Generated revenue. Higher ability to generate profits in all areas of activity, because when using it, you do not need to pay the loan interest in its various forms. “The management of an enterprise must be able to generate profits and money
4. Determination of the rate of generation of income
Three simple questions: How much money is your company generating? How much money does your company tie? How much money needs to be spent for the company to function? The indicators are intuitively obvious. What is needed to turn these questions into formal definitions? I have already discussed these definitions in detail in my book The Goal.
The first is the rate of income generation (Throughput). The revenue generation rate is defined as the rate at which the system generates money through sales.
In fact, we get a clearer definition if we erase the last two words - through sales. It is clear that if the system generates money through bank interest, this is undoubtedly also income. Why then did I add these two words? Due to the usual behavior of companies. Most production managers think that if they have produced something, it deserves the name income. What do you think? If we have produced something, but have not sold it, can this be called income?
This substitution of concepts applies not only to production. How the finance group will respond if you double the amount finished products in stock? If the products are in demand, what will be financial appraisal such an action? The reviewer will tell you that according to his way of interpreting numbers, you did very well. You can guess that this will translate into increased profits. However, your business intuition tells you that this is not the case at all. Additional income cannot be generated due to the shuffling of money within the company. The speed of generating income means an influx of fresh money from the outside, so two words are added - through sales.
At the same time, it should be noted that revenue generation should not be confused with sales. The revenue generation rate is the rate at which the system generates money through sales. So what's the difference? Let's say we sold a product for $ 100. This does not mean that the generation rate has increased by $ 100. It is possible that the sold product contains purchased materials for $ 30. $ 30 is money generated by the vendor's system, not yours. Thus, your income generation rate has only increased by $ 70. The rate of revenue generation is the sales price minus the amount paid to our suppliers for the parts that went into making the products sold, regardless of when we bought them.
In addition to the purchased parts and materials, there are other amounts that must be subtracted from the sales price in order to calculate the revenue generation rate. Subcontractors, third-party commissions, customs duties and even shipping costs must be deducted if we do not have our own transport channel. All these amounts were not earned by our system.
It may also be noted that the definition requires the determination of the point in time when the fact of the sale is considered to have occurred. Two types of accounting are widely used. The first, in which money really changes its owner, the second, more popular, when until some time the money can be withdrawn and the goods returned. Unfortunately, this technique is not always used honestly.
In many consumer goods industries, products are not sold directly from the manufacturer to the consumer. This is done through the sales network. In most cases, these channels reserve the right to return goods without any explanation. It seems that it is inappropriate to consider the product sold in this case, when it is shipped, it is still possible to return it.
You will not believe that some companies refund returns at the current price and not at the price sold. You may be aware that in consumer goods manufacturing, promotion or, as consumers say, "selling" is just the name of the game. Which means that the distributor buys the product during the sale period, waits for two months, returns the product and makes a 20 percent profit in 2 months. It's even cooler than the mafia business. Does this really happen? Much more often than the uninitiated can imagine. When I asked the president of one of these companies why, having been in business for 50 years, he would not close this loophole? He replied: "You are wrong, I have not been in business for 50 years. I have been in business for 200 blocks." Sales are reported in one quarter and returns are reported the next.
This case is presented not at all for humor, but in order to emphasize: the moment of sale cannot be considered the moment of transfer of money. Unfortunately, carelessness in determining the moment of sale is fraught with very serious consequences.
We all know very well that dealers of most American and European car companies hold a 90-day consignment of cars. These cars are considered already sold by car companies. The dealers actually paid for them. Usually the dealer sends money to the seller to buy cars. What is the seller's security? Only cars. If a dealer buys a large warehouse and the model is out of date, who gets hurt? Not a dealer.
