Key Financial Concepts for Business Projects
Economic Analysis Objectives
Economic analysis aims to determine the amount of financial resources required to carry out a project. This includes calculating the total cost of operating the plant (covering production, administration, and sales functions) and establishing a set of indicators that serve as the basis for the final economic evaluation of the project.
Major Production Costs
Major production costs include:
- Cost of raw materials
- Labor cost
- Packaging
- Electricity cost
- Cost of water
- Fuels
- Quality control
- Maintenance
- Depreciation and amortization charges
- Other costs
- Pollution control costs
Initial Investment Components
Initial investment involves the acquisition of all fixed assets, whether tangible or intangible, and deferred assets needed to start the company's operations, excluding working capital.
Defining Tangible Assets
Tangible assets are physical items (what you can touch) owned by the company, such as land, buildings, machinery, equipment, furniture, vehicles, tools, and others.
Operational Assets Explained
Operational assets are the pool of assets owned by the company necessary for its operation. These may include investment in patents, trademarks, commercial or industrial designs, trade names, technical assistance, technology transfer, pre-operating costs, installation and commissioning, service contracts (such as electricity, telephone, water), notary services, studies designed to improve current or future performance (like administrative or engineering studies, evaluation studies), staff training (inside and outside the company), etc.
Depreciation and Amortization Concepts
While sometimes used interchangeably in a general sense of asset value reduction, depreciation specifically applies to tangible fixed assets, reflecting their loss of value over time due to wear, tear, or obsolescence. Amortization applies to intangible or deferred assets, representing the systematic expensing of their cost over their useful life to recover the investment.
Working Capital Definition
From a practical point of view, working capital is the additional capital (beyond investment in fixed and deferred assets) needed to start and run a business. It is required to finance the initial production cycle before income is received.