It Is true that there are many factors that will determine the success or failure of a new business. Some of them are very arbitrary. However, we are convinced that in the times we live, it is not prudent to leave the success we want for our business to chance, especially knowing how difficult it is to save and/or capitalize in order to be able to undertake a dream.
Therefore, we are convinced that developing a capital budget model (as simple as it may be), as well as its deep analysis, allows us to validate profitable business proposals, which tend to be successful. DisMembering a project in each of its constituent parts and analysing it carefully, also allows us to discover in the process new concepts/investments that we had not considered in the first instance. Thus, we help our business even before we begin, designing a model that maximizes profits and allows us to determine each investment proposal.
In Short, the purpose of developing this capital budget model is to make rational decisions based on numbers and not to let us go through the heart. When we make decisions, suddenly everything becomes a little clearer, the environment is calm and we can even go removing some weights from above (we choose strategies, tactics, and even dream of all those activities that we want to undertake in this new Business).
However, it is important to note that when a person seeks to invest in some type of business (especially if it is a micro, small or medium new company), it is essential that you request or need (if you are the only investor) the results of this Capital budget analysis.
Smes in our country require these tools to envision and predict the growth and expansion of them. The Investor requires relevant information that allows him to know a global panorama of how to invest his money. A small business always requires making an investment that implies risk, so the tools that take into account different factors to consider for decision making will always be desirable and valued. For example, the value of money over time, risks, investment alternatives, future opportunities, etc.
That allows the planning of the capital budget
Capital budget planning allows us to search for projects with much higher profits. An instrument like this is essential for project evaluation because it allows to discover and decide which of all the existing proposals would be the most profitable.
The owners and investors of Smes need to visualize as complete a panorama as possible before putting their money into play. Glimpsing their cash flows, for example, will allow them to make better decisions, and could avoid bitter drinks in the future, especially not to contemplate how the profits would behave at the end of each year.
In Addition to the prediction of marginal and net profits, other important indices (which, from our point of view, should be considered in the capital budget tool) and which will allow to evaluate the viability and suitability of a business, would be: Consider the payment of interest (in case of accompanying the business of a bank loan), payment of taxes, as well as the depreciation and salvage value of our assets that at a certain time would help us to be taken into account in the cash flows of Operation and in the flows of operation of the total investment.
Also, of course, There are the basics to evaluate the feasibility of the project: The calculation of discounted flows, whose sum gives an overview of the net present value of our expected cash flows for the business, and can support us in making Decisions to know whether we will leave the debt or not. On the other hand, the calculation of the recovery period will indicate the time in which we expect the return of the initial investment, making us see if it is possible and it is advisable to wait for returns of that last investment certain time of the launching of the new business.
Which points out the internal rate of profitability?
In Addition, the internal rate of return will point us in simple terms of percentage, if the new project aspires to obtain a higher profitability of the one determined by ourselves in the fixed discount rate (percentage of minimum profitability accepted by this Project). This is very important and should be taken into account, as a business can be profitable, but not as far as expected. It Is For this reason that you must set a discount rate for any project, as it waives other investment opportunities throughout the planet, the goal is to win. Also, the calculation of the profitability index will provide a perspective on the money obtained by each invested currency unit. All these elements embodied in our planning tool are very important because they reduce risks and establish control over our project.
According To Moyer (2013) The capital budget is the planning process for the purchase of assets whose cash flows are expected to continue beyond one year. Then, with this type of tool we can evaluate any type of project, that can go from an acquisition or sale of companies, to the purchase of technology or machinery (this is very important because we can observe how the cash flows to Over time), in addition to determining the present value of each exercise. The correct planning of the investment gives the investor the opportunity to find a greater utility.
Again, we emphasize that there is no magic plan or perfect methodology to ensure the success of a business, and we believe that sometimes arbitrary factors have a lot of impact on it. However, adequate budget planning allows in addition to evaluating, monitoring the earnings behavior through the income statement, and this in turn will allow us to adjust costs or potentiate sales, in addition to working in strategies of Continuous improvement for SMES to stay and grow over the years and achieve their consolidation.
The world economy and the current situation of the country make it very difficult (but not impossible) to build a successful business in Mexico. It Is necessary to study and to stop to contemplate with some detail and precaution the investment that is intended to be made. It Is necessary to know and take advantage of the largest amount of financial tools available to ensure the success of our business.
During the last 5 years, in the state of Puebla more births were recorded than business deaths. Around 250.000 births against 89.863 deaths. If not enough, at some point during the first 5 years of life the vast majority of these entrepreneurial projects die, and after 20 years, only survives in the entity 15% of those businesses that were born the same year.
Another sad figure is the one we got in a note from the newspaper El Financiero (2016), which describes how in Mexico fails 75% of the projects of entrepreneurship, resulting in a startup in our country is less likely to survive than in countries like Colombia, Brazil and USA We are Really saddened to learn that Mexico is among the countries of America where more companies close after only two years of operation.
It’s not enough to have a good idea. It Is necessary to have a plan that will help us to define our objectives, mission, values, plan, potential clients, financing methods and project the costs that we will have. These tools allow you to evaluate the types of support and credit available, as well as how they will synergize with our cash flows. Planning through financial tools allows us to get out of that pessimistic statistic and avoid mistakes that could bankrupt our business.
Sitting Down to write a business plan using the available financial tools helps you understand how our business will work and become profitable.
An Elementary step for a project to come to life is to be able to sell it, that is, to find financing, and to do so, investors need to believe in us and our business. They require reliable and credible information to enable them to evaluate the potential of our dream. If It is possible to calculate it, why not Brindárselas?.