According to all practical guidelines, all significant business goals, despite the fact that the cars are in the hands of the dealer, they should not be considered sold. This method leads to a destructive conflict between long-term (to react quickly to the market and thus increase future sales) and short-term goals (sales of the current quarter). This problem does not only apply to car manufacturers. This is a problem for any company that sells through a dealer network and not directly to the end consumer. It is very important to distinguish between the consumer and the buyer. The sale should be recorded only when there has been an irrevocable transaction with the consumer, and not just with the buyer. A surplus of products in distribution channels only increases the distance between the manufacturer and the end consumer. This is almost a surefire recipe for future losses in revenue generation rate. To resolve the conflict between short-term and long-term plans, it is necessary to redefine the "point of sale".
From the book Trainning. Trainer's Handbook author Thorn KayConducting an Idea Generation Event As we discussed above, when running an idea generation program, you need to set very clear goals for what needs to be achieved. It is important to note that not all generated ideas
From the book Organize Yourself author Count JohnImproving the speed of working with the Internet Despite all the wonderful opportunities that the Internet provides us, there is one drawback that is very annoying for users. I am talking about the speed of Internet searches. For efficient use of time
From the book Accounting in trade the author Sosnauskene Olga Ivanovna2.6. Determination of gross income According to State standard RF GOST R 51303-99 “Trade. Terms and definitions "gross trade income is an indicator that characterizes financial results trading activities... It is defined as the excess of sales proceeds
From the book Haystack Syndrome the author Goldratt Eliyahu M.11. Designing the decision-making process for the world of income generation Focusing on everything means that we are not focusing on anything. Focusing means: “There are many responsibilities under my responsibility. But I concentrate the main part of my attention
From the book General Theory of Employment, Interest and Money the author Keynes John Maynard13. Demonstration of the differences between the worlds of cost and generation rate
From the book No Fuss [How to Stop Hurrying and Start Living] by Honore Karl From the book The Great Ones of Their Own Choice author Collins JimChapter 3 Food: Speed is not the place at the table Man is what he eats. Ludwig Feuerbach Have you ever watched the old American animated series "The Jason" about life in the distant high-tech future? For this cartoon, many children for the first time made up for themselves
From the book Real Estate Investments the author Kiyosaki Robert TohruAnalysis of Speed As described in Chapter 5, we analyzed 115 situations where time mattered and tried to compare how fast the group of 10 companies were? and from the control group recognized situations, thought about them, made decisions and acted. We
From the book Business Idea Generator. System for creating successful projects author Sednev AndreyKey factors of speed 1. Private equity. Since we operate with private capital, there is no need for us to submit a loan application to the bank and wait until the credit committee meets for a meeting, which, after a long consideration, will approve it.
From the Google AdWords book. Comprehensive guide by Gedds BradIdea-Generating Environment Where to Think Best Change the Environment One day, while waiting for my wife at the hairdresser's, I opened my notebook and began to write. It was very noisy, the bench was uncomfortable, but somehow miraculously my brain was able to
From the book Get Rich! A book for those who dared to make a lot of money and buy themselves a Ferrari or Lamborghini the author DeMarco MJDetermining revenue per click To calculate revenue per click, divide the revenue from a keyword, placement, or ad group by the number of clicks they receive. If a keyword gets 100 clicks that generated $ 1,000 in revenue, then the revenue per click
From the book A healthy mind is in a healthy business. How great companies develop crisis immunity author Karlgaard RichTesting Revenue Per Click and Revenue Per Impression What Combination Leads to Better Profits? High CTR, many visitors, low conversion rates. Low CTR, Few Visitors, High Conversion Rates - When you combine multiple metrics it is difficult
From the book More Than You Know. An unusual view of the world of finance author Mobussin MichaelIs the speed limit 15 or 150? When your business path goes against the Commandment of Scale, you find it difficult to pick up the speed you need. Whichever road you are driving, if your top speed is 15 mph, you will not be able to reach your destination.
