Financing

Careful financial planning and month-by-month, year-by-year monitoring form the foundation FOR THE SUCCESS OF YOUR START-UP. The main objective of financial planning and using a budget plan is to verify the sustainability of expenses, meaning the balance between income and expenditure. On one hand, consistency is important, and on the other, reviewing and possibly updating forecasts: there is often a tendency to underestimate expenses and overestimate income.

First, let us understand the difference between INCOME AND EXPENDITURE — COSTS AND REVENUES, and familiarize ourselves with the concept of FIXED COSTS — VARIABLE COSTS AND UNIT COSTS. The total cost (TC) of a business is the sum of fixed costs (FC) and variable costs (VC). Fixed costs represent all production factors that, in the short term, cannot be changed, while variable costs are composed of the cost of variable production factors. The unit cost, or average unit cost, is the cost incurred to produce one unit of output (product; service; performance).

We must also keep in mind that FIXED COSTS ARE DIFFICULT TO LIQUIDATE (=sell). In other words, if I do not sell my products and decide to close, I may not be able to sell the machinery or office furniture. However, if my sales have decreased by 10% each month, next month I can purchase 10% less raw materials to reduce unsold stock.

The OBJECTIVE of a good entrepreneur is at least to break even on total costs. Profit comes after the so-called BEP = BREAK EVEN POINT. The break-even point indicates the point at which a company's costs coincide with sales revenues, so neither profit nor loss is recorded; it can be derived mathematically or graphically. To analyze the BEP, three forecast values are needed: fixed costs for the period, variable costs, and total sales volume.

HOW TO IMPROVE THE BEP: The Break Even Point is undoubtedly a fundamental control tool, a key weapon that allows improving business performance. Here are the levers we can use to IMPROVE THE BEP: Reduce fixed costs — by their nature they are difficult to reduce (e.g. employee costs, rent, etc.) but in case of growth, it may be appropriate to evaluate ways to reduce their volume. Reduce variable costs — these costs are closely linked to production. There are various techniques to lower these costs WITHOUT lowering quality. Increase prices — unlike fixed costs, which are directly proportional, the selling price is inversely proportional.

Let us also FAMILIARIZE OURSELVES WITH THE CONCEPT OF CAPITAL. FINANCING NEEDS: Internal sources — self-financing. External sources — equity capital and debt capital. EQUITY CAPITAL derives from contributions by the company's shareholders and is called, in accounting, share capital. It is contributed at the start of the business or during its life (composed of shares or quotas) plus self-financing in the strict sense, which derives from profits earned by the company through its operations. DEBT CAPITAL represents a debt of the company towards those who contributed such capital, which must be repaid. It is divided into: short-term debts (not exceeding one year) and medium-to-long-term debts (over one year). The main source of financing is banks.

If you want to understand whether your business will be profitable, imagine what your costs and revenues will be by filling in this Excel file: https://docs.google.com/spreadsheets/d/1AgEz4ihXgUaMvMxH2ZkmPaONqkiKgGGl/edit?usp=sharing&ouid=108392347812740494470&rtpof=true&sd=true