We continue doing the accounts of the business plan's economic plan. As you'll remember, in the previous module I explained the virtuous cycle. Let's start with this initial balance. Previously we saw the investment plan and the funding plan. It's this snapshot of the first moment. From the movements produced by expenses and income, which is the results account or profit and loss, and controlling that with a treasury forecast, we'll reach a final balance with which we'll set assets and liabilities. I'll explain the assets and liabilities. It's a bit complicated and so I have this diagram. I'll explain. Liquidity and enforceability. Assets and liabilities are organised in these two criteria. From more to less liquid, the green triangle, and from less to more enforceable, the least enforceable is social capital. Social capital, reserves, non-current and current liabilities. This sets up the net wealth, social capital plus reserves, that money that we've placed in the company and that which we've been accumulating if we earn some money, and, therefore, those reserves that are voluntary and compulsory, configure the net wealth and it's the least enforceable, the company's core. In enforceability we have non-current liabilities and the current ones, the short and long term loans or those debts with our suppliers or others who have supplied us. Let's go to the assets, and we'll see that it's set up from less to more liquid. The money we have in cash, at the bottom, is the till and, going up, our customers, the money they owe us, stocks, raw materials and semi-finished products, everything that allows us to produce. These three pieces make up the current assets. The second part are the material and immaterial assets. Material assets are physical, those that we've bought: the van, the PC... Everything the company owns, the physical assets. The immaterial is everything we cannot touch: the brands, the patents, the website, and, key in innovation and knowledge companies: the know-how. That's in the brain, resulting in a change of methodology, in science applied to technology and, as it's in the domain of ideas, it's less liquid. Let's go to the example of the translation company. Same thing. On one hand, the non-current assets, that which is fixed: furniture, office machinery... Here we could add the website. Patents would be an immaterial asset. We have the treasury. Our customers still don't owe us anything, nor do we owe anything to them. On the other hand, as current liabilities we have the loan for €2,500 which we asked for to launch and we have the social capital, which is the money we put initially. Let's go to another piece. Once we have the company set up we need to ensure it works. How does the company work? It has payables and receivables. We'll study this with the P&L account We also call it the profits account. There are other names. Let's start with the net amount of the business figure, also known as sales, what we've sold. We'll deduct supplies: raw materials, what we require for the sales to be produced, we'll add other operating income, sometimes grants, some income that is not a sale, we'll deduct staff expenses, and other operating expenses, such as rent, electricity, utilities... And everything we've spent, diesel, etc. And we deduct the repayment of the immaterial assets. In session 5 we explained how to do the repayment of the immaterial assets. Here you can see the figure. If not, you can look at the module or analyse the supplementary documentation. That will give us a result, a profit or loss, known as operating result. If we have more income than expenses we'll have a profit. If we have more expenses than income we'll have a loss, as you can see. Here we'll add and deduct the financial expenses and it will give us a financial result. The sum of the operating result and the financial result will give us a gross result. If we have profit, we'll have to pay taxes on the profit and deduct the profit from the result before tax and it will give us the net result. This is the profit and loss account and these concepts are recognisable in English terminology. For example EBITDA. Anyone can find it and can see in their usual research tools how these concepts are defined in English. An example. We've sold €36,100. It's cost us €35,000, so, the operating result is €1,100. This loan we have for €2,500 has produced financial expenses of €140 per year. We have a results before tax of €960. As we've earned money, we have to pay the corresponding taxes. If we deduct the taxes from the result, it will give us a result of 768. The balance, the operating account, which is dynamic, but doesn't tell us when the payables and receivables and expenses are produced. Here you can see that I use the terminology that we saw in the previous module. Don't mix it up because it'll be very difficult to understand one another. We start from an initial balance, what we have in our account. We add the receivables and deduct the payables and it will give us an initial balance. This balance in each of the periods, here we put one more, which could be a week, every day or a trimester, we drag this final balance of the last day of the previous period to the opening balance of the first day of the following period. We'll continue adding and deducting payments. Obviously this isn't produced at the same time. For example, when we pay a salary, we pay the salary of the current month at the end of the month, on day 30, we don't pay income tax, we pay it after three months. So, in three months or two or one, whenever we do our tax settlement. Some things go by quarter, others by year, others change every time. You have the customers' receivables, grants, financial income, VAT rebate... Usually VAT is rebated once a year or so. There's income tax return, other receivables too. We have payables for fixed assets, stock or services that could be rolling payments made every month, the repayment of loans every month, rent payment every month, public admin is done every quarter, the payment of professional services which is set on the invoice, insurance is normally one yearly payment or two payments a year or 4 quarterly payments. Utilities sometimes are paid every two months, salaries are paid in part every month and another part every quarter, and other payments. That gives us the final balance. Now one of the questions everyone asks at this point. How do I know if my company is viable or not? That's the definition of break-even point. A company's viable when it's beyond break-even point, it's passed the profitability threshold. When you see this graph, the line or the set of receivables goes beyond the set of payables. As you can see, the income starts at zero and the expenses don't. We have a point on the axis that you can see, that we call fixed expenses. We start doing fixed expenses and then we do variable expenses, as we've already seen, depending on what's being spent. When these two lines meet, that's the break-even point. It's when the fixed expenses plus the variable expenses are the same as the income. To calculate this we use the contribution margin. Here's the formula. It's done with the difference between the sale price and the variable cost on the sale price. Normally it's expressed with a percentage. The calculation of this break-even point allows us to say how many sales or how many sale units we need to reach viability. So, that's the answer to our question. If I had been asked by the jam business from the example, their break-even point would be at €42,945 / year and their contribution margin is 0.815, meaning they have this contribution margin which allows them to reach break-even. That's all. If we follow the virtuous cycle and we exploit the financial instruments that we have in front of us, we'll surely have a business plan that will allow us to say what the concrete economic hypotheses are in order for it to be viable. And now we'll go and fund it.