From the author's bookChoice of speed: chess, not checkers What is speed? The speed is not about thinking about how to start a business with the rules of the overtaking lane, but about starting one. The speed is to identify needs and find solutions to build a prototype. The speed is to
From the author's bookInnovation at 360 kilometers per hour I'd like to end with yet another story from the highly competitive and life-threatening high stakes sport of Formula 1. This is a very unusual story, but it sheds light on how powerful intangible
From the author's bookTrapped in speed? In his book Clock Speed: How to Take Control of the Industry in an Age of Short-Term Advantage, Charles Fine introduces clock speed as a measure of cycle time, defining it at several levels.2 The first level is clock speed.
It's no secret that in the info business you can make money by selling video courses, trainings, master classes, consultations, coaching, etc.
However, in order to create at least one of these products, it is necessary to take at least a number of steps.
And only after that you can think about “how to generate profit” in your info business.
Very few people actually want to take these steps. After all, this (in their opinion) is long, difficult, difficult ...
The very first and very important step (and most people do not do it) is to understand for whom you are creating your "masterpiece", i.e. define your target audience.
Yes, it all starts again with the choice and search for your target audience. There is no other way.
If you do not understand who needs your product, then it is unlikely to be sold.
I will say more - it may not be on sale at all.
Therefore, if you are determined to write down your information product, sit down and write to whoever needs your product.
Describe your target audience in as much detail as possible.
If the question: "What are you creating?" You answer - a video course (training, master class, etc.), then most likely you will not be able to sell it.
You must clearly understand who your buyer is and the above question must be answered with something like: "I am recording a product for women who are over forty and who are eager to learn how to create websites" - this is of course a simple example.
Which point "B" will he get from point "A".
Sit down and write it all down.
Each information product is a kind of transformation of a person who learns from your product.
His life begins to transform, change for the better.
A person learns something through your lessons, classes, etc. and thus changes his life.
And if you poorly build the learning process, then as an author you will not be very good.
That is why I am focusing your attention on the first two steps. Think them over properly.
A small digression for those who constantly read my site. You might think that I am saying the same thing over and over.
Choose the one who will be your client, describe him, think over what his (client's) problems, difficulties, difficulties, etc.
But this is due to the fact that I want to convey to you one single thought: “It is the elaboration of the portrait of your ideal client, the understanding of what this client of yours will receive is the basis of the foundations of any successful project in the Internet".
If you do not want to work on this, then it is unlikely that you will be able to achieve at least some positive results in the info business.
It is like the foundation of a house - if it is strong, then the house will stand on it for a long time, if on the contrary, then ... well, you understand.
Let's continue our conversation.
In one of my previous articles, I already talked about.
Now tell me, please, would you like to work only with those who value you as an expert?
Only those who are highly motivated to get the results they want?
Would you like to have clients who already have acute problems and can you help them solve them?
Do you need such people as clients who understand that they will solve their problems on their own for a very long time or will not be able to solve them at all?
Do you want to work with those who are ready to pay you worthy money for you?
With those who understand the full value of what you give them (or will give)?
Do you want your clients to be ready to talk about you or your services and recommend you?
Do you want all your clients to evoke only sympathy in you, and you were nice to them as a person?
Are you interested in solving your clients' problems?
If you answer “Yes, I want to” to these questions just voiced, then write on a piece of paper who it is, what kind of person (or a small group of people) he is, with whom you will be very pleased to work and who will appreciate you.
Here are the questions to answer when describing your ideal client:
Gender, age, income, marital status, number of children, education, position, in which city he lives, what he drives, his (her) hobbies, how (usually) his (her) day goes, how he (she) rests and where , what is important for him in life in general, what are his values, his (her) psychological portrait, what he reads and looks, what he hears from his environment all the time, what is his (her) past experience (associated with products similar to yours), what TOP 5 desires he (she) has, what trends are in his (her) life, what TOP 5 fears he (she) has that he (she) would like to avoid, what TOP 5 problems exist in him (her) life, what experiences she has, what beliefs she is guided by, what she is guided by for making decisions in her life, where you can find your client on the Internet, etc.
And only after all of the above - start thinking about your product and creating it.
The main mistake and problem of most beginners is precisely that they work with everyone.
And this leads to the fact that you have to "pull" on yourself "difficult clients".
