Assessing the economic and financial feasibility of a business project is a fundamental step to understand its sustainability in the medium to long term.
The economic and financial feasibility of a business—its ability to generate income and cash flow—is one of the first aspects evaluated in a startup. Producing a good or service requires material, intellectual, human, and technological resources that must be compensated.
Money is the lifeblood of any business activity, both in strategic planning and in actual results. Financial management within a company is a key activity that requires specific expertise.
Planning
The first step toward success in your business is to plan financial resources, future investments, and the profitability of your products or services.
If the founding team does not have the necessary funds to acquire resources—materials, technologies, and services—there are two options:
- Seek funding from third parties
- Bring a product or service to market quickly at a price higher than its production costs. This is referred to as self-financing.
In any case, a business plan must be developed. This document includes a descriptive section (market overview, competitor analysis, market need, opportunity and strategy, marketing and operational plan, team expertise) and the economic-financial plan.
Economic and Financial Plan
This is a forecast statement, typically developed over a 3–5 year period, showing the short- and medium-term economic impact of strategic decisions described in the narrative section.
Every strategic decision affects all business activities—every business function either consumes or generates money.
The economic plan is structured like an Income Statement, a tiered format starting with revenues. By subtracting operating costs (cost of raw materials, services, personnel, and other operating costs) and fixed costs (those that do not vary with sales), it yields a key metric in economic-financial analysis: EBITDA (Earnings Before Interests, Taxes, Depreciation, and Amortization), or Gross Operating Margin.
From this value, depreciation, financial expenses, and taxes are subtracted to arrive at the net economic result (profit or loss). This is also a crucial financial indicator and is an approximation of the cash flows generated by operational activity.
Why Are Cash Flows Important?
Because beyond the ability to generate profits, the ability to generate cash is essential. This is critical for ensuring the company’s long-term survival.
EBITDA and cash flows are among the primary indicators used when evaluating a company. They are also utilized by investment funds for financial assessments and investment decisions.
(Article published in the March 2022 issue of Millionaire magazine)
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