---
title: Capital Planning
summary: Calculate what growth will cost, identify funding sources, and structure financing your business can sustain.
est_minutes: 6
sort: 6
---

Growth costs money before it makes money.

Most operators understand this intellectually. Very few plan for it financially.

They decide to hire. They decide to open a new location. They decide to invest in a new system or piece of equipment. And then they look at the bank account and realize the money is not there.

Not because the decision was wrong.

Because the capital requirement was never calculated before the decision was made.

Capital planning is the discipline of calculating what growth is going to cost before you commit to it, identifying where that capital is going to come from, and structuring the financing in a way that the business can sustain.

This module introduces the capital stack, the capital needs calculation, and the framework for choosing the right instrument for the right kind of growth.

**Why Most Operators Undercapitalize Growth**

There are three reasons operators consistently undercapitalize growth decisions.

Reason one: They calculate the cost without calculating the timing.

A new hire costs $60,000 per year. Most operators think of this as $5,000 per month. What they do not calculate is that the hire starts generating revenue three to six months after they join, but the payroll cost starts on day one. That timing gap is the capital requirement. It is not $60,000 per year. It is $15,000 to $30,000 of capital needed before the investment pays back.

Reason two: They calculate individual costs without calculating cumulative impact.

One hire is manageable. One hire plus a new software platform plus a larger office space, all in the same quarter, is a capital event that can strain even a healthy business. Growth decisions made independently without a cumulative capital view compound into a cash crisis that none of them would have caused individually.

Reason three: They assume operating cash flow will cover it.

Operating cash flow is the most expensive form of capital because it is the only form with no cost attached. But it is also finite. When growth requirements exceed what operating cash flow can absorb in the timeframe required, the operator either delays growth, finances it poorly, or depletes the cash buffer needed to operate the existing business safely.

**The Capital Stack**

The capital stack is the combination of funding sources a business uses to finance its operations and growth. For most small businesses, it has four layers.

Layer one: Operating cash flow.

The cash the business generates through its own operations after covering all expenses. This is the ideal funding source for growth because it carries no interest cost, requires no external approval, and does not dilute ownership. Use this for growth investments that have a short payback period and a clear revenue path. When growth requirements exceed what operating cash flow can fund within the needed timeframe, move to the next layer.

Layer two: Business credit.

A business line of credit or business credit card provides flexible, revolving access to capital at a cost. The cost is interest, which must be factored into the return on any investment funded this way. Business credit is appropriate for short-cycle working capital needs: bridging the gap between invoicing and collection, covering a temporary inventory purchase ahead of a known demand spike, or funding a time-sensitive opportunity with a defined repayment timeline.

Layer three: Debt financing.

A term loan, SBA loan, or equipment financing provides larger amounts of capital with a defined repayment schedule. This is appropriate for longer-payback growth investments: significant equipment purchases, leasehold improvements, or hiring a senior role that will take six to twelve months to generate its full return. The cost is interest and principal repayment. The return must exceed the cost over the loan period for the investment to make financial sense.

Layer four: Equity.

An investment from an outside party in exchange for ownership. This is appropriate for growth that requires capital beyond what debt can support and where the business has a clear path to generating returns that justify giving up ownership. Equity is the most expensive form of capital in the long run because the cost is a permanent share of future profits and value. Use it last and only when the growth opportunity justifies the dilution.

**Calculating Your Capital Need**

Before you approach any capital source, you need to know how much you actually need and why.

The capital needs calculation has four components.

Component one: The investment cost.

The total cost of the growth initiative. Hire fully loaded cost including benefits and equipment. Equipment purchase or lease cost. Software implementation cost including setup and training. Facility cost including deposits and fit-out. This is the headline number.

Component two: The timing gap.

How long before this investment generates revenue or reduces costs at the level that justifies its cost? This is the period during which the investment is a pure cash outflow. Multiply the monthly cost by the number of months in the timing gap. That is the minimum capital requirement.

Component three: The operating buffer.

The growth initiative cannot drain the cash buffer needed to operate the existing business safely. Add your minimum cash buffer from Module 02 to the timing gap calculation. The total is the full capital requirement.

Component four: The payback period.

How many months until the investment generates enough return to cover its total cost?

- A payback period of less than twelve months is generally financeable from operating cash flow or a revolving credit line.
- A payback period of twelve to thirty-six months typically requires term debt.
- Beyond thirty-six months, the risk profile of the investment warrants a more conservative capital structure.

Capital planning is not complicated. But it requires doing the math before the decision, not after.

**Your Action Step**

Your worksheet for this module is the Capital Needs Assessment.

It walks you through calculating the capital requirement for up to three growth initiatives over the next twelve months, identifying the appropriate capital instrument for each, and building a simple capital plan that sequences the initiatives based on available funding.

Build the capital plan. Then we set up the review system.