And this is due to the fact that from your sites, from your subscription pages, you are referring not to your best client, but to everyone in a row.
When a person has a headache, say, he does not need medicine for toenail fungus.
He only needs one thing - for the headache to go away.
And your task is to give this medicine on time and sell it correctly in order to make the most of it.
When you actually define who your ideal client is, what his problems are and how you can help him solve them, you will start creating such information products that will "tear off with your hands."
So do it now. Sit down and write down everything I said in this article.
As detailed and clear as possible.
If you are too lazy and do not do this, then then do not say that you did not know that without this you will not have good business and big profits.
And you won't be able to generate profit in your projects, no matter how hard you try.
Good luck and always good mood!
Index | How to determine |
|||
Increase | Income generation rate | Number of products released [UAH / month. (year, quarter)] |
||
Decrease | Tied capital | The cost of all components in the warehouse, work in progress, residual value of fixed assets. |
||
Decrease | Operating expenses | Salary, general production and general expenses, taxes, depreciation per 1 UAH. products sold. Those. all irrecoverable expenses for 1 UAH. generated income. [UAH / UAH 1] |
Goal: to increase the rate of income generation, while simultaneously reducing the associated capital and reducing operating costs.
It is necessary to give a clear definition of these indicators:
The revenue generation rate is the rate at which the system generates money through sales.
Tied capital is all the money that the system has invested in purchased items that can be sold.
Operating expenses are all the money the system spends to turn tied capital into income generation. An interesting property of operating expenses is that this money can be returned or resold in the future. impossible.
It is necessary to show statistics on the rate of income generation, associated capital and operating expenses and show:
the relationship of these indicators with financial performance companies.
Plant performance | Financial indicator |
1. Speed of income generation | |
2. Tied capital | Cash flow |
3. Operating expenses | Return on investment |
Income generation rate
The generation of income in the enterprise occurs through the release and sale of products. Product release can be thought of as a chain of interrelated processes, each of which is performed by a specific resource of the company. The product cannot be released until all these processes have been completed.
Resource => Processes |
At the same time, some of the resources may be overloaded, while others will be idle, waiting for their turn. Processes that are most often delayed indicate that there is a shortage of appropriate resources. In order to accelerate the generation of income by the organization as a whole, it is necessary to find reserves to improve the work of scarce resources (bottlenecks).
A bottleneck (limitation of the system, bottleneck, "bottleneck") is a resource, the capacity of which determines the time of production and delivery of an order. In order to change the situation as a whole, it is necessary to change the situation exactly in the bottleneck, which should become a priority for the company.
It should be borne in mind that downtime in bottlenecks companies are very expensive, while downtime in excess resources does not play a role. Therefore, all attention should be paid to optimizing the performance of bottlenecks.
Tied capital
The current state of the tied capital can be traced by the sum of stocks and work in progress.
An increase in tied capital negatively affects financial condition companies. Inbox cash flows arrive at an insufficient speed, which prevents funding for current and future orders.
Operating expenses
Operating expenses are all the money a company spends, excluding materials and components (which is bought for resale and is related to capital).
The theory of constraints allows you to determine the plan for further work.
Index funds allow you to receive income from investments in the stock market absolutely passively. For example, if you invest in a fund based on the S&P 500 index, your funds will be invested in the general market, and you will not have to think about how to manage your money and whether it is worth buying or selling shares of certain companies. All these points will be managed by the fund, which forms its investment portfolio depending on the state of a particular index.
You can also choose a fund that works with any index. There are funds that are involved in various business sectors - energy, precious metals, banking, emerging markets, and others. You just need to decide for yourself that you want to do it, then invest and relax. From now on, your stock portfolio will run on autopilot.
Make YouTube videos
This area is developing very rapidly. You can shoot videos of absolutely any category - music, educational, comedy, movie reviews - whatever ... and then upload it to YouTube. Then you can connect Google Adsense to these videos, and automatic ads will appear in them. When viewers click on this ad, you will receive money from Google Adsense.
