August 2, 2022
Once we have the idea and the business plan defined, it is necessary to project it in the medium and long term and analyze its viability. This will help us to establish reasonable goals and make decisions based on objective data, on numbers. Failure to do so may lead us to make emotional decisions that are counterproductive in the short-medium term.
To do this, we must draw up an economic-financial plan to evaluate the economic potential of the project. We decide whether to propose optimistic or conservative scenarios and we can adjust the forecasts until we feel comfortable without losing the realistic perspective.
In addition, it is essential to know in advance the potential profitability of the project and to know the financial needs that we will have to cover. This also allows us to know the necessary sales that we will have to generate to cover all the expenses and start making profits.
And how is it done? What are the points?
Depending on our accounting knowledge, we can make a more or less detailed plan. However, there are 2 elements that cannot be missing: the investment and financing plan and an estimate of the income statement for the first years.
Let's look at each of them in detail:
Many people confuse investment with expenditure. First, we must clarify that by investment we mean those amounts for which a return is expected in the future, while expenditure is the simple use of the good or service in exchange for a consideration.
With the initial investment, we can know the assets of the company, that is, the goods and rights to start the economic activity. We can classify it as follows:
After defining the investments, we must have funds that will allow us to acquire them. We can resort to different sources of financing:
Although the main source of funding is always the 3 F's (Friends, Family and Fools) we should not rule out other ways such as crowdfunding, leasing or even resorting to banks.
The income statement will inform us of the potential results obtained during the first financial years, generated by the income and expenses that may be incurred during that period. It is an essential element in the plan.
There are 2 possible scenarios: profit or loss. We can calculate the result as follows:
It is normal to have losses in the initial stages of the project, so it is necessary to take this into account in investments.
In addition, we must monitor compliance with the plan and its deviations. For example, if we did not take into account an important expense or if the income is higher than expected (which may force us to increase some expenses), the plan may deviate. Deviations are not always bad and they help us to better direct our enterprise.
In addition to these accounts, we can use other instruments or methods to calculate profitability, for example, the break-even point, which allows us to know at what point total costs equal total revenues, so we can determine how many sales we need to generate in order to make a profit.
From these calculations, we can analyze and determine if our business is potentially profitable and decide to launch and undertake the project.
Remember! The plan should be as realistic and feasible as possible so that there are no big surprises in the future.
Find out more about Yan Ye, back office at MuttuLab, author of this article.
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