Financing Investment Projects
An Investment Project or Business Plan is a proposal for the resolution of a current or future need, drawing on the resources available for a business group, and maximizing return on investment.
The Business Plan
When you’re making an investment project, the first is whether the idea is viable and will be a good business, regardless of how they will fund, this is what is known as an “Investment Project” or ” Business Plan “, if you have questions about how to make a business plan, we give some advice here.
But once you realize your project, and concluding that it is feasible, the next question that probably you’ll get is, how much should I borrow and how much to invest my own money? Many times, we do intend to meet the requirements of the Bank or Fund will lend us the money, and try to give us as much as possible, this is not always better, because we often work just to pay debt and we have no profits!
Debt and Capital
All you have in your business comes from two sources: your own capital and borrowed money. I’ll give an example: if a company, say a workshop has assets of 800,000 pesos, then a part of this money was borrowed, say, 320 000 pesos, which would be 40%, and the rest was contributed by the entrepreneur or . In such a case, we say that “40% debt and 60% capital.”
Performance
Performance is what an entrepreneur get for your money, your business as if it were a bank or an investment. Let’s see the example of the workshop have already begun. Let us assume that this workshop has total earnings of 200,000 dollars per year, and that their debt is a loan that charges 20% annual interest, then you have to pay 64 000 dollars of debt interest, and he has only 136 000 pesos, the “profit of enterprise.”
For a capital of 480,000 pesos, 136,000 pesos receive “profit of enterprise” or “performance.” As a percentage is: 28% yield.
But what if you have a higher percentage of debt? In this case, as you are charged interest of 20% is lower than he is receiving, 28%, if I had more debt, the performance of your own money would be higher. Do the same calculation with several% of debt, get the result that I show you the chart below:
The more debt then what better? Not necessarily … there is something else you should consider.
Risk
If something goes wrong in your business, for example, you sell less than what you intended, or have to sell at a lower price, then your own capital may have a lower yield than the interest on the debt, whichever is , and your debt ratio is high, your performance can collapse, and may even not have money to pay your debt, putting at risk the very existence of your business.
If the shop we have been studying have a problem or price sales, which make your total earnings are $ 100,000 instead of $ 200,000, then the return on investment of the employer would be:
Now the less debt the better! So what is the best percentage of debt?
Find a Balance
It is very difficult to know what will happen, so when you estimate how much they will be your earnings, use all the data you can: how they have behaved your sales and costs in previous years and what are your products so popular, look for data more realistic, and plans at least two scenarios: one optimistic, where “everything goes well”, and a more pessimistic, where “everything goes wrong”
With these two possibilities, “extreme”, calculate your return on investment for various% debt. The workshop of our example, could have calculated the two scenarios that we saw and raise the graphs as follows:
If this workshop retains its debt ratio by 40%, its performance may be between 8 and 28%. These data are completely different for each company, you must do your own calculations, if you use a computer, you can change several times on stage with ease.
The decision on the best debt ratio depends on your own business, you expect the utility and the risk that you see in the future, usually over 60% of debt is very risky. Every business is different and every company can take a different decision.
What percentage of debt you would have advised you to shop our example?
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