FINANCE FOR ENTREPRENEURS
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What is the economic viability of a new enterprise?
The economic viability of a new enterprise refers to creating the capacity of the enterprise to generate sufficient revenue to cover its costs and to be profitable in the long term. It is about making your company sustainable over time and generating value for the promoting partners. Economic viability is based on the analysis of various financial factors, such as costs and revenues, as well as on the projection of cash flows and key financial indicators.
What tools can be used to assess the economic viability of an enterprise?
IN THIS SPRINT YOU WILL LEARN HOW TO USE THE FOLLOWING TOOLS:
- Analysis of costs, prices and margins: This analysis is used to assess the costs and benefits associated with a particular project or investment. It allows to determine whether the revenues generated by the project are sufficient to cover the costs and make a profit.
- Cost-benefit analysis: This analysis is used to assess the profitability of a project or investment. It determines whether the income generated is sufficient to make a profit and how long it will take to recoup the investment.
- Financial projections: Financial projections are a set of reports that allow an assessment of the future financial situation of a company. They include projected financial statements, financial ratio analysis and projected cash flow for the next 18 months.
Why is it important to assess the economic viability of a new venture?
It is important to to assess the economic viability of a new enterprise because it allows to determine whether the business project is feasible and sustainable over time. By assessing financial viability, you can identify potential risks and opportunities, and make informed decisions about what funding your business needs. In addition, a proper assessment of economic viability helps to set realistic goals and objectives, as well as to design strategies to achieve them.
In a nutshell, assessing economic viability is essential to ensure the long-term success of the enterprise. Lack of liquidity is a situation where a company does not have sufficient cash or liquid assets to meet its short-term financial obligations..
In the context of start-ups, this may occur when a good feasibility plan that takes into account all possible contingencies has not been carried out and more financing is needed than initially foreseen. It is important for entrepreneurs to draw up a viability plan that includes realistic financial projections and a clear strategy for obtaining financing. Lack of financing can be due to various causes, such as lack of credit in the market, lack of confidence in the project, lack of guarantees or lack of a clear marketing strategy.
To avoid a lack of liquidity, entrepreneurs should have a realistic view of their financial needs and look for appropriate sources of funding for their project. These sources can include angel investors, venture capital funds, bank loans, crowdfunding, among others.
It is also important that entrepreneurs identify and adequately manage financial risks, such as interest rate risk, exchange rate risk, default risk, liquidity risk, among others. Good financial risk management will enable the company to be prepared for possible liquidity shortages.
In short, the lack of liquidity is one of the most important The main causes of failure in start-ups can be prevented by a good feasibility plan that includes realistic financial projections and a clear strategy for raising finance. In addition, good financial risk management will enable the company to be prepared for possible liquidity shortages.
Who carries out the economic viability plan?
The economic viability plan is an essential tool for any entrepreneur seeking to launch his or her company in the market. In this plan, costs and expected revenues should be detailed for a given period, usually one to three years. The 18-month cash flow forecast is a fundamental tool within the viability plan, as it allows the entrepreneur to have a clear vision of the current and future financial situation of the company.
It is important to stress that the economic viability plan is a task that must be carried out by the entrepreneur and cannot be delegated to an accountant or financial advisor. Many entrepreneurs mistakenly believe that this task is not theirs and delegate it, but this is a serious mistake, as there is no one better than the entrepreneur to know in depth the business model, the costs and the expected income.
The entrepreneur should personally maintain the feasibility plan and update it at least once a month. He/she must be able to identify the risks and opportunities that may arise during the development of the business and make timely and appropriate decisions accordingly. Lack of liquidity is the second cause of failure in start-ups, after lack of market.
This is due to the lack of a good feasibility plan and the lack of forecasting the necessary financing to carry out the business project. It is therefore essential that the entrepreneur takes the necessary time to draw up a solid and realistic feasibility plan and to look for the necessary sources of financing sufficiently in advance. In this way, he will be able to ensure the long-term success and sustainability of his business.
At what point do I start to identify my costs and look into the feasibility (+) economic impact of my project?
Only when I have already validated the right part of the CANVAS (the emotional part), product market fit), only after that I start with the left, the rational one. If you are participating in the mentorDay acceleration programme, financial viability is the second sprint (see) and it is necessary that you have completed the first sprint (see+) before moving on to this second (see+).
In other words, I only start quantifying costs after validating the market, when it is clear to me that my value proposition is sufficient, that it satisfies a need for an customer segment (see+) and I am clear about how much the customer is willing to pay. After the product market fit is when I am clear about which activities are key, which resources are key, which partners are needed and therefore I can see my cost structure. Only after I see that I have a market fit do we start with the left part of the Canvas.
How much will the value we have to generate cost us?
Each of the key activities necessary for the customer to perceive sufficient value to buy involves costs and investments, and each key resource involves costs.
