In our day starting a business is attracting many questions, the one that worries us as entrepreneurs is certainly if the business will be economically profitable to pay debts, salaries and profit. Therefore, the elaboration of a capital budget is a tool that is too useful to analyze the convenience of an investment project or a business.
In The course of this essay we will explain mainly the process of elaboration of the capital budget with the purpose of providing to the entrepreneurs of an overview of the variables to take into account in this type of financial analysis for a taking of More reliable and accurate decisions in the business or investment venture.
We will Mention some important variables that come to determine this feasibility in our project, such as the interest rate and the risk-free rate.
We will Explain further in the development of this work the models or rules on which the financial evaluation of a project is based, as for example the VPN, TIR, IR and PRD.
Finally, in our conclusions, we will highlight the importance of the elaboration or analysis of the capital budget of a new project or, in the modification or improvement of an existing one.
As A first step it is necessary to calculate the initial investment, that is to say, the total of the resources required to generate our project. These range from the fixed assets achieved or planned to buy in the future as an example may be: a land or building, machinery, plant and equipment, to the working capital necessary to initiate activities.
Every fixed asset has a salvage value. This value is Usually given by the financial advisor or the manufacturer. They also have a value of depreciation or, of appreciation. These are based on the time and conditions of use of that good. They need to be taken into account, because even though they will be reflected at the end of the life of the project, they result in an investment return.
Estimated revenue will be an important part, so it is necessary to define goals based on a market analysis. These are based on sales over the life of the project and the variable costs of the product. Normally, positive linear growth is inferred for both, because, as the years go by you tend to acquire more experience, therefore you will sell your product more, but it also costs you more to produce it.
Variable costs are all those that are necessary to produce the product. i.e. labor, raw material, indirect costs, etc. These As we said, tend to increase as the vast majority of products or services in our country, because they are affected by the rate of inflation. As expected, at least cover this index in the selling price of our product to generate profits.
All costs and expenses other than variables are called «Fixed or operating». To name a few examples, annual salaries to trusted employees and administrative expenses are included in this category.
So far and as long as we have the capital to absolve our initial investment, it seems that everything is in good running, however, many of the times otherwise, it is advisable to leverage financially to achieve faster our Objectives.
Leveraging in financial terms means, borrowing. Here is where the intervention of investors or partners can be of great help. This debt is taken into account in our analysis, and it is of vital importance to absorb the costs or, the interest within the period determined to amortize the initial investment.
But how much to borrow? It certainly depends on the proper convenience of investing your own money or reserving it for another type of concept.
Thus, the TREMA or minimum yield rate acceptable according to the percentage contributed by the partners or by a banking institution is calculated, taking into account the percentage points that these have estimated as a risk prize and the risk-free rate Provided by the Treasury certificates of the Federation «CETE» (http://www.banxico.org.mx/portal-mercado-valores/index.html, S.F.). For practical terms, we will try to describe the CETE as the lending of money that you give to the government by acquiring them so that it can pay their commitments, and in return you take a profit or interest.
So, by making the product of these two rates, we will find the minimum acceptable yield rate for the project (TREMA). In the end we will end up weighing against the percentages of participation of the parties to find the discount rate or TREMA weighted.
Later we determine the profits, nominal cash flows and discounted in the projection in the time determined to amortize the investment. Net income is obtained by subtracting the marginal utility, depreciation of assets, administrative expenses and of course the interest payable to the Bank and the government (ISR).
The cash flow of operation or, the cash we need to operate our business is the sum of the depreciation plus the net profit. Well, using the TREMA weight and a discount factor to the number of years to pay the debt, we find the cash flow discounted. This is necessary because the flows of funds in different periods cannot be compared directly since it is not the same to have a quantity of money now that in the future.
The equilibrium point refers to the level of sales where the fixed and variable costs are covered. These will be absorbed from a percentage of the marginal utility to pay the fixed. The remainder is considered to pay the variable costs.
The point of equilibrium in units is the result of the sum of the fixed costs between the selling price of our product, (Zutter, 2012).
As the last step of our analysis, we will focus on the financial evaluation of the project through the 4 Rules or principles VPN, TIR, IR and PRD, (Van Horne, 2010).
So, adding the discounted flows we can get the net present value (VPN). If the current value of cash flows is greater than zero, the project is accepted (Van Horne, 2010).
The recovery Period (PRD) is calculated by subtracting the initial investment and discounted cash flows. If They Consider as feasible if it is a positive difference to zero, (Van Horne, 2010).
In Addition, it is necessary to corroborate the financial feasibility through the calculation of the internal rate of profitability (TIR), this must be higher than the minimum discount rate in order to accept the project, (Van Horne, 2010). There Are Easy-to-understand computing formulas to calculate.
Finally, the rate of profitability (IR) is calculated, i.e. the weight you obtain for each weight invested. This is obtained by dividing the sum of discounted cash flows between the profitability index, if it is greater than 1 the project is accepted, (Van Horne, 2010).
At present, financial analysis is very important before starting a business or an investment, since these provide us with a wide panorama of the financial behavior during the life of the project. This helps us and gives us a better decision-making power in the face of doubt or uncertainty.
The lack of financial knowledge often causes us to we miss our decisions, focusing our resources also in an inadequate way. This can attract delays and many expenses not covered at the beginning of the project. Tools such as the elaboration of capital budget clarify doubts, especially if the project will be sustainable over time.
This type of procedure is of first instance difficult to understand, however, with a little practice it ends up being too practical. Today There are many applications on the Internet that can help you genéralo and of course, this essay can serve as a good reference to understand the concepts and steps to follow in one of them.