Founders underestimate need for financing

• Two out of three new businesses start with a business plan
• But: need for financing is on average twice as high as planned
• Incorrect planning often the basis of failure

Founders make a business plan for only two out of three new businesses. Around 70% of them underestimate their need for financing in the year of foundation. These founders need more than twice the amount of money as funds than suggested in the business plan. This is shown by a KfW study. "Thin capitalisation right at the start of a business increases the risk of failure immensely," says Dr Jörg Zeuner, Chief Economist of KfW. "Founders have to attend to the need for financing and put a buffer in place. If a financial buffer is missing, unexpected cash flow problems, such as bad debt, can only be overcome with great difficulty. New companies can get into serious difficulties very quickly in this way.“

For the first business year of their new company, founders calculate on average a need for EUR 102,000 of investments and working capital, but in fact the average amount needed is EUR 152,000. The smaller the planned amount, the greater the difference: Founders who have costs in their business plans of less than EUR 25,000 per year have on average a need for financing of 3.3 times this value; companies with a planned requirement for EUR 25,000 to 100,000 have an additional requirement of 90% and companies which calculate more than EUR 100,000 need on average 65% more money. Across an average of all founders there is a deviation from the business plan of 122%.

It is noticeable that in particular business founders who employ staff are surprised by their actual need for finance: they have an additional requirement of 172% to their budgeted amount, while founders without staff are at 44% over budget. Zeuner warns: "Founders should always plan for a growth scenario. In doing so it is important to work with the gross costs of additional employees."

Along with the environment, infrastructure and housing construction, KfW supports small and medium-sized enterprises of every age. For founders, KfW offers among other things the KfW Start-up Loans StartGeld and Universal (from 01 December 2014 with improved terms) as well as the ERP Start Fund for equity capital. Aside from this, KfW offers qualified advice through start-up coaching grants. Founders can get information as to KfW products via the Infocenter (0800/5399001).

Forming the basis of the results is a special report of KfW(ZEW Start-up Panel where around 6,600 companies between 1 and 4 years old were surveyed. You can find this special report on www.kfw.de/kompakt.