Your main task is to create worthy videos, promote them in social networks and maintain enough of them to generate income from multiple clips. It is not so easy to shoot and edit videos, but after that you will receive a source of completely passive income that can last a very long time.
Not sure if you can do it on YouTube? Michelle Phan has combined her love of cosmetics and painting with video shooting, has gained over 8 million subscribers, and has now opened her own company with a capitalization of $ 800 million.
Try affiliate marketing and start selling
This is a passive earning technique more suitable for blog and active website owners. You can start promoting any products on your website and receive a flat fee or a percentage of sales.
Making money this way is not as difficult as you might think, because many companies are interested in selling their products in as many places as possible.
You can find partnership offers either by contacting manufacturers directly or on specialized sites. It is best if the advertised product or service is interesting to you or corresponds to the topic of the site.
Make Your Photos Profitable On The Web
Do you like taking pictures? If so, you may be able to turn it into a source of passive income. Photobanks like and can provide you with a platform to sell images. You will receive a percentage or flat rate for every photo sold to a client of the site.
In this case, each photo represents a separate source of income that can work over and over again. You just need to create a portfolio, upload it to one or several platforms, and this is where your active actions will end. All technical issues of photo sales are handled through the web platform.
Buy high yielding stocks
By building a high-yield portfolio of stocks, you will receive a source of regular passive income with an annual interest rate well above bank deposit interest.
Don't forget that high-yielding stocks are still stocks, so there is always the possibility of capital revaluation. In this case, you will receive profit from two sources - from dividends and return on invested capital. You will need to create a brokerage account to purchase such stocks and fill out the appropriate forms.
Write an e-book
Of course, this can be quite a laborious process, but when you write a book and publish it on trading platforms, she will be able to provide you with income for years. You can sell the book on your own site, or enter into partnerships with other sites that match the subject matter of the book.
Write a real book and receive royalties
As with writing e-book, first you have to work hard here. But when the work is finished and the book goes on sale, it will become a completely passive source of income.
This applies especially to a situation where you manage to sell a book to a publisher who will pay you a sales royalty. From each copy sold, you will receive a percentage, and if the book is popular, this percentage can result in substantial sums. Plus, these payments can last for years.
Mike Piper of ObviousInvestor.com recently did this. He wrote the book Investing in Plain English, which was only sold on Amazon. The first book became so lucrative that he created an entire series. These books are in total.
Get cashback on credit card transactions
Many credit cards provide cashback ranging from 1% to 5% of the purchase amount. You go shopping and spend money anyway, right?
Such bonuses allow you to provide yourself with a kind of passive "income" (in the form of reduced spending) from actions that you do anyway.
Sell your own products online
In this area, the possibilities are endless: you can sell almost any product or service. It can be something you create and make yourself, or it can be a digital product (software, DVDs, or instructional videos)
For trading, you can use a specialized resource if suddenly you do not have your own website or blog. In addition, you can conclude a partnership agreement by offering goods to sites of relevant topics or using platforms like (American marketplace for selling information digital products - editor's note).
You can learn how to sell products on the Internet and earn a lot from it. It may not be completely passive income, but it is certainly more passive than the usual work that you have to go to every morning.
Invest in real estate
Rather, this method falls into the category of semi-passive income, since real estate investments imply at least a small level of activity. However, if you have a property that you are already renting out, basically all that remains is to maintain it.
In addition, there are professional property managers who can manage your property for a commission of about 10% of the rent. These professional managers help make the process of making a profit from such investments more passive, but they will take away part of it.
Another way to invest in real estate is to repay the loan. If you take out a loan to buy a property that you will be renting out, your tenants will gradually pay off this debt every month. When the entire amount is paid, your profit will skyrocket, and your relatively small investment will turn into a full-fledged care program for the main job.
Buy a blog
Thousands of blogs are created every year, and many of them are abandoned over time. If you can buy a blog with enough visitors - and therefore enough cash flow - that can be a great source of passive income.
