Excel cash flow template
How to study the existence of a project?
How to establish a feasibility study for an IT project?
Multiple choice network review and case study
How to do a real estate market study?
How to do market research to open a restaurant?
Excel tutorial: Gantt chart
Excel tutorial: dashboard
Excel: how to draw a regression curve
The fixed costs are also called overhead costs, they are distinguished by the recurrence regardless of the level of business activity and are fixed in advance (rent, electricity costs, salaries , insurance premiums, depreciation, etc.)
The variable costs are directly determined by the level of activity of the company and they often relate to the purchases of goods or the purchases of raw materials for industrial companies.
Calculation of the SR break-even point
To proceed with the calculation of the breakeven point, the entrepreneur or the financial analyst must examine the income statement and also examine the accounting balance, accounting restatement is essential to distinguish between variable and fixed costs.
Break-even point = fixed costs / (turnover - variable costs / turnover)
The ratio : (turnover - variable costs / turnover) is the margin rate on variable costs
Example :
A company that imports electrical equipment expects to achieve a turnover of 1,000,000 Dirhams.
The founder estimated fixed charges of 230,000 Dhs linked. Variable costs are calculated from the commercial margin which is 45%
SR = 230000 / (1000000 - 45% x 1000000) / 1000000) = 418181, 818181
The minimum turnover to reach the breakeven point is 418181, 818181
The calculation of the breakeven point
The breakeven point is derived from the breakeven point, but we must not be mistaken, it is not a financial concept but a duration expressed in the number of days j.
Break Even point (in days) = Break Even point / (Annual turnover / 360)
Evaluation of the profitability of a project
The study and calculation of the break-even point is important. In addition, the investment decision making should be carefully considered, in reality, the project can generate expenses which were not foreseen. The unforeseen are linked to inflation, external factors such as the economic climate, technological change or even natural disasters.
Present value and the discount principle
This is a criterion which takes into account the discount factor. Undoubtedly, this method makes the incoming and outgoing money flows (cash flow or cash flow) related to an investment and received over different periods of time homogeneous.
The principle of discounting is based on the fact that the value of money is not constant, with the period when a currency loses or gains in value, so the comparison of flows must absolutely take into account the period.
Two variables are found: the future value (VF) and the present value (VA) as well as the discount rate (K) and the period (T).
The formula: VF = VA * (1 + k) T
And so: VA = VF / (1 + k) T
Interpretation: a present value of an amount or a capital placed in the period T (T = number of years) will be lower if T is large and if the rate K is increasing.
How to use the present value as a criterion of profitability?
If we take for example an initial investment which generates cash flows and in return, named outgoing flows (D) over years T and an overall duration T. This investment will be considered profitable if the sum of all the present values is greater than the amount initially invested.
With the rating S relating to the residual value of the goods of the equipment, we obtain this formula:
As well as the current value relating to an annuity: VA = A [(1-1 / (1 + k) T) / k]
The net present value that we call (NAV) is therefore:
VNA = VA - Initial capital
Interpretation : in practice, if the entrepreneur had to choose between several projects, it is obvious that he maintains the project in the net present value is higher.
An eloquent index among financial indices, it is the profitability index whose reference value is 1, this index must be greater than 1:
IP = VA / Initial Capital
The discount rate
We can define the discount rate also by the cost of raising capital. Every entrepreneur can profit from his financial resources by an alternative of the investment, the alternative is the placement.
The investment is different from the investment by the opportunity cost than the financial rate of return on investment. In the case of the investment, the entrepreneur has no financial return up front and accepts the risk of investing without having the guarantee of making a profit.
Now that we understand the difference between investing and investing, we come back to the discount rate. Sometimes the entrepreneur does not have the necessary capital, and therefore seeks to borrow money from a third party. The provision of capital by a third party is remunerated by a rate which is the discount rate.
Theoretically, the discount rate is expressed as an annual rate, but in practice the incoming and outgoing financial flows do not extend over a year.
We denote (m) the time a cash flow occurs, so we can have the following formula that determines the discount rate in this case: k '= (1 + k / m) - ™
On the other hand, if the company decides to invest in a new technology while the current solutions in the company are functional, profitability is calculated by integrating the total amount invested. In this case, the entrepreneur measures profitability after comparing profitability to total expenses.
The period to be taken into consideration: the study of the profitability of a project by following the net present value method (NAV) is based on knowledge of its duration. A distinction must be made between the technical lifespan and the economic lifespan. In the life of a company, an item of equipment does not reach the end of its theoretical life, also known as technical, the equipment is likely to be replaced or repaired. It is therefore important to take into account the economic life to assess profitability, the economic life is defined as the time after which it is not profitable to use equipment although it may survive because of the weakness of its technical performance in comparison with the competition.
The “crossed” comparison of the two projects: in order not to devalue a project, it is useful to compare it by another project, the comparison always involves finding a common between the compared projects.
Example: to compare a project with a lifespan of 3 years with a project with a duration of 5 years, a common deadline of 15 years must be taken.
A second approach consists in calculating this annuity:
ANCO = (VA * k) / [(1-1 / (1 + k) T
This is the equivalent annuity of the projects which corresponds to the net present value of the project calculated over its lifetime.
It should be remembered that after the elimination of investment projects deemed unprofitable, the entrepreneur must know how to prioritize investments for which the NAV is high but which does not pose a problem such as access to financing or the intersection with other investments.