FINANCIAL STUDY
Investment and Financing
Balance Points
Budgets
Structure and Sources of Financing
Table of Sources and Use of Funds
WHY IS IT INVESTED?
WHY ARE THE PROJECTS NECESSARY?
Day after day, wherever we are, a range of man-made items or services are continually available.
The clothing we wear, the processed foods we buy for our consumption, even the modern microcomputers that greatly support the work of human beings.
Each and every one of these goods and services, before being commercialized, were studied and evaluated from various points of view, always with the purpose of satisfying human needs.
After that, the decision was made to mass produce them, for which an economic investment had to be made.
Therefore, whenever there is a human need for a product or a service, there will be a need to invest, since this is the only way to produce a good or a service.
Investments are not made just because "someone" wants to produce a certain item or believes that by producing it they will earn a lot of money.
In our days, a good investment requires a foundation to support it.
This foundation is constituted by a well structured and evaluated project, which indicates the guidelines to be followed. This is where the obligation to prepare the projects comes from.
The investments to be made constitute the initial costs corresponding to the execution of the project.
Author Gabriel Baca Urbina explains that:
“The initial investment includes the acquisition of all fixed or tangible and deferred or intangible assets necessary to start the operations of the company, with the exception of working capital.
A tangible asset (that can be touched) or fixed is understood to be the property owned by the company, such as land, buildings, machinery, equipment, furniture, transport vehicles, tools and others. It is called "" fixed "" because the company cannot easily dispose of it without causing problems to its productive activities (unlike current assets).
An intangible asset is understood to be the set of assets owned by the company necessary for its operation, and which include: patents for invention, trademarks, commercial or industrial designs, commercial names, technical assistance or technology transfer, pre-operating and installation expenses and start-up, service contracts (such as electricity, telephone, fax, water, three-phase current and notarial services), studies that tend to improve the operation of the company in the present or in the future, such as administrative or engineering studies, studies evaluation, training of personnel inside and outside the company, and so on.
In the case of the cost of the land, this must include the purchase price of the lot, the commissions to agents, notary fees and expenses, and even the cost of demolishing existing structures that are not needed for the purposes that the land is intended to give. . In the case of the cost of equipment and machinery, it must be verified if this includes freight, installation and start-up.
In project evaluation it is customary to present the list of all tangible and intangible assets, noting what is included in each one of them ”.
In investments, all the resources necessary for the execution of the project in the established time are quantified in monetary values, and two cases can occur:
1.- EXTENSION OF FACILITIES.
When you have an installed and operating plant, and you want to increase production capacity with the inclusion of machines with the same specifications, with the same or greater production capacity.
2.- NEW PROJECT.
Fixed Investments.
Fixed investments have been made up of assets that are not subject to transactions, are obtained during the implementation or execution stage, and are used during the life cycle of the project.
Working Capital.
Working capital or operating capital is achieved by subtracting current liabilities from current assets of a going concern.
The working capital changes according to the type of project to be executed, becoming one of the most important points in the financial situation of the company. As long as a company does not achieve that its income is greater than its expenses, it will always need working capital.
Investment Schedule.
Every project must present an execution schedule indicating the disbursements and the dates on which they will be made.
The final balance of the month becomes the beginning balance of the following month, and must be placed in the box corresponding to the "previous balance" of the following month. If the financial resources are not enough to meet the investment needs of the minimum size plant, it is clear that the project is impossible.
Similarly, if your own financial resources and those of others allow you to choose between several sizes for which there is a large difference in costs and economic performance for similar productions, it will be advisable to select the size that can be financed more comfortably and safely, and that while offering, where possible, the lowest costs and high return on capital.
-Of course, it will be necessary to make a balance between all the mentioned factors to make a good choice.
-For the aforementioned, the purpose of the financing study is to determine the way to attract financial resources in order to allocate them to the investment that is analyzed in the project.
The breakeven point shows a situation in which the company neither wins nor loses, and is performed to determine the lowest levels of production or sales at which a project can operate without jeopardizing financial viability.
It is used to designate a level of operations, in which the project leaves neither loss nor profit.
The lower the breakeven point, the greater the probability that the project will make a profit and the lower the risk that it will incur losses.
To calculate it, it is necessary to decompose costs into fixed and variable.
