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 in, 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 to be able to undertake a dream.
For this reason, we are convinced that developing a capital budgeting model (however simple it may be), as well as its in-depth analysis, allows us to validate profitable business proposals that tend to be successful. Dismembering a project in each of its constituent parts and analyzing them 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 starting it, designing a model that maximizes profits and allows us to determine each investment proposal.
Simply put, the purpose of developing this capital budgeting model is to make rational decisions based on numbers and not get carried away by the heart. When we make decisions, suddenly everything becomes a little clearer, the environment calms down and we can even remove some weights from ourselves (we choose strategies, tactics, and we even dream of all those activities that we want to undertake in this new business).
In any case, it is important to note that when a person seeks to invest in some type of business (especially if it is a new micro, small or medium-sized company), it is essential that they request or need (if they are the only investor) the results of this capital budget analysis.
SMEs in our country require these tools that allow us to envision and predict their growth and expansion. 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 involves risk, so tools that take into account different factors to consider for decision making will always be desirable and valued. For example, the time value of money, risks, investment alternatives, future opportunities, etc.
Planning the capital budget allows us to search for projects with many higher profits. An instrument like this is essential for project evaluation because it allows you to discover and decide which of all the existing proposals would be the most profitable.
SME owners and investors need to visualize as complete a picture as possible before putting their money at stake. Glimpsing their cash flows, for example, will allow them to make better decisions, and could avoid bitter drinks in the future, especially not contemplating how 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 budgeting tool ) and that will allow evaluating the viability and suitability of a business, would be: consider payment 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 moment would help us by being taken into account in the operating cash flows and in the operating flows of the total investment.
Also, of course, there are the basics to evaluate the viability of the project: the calculation of the discounted flows, the sum of which 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 if we will get out of debt or not. On the other hand, the calculation of the recovery period will indicate the time in which we expect the recovery of the initial investment, making us see if it is possible and it is convenient to wait for the return on that investment after a certain time of the launch of the new business.
In addition, the internal rate of return will indicate to us in simple percentage terms, if the new project aspires to obtain a higher return than that determined by ourselves at the fixed discount rate (minimum rate of return accepted by this project). This is very important and must be taken into account, since a business can be profitable, but not to the extent expected. It is for this reason that a discount rate should be set for any project, since other investment opportunities are waived throughout the planet, the objective is to win. Likewise, the calculation of the profitability indexIt will provide a perspective on the money obtained for each monetary unit invested. All these elements embodied in our planning tool are very important, since 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. So, with this type of tool we can evaluate any type of project, which can range from an acquisition or sale of companies, to the purchase of technology or machinery (this is very important since we can observe how the cash flows behave through time), in addition to determining the present value of each year. The correct planning of the investment gives the investor the opportunity to find a greater profit.
Once 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 to do with it. However, adequate budget planning allows, in addition to evaluating, monitoring the behavior of earnings through the income statement, and this in turn will allow us to adjust costs or boost sales, in addition to working on continuous improvement strategies so that the SMEs stay and grow through the years and achieve its consolidation.
The world economy and the current situation of the country make it very difficult (but not impossible) to set up a successful business in Mexico. It is necessary to study and stop to contemplate the investment that is intended to be made with some care and caution. It is necessary to know and take advantage of the greatest number of financial tools available to ensure the success of our business.
During the last 5 years, the state of Puebla registered more births than business deaths. Around 250,000 births against 89,863 deaths. As if that were not enough, at some point during the first 5 years of life, the vast majority of these entrepreneurial projects die, and after 20 years have passed, only 15% of those businesses that were born in the same year survive in the entity.
Another sad figure is the one we obtained in a note from the newspaper El Financiero (2016), which describes how 75% of entrepreneurship projects fail in Mexico, resulting in that a startup in our country is less likely to survive than in other countries. such as Colombia, Brazil and the US We are really saddened to learn that Mexico is among the countries in America in which the most companies close after only two years of operation.
Having a good idea is no longer enough. It is necessary to have a plan that helps us define our objectives, mission, values, plan, potential clients, financing methods and project the costs that we are going to have. These tools allow us 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 financial tools available helps to 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 for this, it is necessary that investors believe in us and our business. They require reliable and credible information that allows them to evaluate the potential of our dream. If it is possible to calculate it, why not give it to them?
References
Moyer, R & McGuigan, James & J. Kretlow, William. (2018). Contemporary Financial Management / R. Charles Moyer, James R. McGuigan, William J. Kretlow. SERBIULA (Librum 2.0 system). Translation of: Contemporary financial management
López, J. (January 18, 2016). The financial. Obtained from Fracasan in Mexico 75% of enterprises: http: //www.elfinanciero.com.mx/empresas/fracasan-en-mexico-75-de-emprendimientos
