OTE2601
PORTIFOLIO
QUESTION
DUE: 10 October 2025
, Financial Management Portfolio Question
Question 1
1.1 Illustrate how and why you would execute the following five financial
management functions to achieve the company’s goals
1.1.1 Estimation of Capital Requirements (12 marks)
The estimation of capital requirements is the first and most critical step in financial
management. It refers to determining the amount of money a business needs to finance
both its short-term operations and long-term investments. For a startup, this process is
vital because it defines the financial foundation upon which all future decisions are built.
Capital requirements can be divided into two key categories:
• Fixed capital: This includes funds needed to acquire long-term assets such as
machinery, equipment, office furniture, property, and technology systems that are
essential for starting operations.
• Working capital: This refers to money required for the day-to-day running of the
business, including expenses like inventory, staff salaries, utilities, rent, and raw
materials (Correia et al., 2022).
Accurately forecasting these needs prevents two major risks:
1. Undercapitalisation – when a company raises insufficient funds, causing
difficulties in meeting obligations, paying suppliers, or funding growth.
2. Overcapitalisation – when a company raises excessive funds, resulting in idle
resources and reduced efficiency (Brealey et al., 2019).
To calculate capital requirements, financial managers apply tools such as:
• Break-even analysis: Determines the minimum sales volume required to cover
costs.
, • Cash flow forecasting: Projects inflows (sales, loans, equity) and outflows
(wages, expenses, debt repayments) over time.
• Projected income statements: Estimate future revenues, costs, and profits to
assess sustainability.
In the context of a startup, estimation builds realistic operational plans and strengthens
investor and lender confidence, since financial clarity shows that the business is
prepared and well-structured.
Practical Example
A startup retail company estimates that it requires:
• R500,000 for fixed assets such as shelves, point-of-sale (POS) systems, and
shop fittings.
• R200,000 for working capital to cover stock purchases, staff salaries, and
utilities.
This totals R700,000, which gives the business a clear financial roadmap and guides
decisions on how much funding to raise and what sources of finance to consider.
Table 1: Example of Estimation of Capital Requirements for a Retail Startup
Estimated Amount
Capital Type Examples
(R)
Machinery, furniture, technology, POS
Fixed Capital 500,000
systems
Working
Inventory, salaries, utilities, rent 200,000
Capital
Interpretation: In this example, the startup estimates a total of R700,000 is required
R500,000 for fixed assets to establish the business infrastructure and R200,000 for
working capital to sustain daily running costs. This estimation ensures the company is
PORTIFOLIO
QUESTION
DUE: 10 October 2025
, Financial Management Portfolio Question
Question 1
1.1 Illustrate how and why you would execute the following five financial
management functions to achieve the company’s goals
1.1.1 Estimation of Capital Requirements (12 marks)
The estimation of capital requirements is the first and most critical step in financial
management. It refers to determining the amount of money a business needs to finance
both its short-term operations and long-term investments. For a startup, this process is
vital because it defines the financial foundation upon which all future decisions are built.
Capital requirements can be divided into two key categories:
• Fixed capital: This includes funds needed to acquire long-term assets such as
machinery, equipment, office furniture, property, and technology systems that are
essential for starting operations.
• Working capital: This refers to money required for the day-to-day running of the
business, including expenses like inventory, staff salaries, utilities, rent, and raw
materials (Correia et al., 2022).
Accurately forecasting these needs prevents two major risks:
1. Undercapitalisation – when a company raises insufficient funds, causing
difficulties in meeting obligations, paying suppliers, or funding growth.
2. Overcapitalisation – when a company raises excessive funds, resulting in idle
resources and reduced efficiency (Brealey et al., 2019).
To calculate capital requirements, financial managers apply tools such as:
• Break-even analysis: Determines the minimum sales volume required to cover
costs.
, • Cash flow forecasting: Projects inflows (sales, loans, equity) and outflows
(wages, expenses, debt repayments) over time.
• Projected income statements: Estimate future revenues, costs, and profits to
assess sustainability.
In the context of a startup, estimation builds realistic operational plans and strengthens
investor and lender confidence, since financial clarity shows that the business is
prepared and well-structured.
Practical Example
A startup retail company estimates that it requires:
• R500,000 for fixed assets such as shelves, point-of-sale (POS) systems, and
shop fittings.
• R200,000 for working capital to cover stock purchases, staff salaries, and
utilities.
This totals R700,000, which gives the business a clear financial roadmap and guides
decisions on how much funding to raise and what sources of finance to consider.
Table 1: Example of Estimation of Capital Requirements for a Retail Startup
Estimated Amount
Capital Type Examples
(R)
Machinery, furniture, technology, POS
Fixed Capital 500,000
systems
Working
Inventory, salaries, utilities, rent 200,000
Capital
Interpretation: In this example, the startup estimates a total of R700,000 is required
R500,000 for fixed assets to establish the business infrastructure and R200,000 for
working capital to sustain daily running costs. This estimation ensures the company is
