Administración de negocios y planificación integrada de negocios – (business management and integrated business planning)
1. Fundamentación del tema
The importance of this topic, which is part of the Business Communication Learning Unit (UDA, for its acronym in Spanish), lies in knowing how to evaluate an investment project. The functions of an accountant can include the management of a business or even the creation of one. It is important to recognize the different scenarios that must be considered before starting a business and the aspects that each one has.
2. Objetivo didáctico
Recognize the different substantial aspects to be considered before starting a business as an investment project.
3. Contenido didáctico
Introducción
Welcome back, dear student! We are glad to have you here one more time. In this lesson we will show you the different scenarios that must be considered before starting a business, which comprise:
- Market research
- Technical analysis
- Economic evaluation
We will explain the general aspects of each one in a simple way. We hope you find it useful!
Desarrollo del tema
1. Market research
This part of the project evaluation consists of the determination and quantification of:
- Supply and demand
- Price analysis
- Commercialization
Although the quantification of supply and demand for some products or services can be easily obtained from secondary information sources, it is always advisable to research based on primary sources, as they provide direct, updated and much more reliable information than any other type of data source. The general objective of this research is to verify the real possibility of product penetration in a given market. At the end of a meticulous and well-conducted study, it will be possible to sense or feel the risk involved and the possibility of success with the sale of a new item or with the existence of a new competitor in the market. Although there are important intangible factors (such as risk, which is not quantifiable but perceptible), this does not imply that quantitative studies should be left out. On the contrary, the basis for a good decision will always be the data collected in field research, mainly from primary sources.
On the other hand, market research is also useful to foresee an appropriate pricing policy, to study the best way to market the product, and to answer the first important question of the study: is there a viable market for the product to be manufactured? If the answer is positive, the study continues. If the answer is negative, a new, more precise and reliable study should be considered. If the study already has these characteristics, it would be advisable to stop the investigation (Baca, 2001).
a. Supply and demand
The main objective of demand analysis is to determine and measure the forces affecting market needs for a good or service, as well as to determine the possibility that the project’s product will satisfy that demand. Demand depends on a series of factors, such as the real need for the good or service, its price, the population’s income level, and others, so the study will have to take into account information from both primary and secondary sources, econometric indicators, and so on. To determine demand, the market research tools are used, specifically statistical research and field research.
The objective of supply analysis is to determine or measure the quantities and conditions under which an economy is able and willing to make a good or service available to the market. Supply, like demand, depends on a series of factors, such as market prices, government support for production, and so on. The field research to be carried out should take into account all these factors along with the economic environment in which the project will be developed.
To learn more about supply, demand, equilibrium point you can watch the following videos:
Primary and secondary sources:
In primary sources a direct contact with the future consumer is required, e.g. questionnaires, surveys, free trials, etc. On the other hand, secondary sources use information from an organization, such as the INEGI in Mexico or Google Trends.
In Google Trends, you can see how much a good or service has been searched on the web over time in a country or even a city. You can also see related searches, topics or queries from the goods or services. With this kind of information you can forecast the market behavior for your new product launch.
In the following image we will show a small research of financial services in Mexico in Google trends:
You can also get helpful information from organizations or public institutions. In Mexico there is an institution named “INEGI” (National Institute of Statistics and Geography), which periodically provides statistical information, e.g. how the population spend their free time, how much time they spent by age, gender, and in what activities,how Mexico’s gross income is divided, which sectors are the leading ones and much more. Here is an example:
b. Price Analysis:
In order to determine the selling price, a number of considerations are followed:
- The basis of all for all selling prices is the cost of production, administration and selling, plus a profit. It is this additional profit percentage that carries a number of strategic considerations.
- A second consideration is the potential demand for the product and the economic conditions of the country. There are times of economic boom in countries which can be taken advantage of to raise prices a little. There are also times of economic crisis when the important issue is to stay in the market at all costs. A country’s economic conditions have a definite influence on sales price setting.
- The reaction of the competition is the third important factor to take into account. If there are very strong competitors for the product, your first reaction to a new competitor will probably be to lower the price of the product to weaken the new competitor. This, in turn, will cause the new producer to adjust its price.
- Reseller behavior is another very important factor in pricing. It is known that at least each reseller of the product makes a profit ranging from 20% to 30% on the price at which it buys the product. If the marketing chain is long, the final price is easily doubled. It is important to select those product intermediaries who are willing to sacrifice a little of their profits in times of low sales, so as not to affect the sale price of the product too much.
- Marketing strategy is one of the most important considerations in pricing. Marketing strategies would be entering the market, winning the market, staying in the market, cost plus percentage of profit previously set regardless of market conditions, profit percentage on the investment made, matching the highest price, and so on.
- Finally, it is necessary to consider the price control that any government can impose on the products of the so-called “market basket». If the product we consider is not within this market basket, then it will never be subject to price control.
c. Commercialization
Commercialization is the activity that allows the producer to deliver a good or service to the consumer with the advantages of time and place.
