placement memorandum, which is a formal legal document.

Start with the Use of Funds Section

The Use of Funds section of your business plan must include all of the costs required as well as the capital to sustain your business until it becomes cash-flow positive. The initial costs are those costs required to open the business. Working capital is the money it takes to pay your bills (including labor) until your business is generating sufficient cash to fund itself. Your financial projections (Section 9) will have taken you through the hard work required to arrive at these numbers.

A simple table or spreadsheet should be used to show your use of funds or costs. Summarize costs into major categories. Customize the example below for your business. Most importantly, include all expenses that are listed on your financial statements.

For the working capital number, look at your cash flow statement. If you had no funding whatsoever, how much money would your business consume before it starts to turn a profit or become cash-flow positive? That’s how much working capital your business will need, plus a contingency fund.

The example below is meant to be easily understood and is modeled around a startup business. It also includes rolled up numbers at a high level. It is okay to present your numbers in this manner, so long as you have the detailed version –that totals to the same amounts- if asked.

Sample Start-up Costs

Facilities

Office Build-Out     $12,000

Prepaid Rent     $ 4,000

Office Equipment     $ 6,000

Marketing

Grand Opening     $ 3,000

90-Day Ad Campaign  $ 5,000

Website Design   $  2,000

Administrative Costs

Insurance     $2,000

Fees & Permits    $ 1000

Miscellaneous Startup Costs, $15,000

Total Startup Costs     $50,000

 

Working Capital

Annual Salaries for 3 employees $300,000

Contingency capital funds $50,000

Total W/C     $350,000

Total Use of Funds     $400,000

 

Sources of Funds

Let’s start with the obvious. The sources of funds needs to meet or exceed the use of funds from the section above.

Now that you have laid out the financial needs of the business, where will that money come from? Ideally, at least some of that will be coming directly from you. Perhaps you’ll even include a “family and friends” round of investment. The balance will be the amount you need to bring in either as loans or outside investments. Customize the example below to your business.

Sources of Funds Table

Owner’s Cash Investment $50,000

Family and Friends Investment (Equity) $20,000

Loan Sought $330,000

Total

$400,000

While you don’t have to include it in your business plan, you should be prepared to talk about your collateral, or how you will guarantee that the lender will be repaid. Most financial institutions require a primary and secondary source of collateral. This topic is covered in the section titled, Exit Strategy or Payback Analysis.

Summary

Many people think about the balance sheet and income statement as the most important financial statements. It’s the cash flow statement that tells most about the company’s financial health and ability to continue. The “sources and uses of funds” section of your business plan is a means of looking ahead at the cash flows of the business – both incoming and outgoing – to determine how much cash you’ll need to raise.

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Want a great business plan template you can complete in just one day?

Click GET STARTED to access our great fill in the blank business plan. Our template is in-depth and covers all the details you need to develop a foundation for many businesses of various industries. We are so confident you will like this plan that we even offer a full money back guarantee.

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