THE OBJECTIVES OF THE ECONOMIC VIABILITY OF A NEW COMPANY ARE:
- Make the project economically viable: It is important to analyse whether the business model is profitable and sustainable in the long term and if not, to adjust it.
- Calculate the amount of money needed: Estimate the amount of money that will be needed to finance the project and arrange for the treasury (see+) efficiently.
- Reduce financial need: The bootstrapping (see+) o internal financing can be an option to reduce dependence on external funding and improve economic viability.
- Mitigate economic and financial risks: It is important to identify and mitigate financial and economic risks that may affect the viability of the project.
- Learn basic financial concepts: Entrepreneurs must have a basic knowledge of finance in order to understand the economic and financial situation of their company and make informed decisions.
What steps do you have to take and in what order to achieve the economic viability of a project?
IF YOU ARE PARTICIPATING IN THE MENTORDAY ACCELERATION PROGRAMME:
- Before beginning the feasibility you must complete the first sprint 1 of the acceleration programme (see+). If you have no market fit, there is no point in looking for the economic viability of your company.
- You will find it much easier to complete your financial viability plan by answering the questions we have asked you in the deliverable in writing.
- You will receive your deliverable when you are selected to participate in the acceleration programme, this is the template -> Deliverable: Economic Feasibility (ver+).
- Solve each of these questions, without skipping any of them, in order to carry out the economic viability of your company.
- You should write in your deliverable the answers to each of these questions so that you can then share this document with mentors, experts and other peers for feedback.
- Present and receive feedback from your peers:
- Share the drive file of your economic viability plan with your colleagues in the programme, allowing them to comment and offer suggestions for improvement.
- During the 1st and 2nd week of the acceleration programme we will create triads to share and discuss your plans.
- Defend your plan to economic viability (see+) in the webinar.
- Participate in the planned webinar where each entrepreneur can present his or her feasibility plan and receive feedback from others and the expert speaker (see+). This activity will allow you to receive additional feedback and gain a broader perspective on your plan and learn by collaborating on the other CANVAS.
- Improve your plan by taking advantage of all the feedback received (see+).
- With the feedback obtained, improve your plan as necessary, focusing on identifying all the hypotheses you have yet to validate in order to achieve your customer-problem-solution fit.
- Consult your doubts at WikiTIPs (see+) If a query of yours does not get a good answer, don't worry, because an expert will take care of it.
- Action plan.
- Write down all the activities you have to carry out to complete your economic viability plan, and for each activity the start date, duration, who is going to carry it out and its budget (if there is a cost).
- Make a list of all the actions you have to carry out to validate. Write down for each one: when you are going to start them, the duration, the person responsible for executing them and the budget.
- Take the actions to your: Implementation plan. Gantt chart or bar chart (see+).
- Individual sessions with your mentor or advisor.
- Share your plan with your assigned mentor or advisor (send them a link as a "commentator") and ask them to insert written comments in your file.
- Final review of your feasibility plan and delivery of the document:
- Make a final review of your plan to ensure that it is realistic and comprehensive
- Add to your business plan (ppt presentation) two images that summarise your economic viability plan.
APPLY THIS TIP TO YOUR PROJECT
NOW THAT YOU HAVE READ THIS TIP, ANSWER THE QUESTION:
- What do you need to make your project economically viable?
CASE STUDY FOR AN ENTREPRENEUR TO DRAW UP AN 18-MONTH ECONOMIC VIABILITY PLAN FOR HIS NEW COMPANY
Juan is an entrepreneur who has decided to launch a new financial advisory services company. After validating his business model and conducting a market study, he has decided that it is time to draw up an 18-month economic viability plan to ensure the sustainability of his company over time.
TO DO THIS, JUAN HAS CARRIED OUT THE FOLLOWING STEPS:
- Identification of costs and expected revenues: Juan has analysed in detail the costs and revenues expected over the next 18 months, including fixed and variable costs, marketing costs, personnel costs, sales revenues, revenues from additional services, etc.
- Carrying out financial projections: Juan has projected his company's cash flows for the next 18 months, taking into account expected costs and revenues. In addition, he has calculated various financial indicators, such as break-even point, contribution margin, return on investment, among others.
- Identification of risks and opportunities: Juan has identified the main risks and opportunities that may affect the economic viability of his business, such as competition, market developments, inflation, etc. He has also established contingency plans to deal with possible risk situations. He has also established contingency plans to deal with possible risk situations.
- Funding strategy: Juan has defined a clear strategy to obtain financing if needed, taking into account possible sources of funding, such as angel investors, bank loans, crowdfunding, among others.
- Monthly update of the feasibility plan: John has decided to update the financial viability plan at least once a month, in order to have a clear and up-to-date view of the financial situation of his company.
Thanks to his 18-month economic viability plan, Juan has been able to anticipate possible risk situations and has identified opportunities for improvement in his business model. In addition, has been able to establish a clear financing strategy to ensure the sustainability of its business over time.
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