Most blogs use Google Adsense, which pays once a month to advertise on the site. To provide additional income you can also enter into partnership agreements. Both of these streams of profit will be yours if you own a blog.
From a financial point of view, blogs usually sell for 24 times the monthly income that blog can generate. That is, if a site can make $ 250 per month, chances are you can buy it for $ 3000. This means that by investing $ 3000, you can receive $ 1500 annually.
You may be able to buy a website for less money if the owner really wants to get rid of this asset. Some sites contain "eternal" materials that will not lose their relevance and will generate income years after publication.
Bonus advice: If you buy a site like this, and then fill it with fresh content, you will be able to increase your monthly income, and after a while you can sell the site again for a significantly higher price than you gave when you bought.
Finally, instead of buying a blog, you can create your own. This is also a good way to make money.
Create a selling website
If there is a product that you know a lot about, you can start selling it on a specialized site. The methodology is the same as when selling a product of your own manufacture, except that you do not have to deal with the production itself.
Over time, you may find that you can add similar products. If this happens, the site will start generating substantial profits.
If you find a way to ship goods directly from manufacturer to customer, you don't even have to get your hands dirty. Maybe this is not one hundred percent passive earnings, but very close to it.
Invest in Real Estate Investment Trusts (REITs)
Let's say you decide to invest in real estate, but don't want to devote time and attention to it at all. Investment trusts will help you with this. They are kind of like a foundation that owns various real estate projects. The funds are managed by professionals, so you don't have to interfere with their work at all.
One of the main benefits of investing in REIT trusts is that they usually yield higher dividends than stocks, bonds, and bank deposits. You can also sell your interest in a trust at any time, making such assets more liquid than owning real estate on your own.
Become a passive business partner
Do you know a successful company that needs capital to expand its business? If so, you can become something of a short-term angel and provide that capital. But instead of giving credit to the owner of the company, ask for a share of the shares. In this case, the owner of the company will manage the work of the company, while you will be a passive partner, also taking part in the business.
Every small business needs a referral source to support sales. Make a list of entrepreneurs whose services you regularly use and whom you can recommend for cooperation. Contact them and see if they have a referral payment system.
You can include familiar accountants, landscape designers, electricians, plumbers, carpet cleaners, or anyone else on the list. Be prepared to recommend the services of these people to your friends, family, and colleagues. You can earn commission on every recommendation just by talking to people.
Do not underestimate referral programs in the professional field either. If the company you work for has bonuses for referring new employees or new clients, take advantage of this. This is very easy money.
List unused accommodations on Airbnb
The concept appeared only a few years ago, but quickly spread all over the world. Airbnb allows people to travel the world and pay much less room fees than regular hotels. By participating in Airbnb, you can use your home to host guests and earn extra money just through rentals.
The amount of income will depend on the size and condition of your home and its location. Naturally, if your home is located in an expensive city or near a popular resort, the income will be much higher. This is a way of earning money from vacant premises in your house, which would be empty anyway.
Write an application
Apps can be an incredibly lucrative source of income. Think about how many people have smartphones today. Almost everything! People download apps like crazy - and for good reason.
Apps make people's lives easier. It doesn't matter if it helps you post beautiful pictures or keeps track of tasks, there is always an application that is useful to someone.
You might ask, if there are so many applications out there, why would you try to create another one. Is the competition too much? All of this is true, but fresh creative ideas can win. If you can come up with something unique, you can make money from it.
Not sure how to program? No problem, you can learn. There are a lot of different courses on the Internet, including free ones. Alternatively, you can hire a developer to create an app based on your idea.
The end result is an application that will potentially generate relatively passive income.
Create online courses
Every person is an expert in something. Why not create an online course about your hobby?
There are several ways to create and deliver your own online courses. One of the most simple ways is to use sites like
Ensuring the financial stability of the development of the enterprise, its solvency in the long term, and, accordingly, reducing the risk of bankruptcy.