Fixed costs remain constant regardless of production volume.
Variable costs are directly related to the volume of production.
It is advisable to work with annual data when calculating the breakeven point.
After determining the investments and financing sources to implement and start the project, the income and expenses budget is developed, to analyze the operations of the new company or expansion of this, or it could be the operating costs during the life useful, of a project or social program.
Every project for its normal operation must obtain income (according to the type of project) and expenses. Some projects of a social nature do not generate income, only costs. Some cost structure could be the following:
- PRODUCTION COSTS.
The establishment of total costs represents the expenses or expenses that the company will incur in the normal development of its operations.
Among some expenses we have:
1) Manufacturing Costs and Expenses.
In this area, all the elements involved in production are taken into account, that is, raw materials or materials, whether direct or indirect, direct labor, or those who make the product or services, the hand indirect work, such as supervisors, depreciation of equipment, water, energy, etc., everything related to production.
The following can be detailed within this heading:
• Raw Material or Direct Materials: is what is part of the product, such as in a shoe, the sole that composes it, as well as the strap and the leather, as well as other materials that it carries internally and that are necessary for its elaboration. Indirect materials are those that do not constitute part of the product for its operation, such as bags and boxes that are used to give presentation to the packaging.
• Labor: it is divided into direct and indirect labor. Direct labor is that which performs physical work, also actively participates in the elaboration of the product, for example: bonding of bricks, drilling of material, assembly, etc. Indirect labor is made up of supervisors, guards, secretaries, administrative assistants, maintenance personnel, etc.
• Other manufacturing expenses: here you can include expenses such as cleaning supplies, office stationery, fuel and lubricants, spare parts and accessories, water and energy, rent, insurance, taxes, depreciation, maintenance, and others.
2) Selling Expenses.
They are those that are used to boost the sales of the company and are made up of advertising, propaganda, salaries and commissions of sellers, shipments and delivery of merchandise, transportation, etc.
3) Administration Expenses.
These expenses are made up of the expenses for the administration of the company. In this category are the salaries of administrative personnel, depreciation of office equipment, payments for rent, electricity, telephone, mail, telegraph, cleaning expenses, stationery and stationery.
4) Financial Expense.
These expenses refer to the operations carried out in order to stimulate the activities of the company.
- PRESENTATION OF THE COST BUDGET.
The cost budget is presented in the form of accounting and financial results. It is prepared considering in detail all the items studied, and the basic scheme.
The Stages to follow for financing are:
1) Determine the financing needs. Carry out an analysis of the project execution costs, that is, the initial investment, also taking into account other investments that need to be made in the useful life of the project.
The establishment of the project resources will come from the company itself and from the income and expense budgets, where surpluses from operations are achieved.
2) Identify possible sources of financing.
For the financing of a project, the first aspect to examine are the possible sources of financing. These can be:
-Internal Sources.
- External Sources.
- Capital Market.
- Banks and Development Institutions.
- Cooperation for Development.
Analysis of the Alternatives.
When there are different sources of financing and at different terms, interest rates and financing periods, it is advisable to carry out amortization calculations for each alternative and then compare them in a matrix.
The most convenient source of financing is chosen, taking into account the needs of the project, or a combination of several sources of financing can be made, if this is more suitable for the project.
The preparation of another table is also recommended, where the way in which the financing that has been obtained will be amortized is presented, and must be prepared taking into account the conditions required by the financial institution.
FINANCIAL EVALUATION.
Net present value. "It is the monetary value that results from subtracting the sum of the discounted flows from the initial investment" (G. Baca Urbina).
Then, the Net Present Value (NPV) of a project can be defined as the obtained value updated separately for each year; extracting the difference between all cash inflows and outflows that occur during the life of a project at a predetermined fixed interest rate.
It also includes investments which must be redeemed from the net flow of income and expenses.
It should be noted that the discount rate must be equal to the interest rate paid by the borrower and reflects the opportunity cost of capital.
To determine the NPV, the company's Cash Flows are used.
In the case of the previous table, with a discount rate of approximately 19%, the result is a positive NPV, therefore the execution of the project is accepted.
In year zero (0) the initial investment appears, and from year 1 the flows turned out to be positive, then the sum of all flows is subtracted from the initial investment of $ 12,845.4 because it is a disbursement, which provides a final positive value .