Decisions on investments, debt levels and budget are essential to your planning when drawing up your business plan.
All projects must be properly financed. As both minimum rate of return and cash flow are involved, funding sources can influence valuation.
Find the right balance
We therefore need to determine the "optimal combination" of financing, i.e. the capital structure that will deliver maximum value.
We usually use a mix of debt and equity financing.
Have your financial ratios inspected to establish the right balance between your company's foreign and domestic debt.
External financing: debt financing - Indebtedness
Debt financing gives rise to a debt that must be repaid through disbursements, regardless of how successful the project is.
The interest rate will depend on the repayment period, the amount requested and your financial strength.
Internal financing: capital financing (company's own funds)
Equity financing is less risky in terms of treasury obligations, but entails dilution of capital, control and earnings.
In general, the cost of capital financing is higher than that of debt financing. A higher minimum rate of return can therefore offset any reduction in cash flow risk.
You should also try to choose financing sources as closely as possible to the assets to be financed, taking into account both timing and cash flow.
In addition to your investment plan, you'll need to prepare a provisional budget.
A financial plan involves forward-looking estimates of revenues, expenses and assets, and is linked to the three main financial statements (balance sheet, income statement and cash flow statement).
Thanks to this budget, you can analyze your repayment capacity and optimize your debt threshold.
In a nutshell:
The right balance between these 2 aspects of financing is crucial to the financial health of your business. Over-indebtedness can quickly bankrupt you, as all the cash generated by your business will be used to repay bank interest.
At the same time, under-indebtedness isn't advisable either, as you'll have money lying idle in your coffers that could have helped you in your development.