At the same time, it is characterized by the following limitations:
The limited volume of attraction, and, consequently, the possibility of a significant expansion of the operating and investment activities enterprises during periods of favorable market conditions at certain stages of its life cycle.
High cost compared to alternative borrowed sources of capital formation.
An unused opportunity to increase the return on equity ratio by attracting borrowed funds financial resources, since without such involvement it is impossible to ensure the excess of the financial profitability ratio of the enterprise over the economic one.
Thus, an enterprise using only its own capital has the highest financial stability (its autonomy coefficient is equal to one), but limits the pace of its development (since it cannot provide the formation of the required additional volume of assets during periods of favorable market conditions) and does not use financial opportunities to increase the return on invested capital.
The borrowed capital is characterized by the following positive features:
Sufficiently broad opportunities for attracting, especially with a high credit rating of the enterprise, the presence of a pledge or guarantee of a guarantor.
Ensuring the growth of the financial potential of the enterprise if it is necessary to significantly expand its assets and increase the growth rate of its volume economic activity.
Lower cost compared to own capital by ensuring the effect of the "tax shield" (removal of the costs of servicing it from the taxable base when paying income tax).
4. The ability to generate an increase in financial profitability (return on equity ratio).
At the same time, the use of borrowed capital has the following limitations:
The use of this capital generates the most dangerous investment risks in the economic activity of the enterprise - the risk of a decrease in financial stability and loss of solvency. The level of these risks increases in proportion to the growth in the share of the use of borrowed capital.
Assets formed at the expense of borrowed capital generate a lower (other things being equal) rate of return, which decreases by the amount of interest paid on a loan in all its forms (interest for a bank loan; leasing rate; coupon interest on bonds; bill interest for a commodity loan and etc.).
High dependence of the cost of borrowed capital on fluctuations in the financial market. In some cases, with a decrease in the average interest rate on the market, the use of previously obtained loans (especially on a long-term basis) becomes unprofitable for an enterprise due to the availability of cheaper alternative sources of credit resources.
4. The complexity of the attraction procedure (especially on a large scale), since the provision of credit resources depends on the decision of other business entities (creditors), in some cases requires appropriate third-party guarantees or collateral (while guarantees of insurance companies, banks or other business entities are provided, usually on a paid basis).
Thus, an enterprise using borrowed capital has a higher financial potential for its development (due to the formation of an additional volume of assets) and the possibility of an increase in the financial profitability of activities, however, to a greater extent generates financial risk and the threat of bankruptcy (increasing as the share of borrowed money in the total amount of capital used).
Project financing: concept, conditions, and main advantages.
Project financing is the financing of investment projects, in which the source of servicing debt obligations is the cash flows generated by the project. The specificity of this type of investment is that the assessment of costs and revenues is carried out taking into account the distribution of risk between the project participants.
Project financing is a method of attracting long-term debt financing for large projects through financial engineering, based on a loan against cash flows created only by the project itself, and is a complex organizational and financial measure for financing and monitoring the implementation of a project by its participants.
Funding for the project must be carried out subject to the following conditions:
»The dynamics of investments should ensure the implementation of the project in accordance with the time and
financial constraints;
»Reducing the cost of financial resources and project risks should be ensured by
appropriate structure and funding sources and certain organizational
measures, including: tax incentives, guarantees, various forms of participation.
Project financing includes the following main stages:
»Preliminary study of the viability of the project (determination of the feasibility of the project for
costs and projected profits);
»Development of a project implementation plan (risk assessment, resource provision, etc.);
»Organization of financing, including:
Assessment of possible forms of financing and selection of a specific form;
Identification of funding agencies;
Determination of the structure of funding sources;
»Control over the implementation of the plan and terms of financing.
Funding for projects can be carried out in the following ways:
»Self-financing, that is, the use of own funds as a source of financing
investor funds (from the budget and extra-budgetary funds - for the state, from
own funds- for the enterprise);
»Use of borrowed and attracted funds.
The investment project financing system includes:
" sources of financing;
» organizational forms financing.
