Company Financing and Investment Strategies

Financing Your Company

Obtaining the necessary funds is crucial for the optimal functioning of a company.

Types of Financing

Self-Financing

• Capital contributed by partners
• Reserves and undistributed profits (self-financing):
  • From enrichment: Legal Reserve, Statutory Reserve, and Voluntary Reserve
  • Maintenance: Depreciation and provisions

External Financing

• Based on Term:
  1. Short Term: Commercial loans, factoring, discounting of bills, financial credits, and bank loans.
  2. Long Term: Loans, leasing, renting, loans for fixed assets, bonds or obligations.
• Based on Origin:
  1. Internal Funding: Reserves or undistributed assets.
  2. External Funding: Other sources.
• Other External Funding:
  1. Grants and aid: Economic quantities that governments provide to entrepreneurs who meet specific requirements.
  2. Bonuses: Incentives that support entrepreneurs and alleviate financial pressure to encourage specific actions. Important bonuses include: lines of credit at very low premiums for the purchase of specific products and reductions in social security contributions when formalizing certain types of employment contracts.

Investment Strategies

Investment is the application of economic resources to the formation or maintenance of fixed assets of the company, aimed at achieving business goals.

Relationship with Finance

Finance investments whose profitability is positive.

Selection Criteria

Static Criteria

These do not consider the impact of time on the value of cash flows.

• Payback or Recovery Period: The time it takes for cumulative inflows to recoup the initial investment.

Dynamic Criteria

These take into account the interest rate that affects the value of cash flows.

• NPV (Net Present Value): The discounted value at a certain interest rate of all flows expected to be produced by the investment, minus the expenditure required for the investment.
• IRR (Internal Rate of Return): The interest rate that equates the net present value (NPV) of the investment to zero. In other words, the interest rate needed for current cash flows to redeem the initial investment.

Quantities Involved in Investment

Down Payment (DI), cash flows (Q): Payments of maintenance (P), Collections of the investment (C). Should be Q = C - P. DI <? cash flows of the years of life of the investment.