2. Technical analysis
Technical analysis can be subdivided into four parts: determination of the optimal size of the company, determination of the optimal plant location, project engineering and management analysis.
Determining an optimal size is essential in this study. It should be noted that such determination is difficult since the existing techniques for that purpose are iterative and there is no precise and direct method for the calculation. The size also depends on the number of shifts worked, because, for certain installed equipment, production varies directly according to the number of shifts worked. In this case it is necessary to propose a series of alternatives when the technology that will be used is not known or mastered.
As for the determination of the optimal location of the project, it is necessary to take into account not only quantitative factors, such as transportation costs, raw materials and the finished product, but also qualitative factors, such as fiscal support, climate, community attitude and others. It should be remembered that analyses must be holistic, because if they are carried out from a single point of view they will lead to unsatisfactory results.
In terms of project engineering, it should be said that, technically, there are several optional production processes, which are basically highly automated and manual. Choosing one of them will depend largely on the availability of capital. This part also includes other studies, such as the analysis and selection of the necessary equipment, given the selected technology; then, the physical distribution of such equipment in the plant, as well as the proposal of the general distribution, in which each and every one of the areas that will make up the company are necessarily calculated.
Some aspects that are not analyzed in depth in feasibility studies are organizational, administrative and legal. This is because they are considered aspects that, due to their importance and sensitivity, deserve to be dealt with in depth in the final phase of the project. This does not imply that they should be ignored, but rather that the general idea about them should be mentioned; otherwise an adequate and precise selection of personnel, a procedures manual and a breakdown of functions should be made. In addition, the main articles of the different laws relevant for the company should be extracted and analyzed; since this is a delicate and meticulous job, it is included in the final project stage.
(V. Muro, comunicación personal, 2020)
3. Economic evaluation
The objective of economic evaluation is to organize and systematize the monetary information provided by the previous stages, as well as to prepare the analytical tables that serve as the basis for the evaluation.
This phase begins determining the total costs and the initial investment, the basis of which are the engineering studies since both, the costs and the initial investment, depend on the selected technology. It continues with the determination of the depreciation and amortization of the entire initial investment.
Another important point is the calculation of the working capital, which although it is also part of the initial investment, is not subject to depreciation and amortization, given its liquid nature.
The aspects that serve as the basis for the next stage, which is the economic evaluation, are the determination of the minimum acceptable rate of return or hurdle rate and the calculation of the net cash flows. Both rates and flows are calculated with and without financing. The flows come from the projected income statement for the selected time horizon.
(Magni, 2011).
When talking about financing, it is necessary to show how it works and how it is applied in the income statement, since it modifies the net cash flows. In this way, a financing plan is selected, the most complicated one, and its calculation is shown both in the form of interest and capital payment.
It is also recommended to include in this part the calculation of the minimum economic amount to be produced, called the equilibrium point. Although it is not an evaluation technique, due to the methodological disadvantages it presents, it is an important reference point for a production company to determine the level of production at which total costs are equal to total revenues.
We invite you to watch the following video explaining the internal rate of return:
Before starting a business, it is very important to check at least every aspect shown in this topic. You might be excited because your idea is amazing and you think it is going to be a success. Unfortunately, passion and love for your idea are not enough, as you must analyse every significant aspect carefully, because you are working with a capital, whether it is yours or someone else’s.
We invite you to view the following presentation that has been prepared for you on an example of an analysis for a student-level investment: Tema 3. Administración de negocios y planeación de negocios integrado.
We hope you found this topic useful and we hope to see you again soon.
Resumen e ideas relevantes
It is important that you keep in mind:
- Before starting a business, you must analyze different aspects in order to forecast how your idea will behave in the market and whether it will be profitable.
- Some aspects that you must consider are:
- Market research
- Technical analysis
- Economic evaluation
- Market research aims to identify how your good or service will behave in the market and which market you can target.
- In the technical analysis you will see what you need to produce your goods or services, as well as the administrative and legal aspects that you have to take into account before starting your business.
- In the economic evaluation, you will verify if the business is profitable, how much money you have to invest, if you will need financial support and forecast your sales and expenses.
Fuentes de consulta
- Baca Urbina, G. (2001). Evaluación de proyectos. México: McGraw -Hill.
- Instituto Nacional de Estadística y Geografía [INEGI]. (2014). Encuesta Nacional sobre Uso del Tiempo (ENUT) [Conjunto de datos]. Recuperado de: https://www.inegi.org.mx/programas/enut/2014/
- Magni, C. (2011). The Internal-Rate-of-Return approach and the AIRR paradigm: A refutation and a corroboration. Archivio istituzionale della ricerca – Università di Modena e Reggio Emilia. Módena, Italia: Università di Modena e Reggio Emilia. Recuperado de: https://core.ac.uk/download/pdf/54000574.pdf