In applying for project funding from European funds, it is essential to check not only the eligibility of the investment but also the eligibility of the entrepreneur, which is an integral part of the analysis of financial reports. The criteria for ‘entrepreneur eligibility’ are the most common excluding factor in fund competitions, but with timely intervention, the entrepreneur can influence their adequate documentation.
We are entering a new programming period, as well as additional co-financing sources, both from the EU and national sources. Considering the many opportunities for co-financing investment projects, as well as research and development projects with an emphasis on the digital and green transition of entrepreneurs, it is crucial to timely prepare a long-term investment plan and their possible applications for calls. This is important for the entrepreneur to maximize the potential of allocated funds and to allow enough time to prepare quality and competitive projects upon the announcement of calls.
When analyzing the eligibility of a project for specific calls, it is necessary to check not only the eligibility of the investment but also the eligibility of the entrepreneur, which includes the analysis of financial reports. The most common criteria for entrepreneur eligibility that can be an excluding factor from the perspective of eligibility for EU fund competitions are easily verifiable, and the entrepreneur can influence their adequate documentation with timely intervention.
What is ‘eligibility’
For entrepreneurs to have the best chances of obtaining funds from EU funds for their projects, it is essential to keep in mind the criteria for the eligibility of the entrepreneur and the project. The eligibility of the entrepreneur, i.e., the legal and financial capacity of the entrepreneur, is one of the key conditions that affect the possibility of applying for funding from one of the many EU funds or programs, and as part of the project eligibility analysis, it is necessary to check compliance with EU guidelines and directives, operational programs, and finally the specific call for project proposals.
The eligibility of the entrepreneur is determined by considering several factors, such as the type of activity, the size of the company, and the legal form, as well as the value of items recorded in the financial reports.
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The analysis of project eligibility includes checking for innovation, sustainability, contribution to EU goals, and reasonable and realistic financial construction of the project. As part of this process, it is important to check whether there is a clear need for the project and whether it is in line with national and EU policies and strategies. It is also checked whether there is an incentive effect, i.e., whether the entrepreneur could implement the project in full scope without the incentive effect of non-repayable funds
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The analysis is conducted to determine the financial capacity of the entrepreneur to implement the project, i.e., to adequately manage the allocated funds. This is why entrepreneurs who, according to the interpretation of implementing bodies, have financial reports that do not show the required indicators may have problems with eligibility for EU fund competitions.
What is checked
The eligibility of the project refers to the compliance of the project proposal with the goals and priorities of EU funds and with the legal, financial, technical, environmental, and other requirements of implementing bodies. The analysis of project eligibility includes checking for innovation, sustainability, contribution to EU goals, and reasonable and realistic financial construction of the project. As part of this process, it is important to check whether there is a clear need for the project and whether it is in line with national and EU policies and strategies. It is also checked whether there is an incentive effect, i.e., whether the entrepreneur could implement the project in full scope without the incentive effect of non-repayable funds.
To ensure the eligibility of the project, it is necessary to timely prepare all required documents and attachments and ensure that they comply with the call requirements. It is also important to ensure that the project proposal contains clearly defined goals, results, and performance indicators, detailed activities, and a timeline for their implementation.
Rules for financial reports
As previously mentioned, in preparing entrepreneurs for EU fund competitions, it is crucial to have well-prepared financial reports, which also include reasonable, i.e., fair adjustments in accordance with actual business events. In this process, entrepreneurs must ensure the accuracy and completeness of financial reports and correctly present all transactions in accordance with legal and accounting frameworks, i.e., Croatian and international financial reporting standards.
Part of the entrepreneurs who operate through more than one separate legal entity must prepare consolidated financial reports, and in some situations, they may be relevant for assessing the eligibility of the entrepreneur. Furthermore, in this context, it is important to mention the audit of financial reports, i.e., the process by which an independent auditor checks the financial reports and their compliance with international accounting standards.
This guarantees the adequacy of financial reports and ensures credibility, so it is crucial to adhere to all professional rules, i.e., the established legal framework. Additionally, from the perspective of properly closing the financial year for entities operating within groups, specific group rules are also important, which relate to a set of internal principles and guidelines that define accounting principles, i.e., the ways in which the company is obliged to keep business records and ultimately consolidate financial reports when operating through multiple entities. It is important to adhere to these rules to ensure that accurate and consistent data about the financial position and performance of the group is presented.
For the calendar year 2022, annual financial reports for statistical and other purposes are prepared by entrepreneurs in kuna and submitted to Fina by April 30, 2023. When it comes to public disclosure, annual financial reports for 2022 are prepared and submitted in kuna by June 30, 2023 (for entrepreneurs whose financial year is equal to the calendar year, and for others, the deadline is six months after the end of the financial year). The form and structure of financial reports for statistics and public disclosure are prescribed by Fina, and it is useful to know that the form for 2022 is identical to that for 2021.
Financial corrections and the return of funds are a risk for entrepreneurs applying for funds from EU funds. Namely, if the entrepreneur does not meet the conditions of the grant agreement or does not adhere to the rules defined in the agreement, there is a possibility of financial corrections or even the total return of funds. Therefore, it is very important to carefully prepare financial reports to ensure an adequate starting position, and it is also necessary to monitor the fulfillment of obligations during the project implementation.
What is possible and what must be done
The conditions related to financial reports and historical business operations are one of the key elements when preparing applications for EU fund competitions. It is necessary to carefully and timely analyze financial reports to find opportunities for improving eligibility and quality preparation of the application. Additionally, since it is currently the time of year when closing the financial year is a relevant topic, it is useful to work on preparing financial reports while keeping in mind the usual requirements in calls for European and national funds to increase the likelihood of entrepreneur eligibility, i.e., successful applications.
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Since the business year 2022 has already ended, entrepreneurs currently have a limited number of options in terms of adjusting financial reports for the past year, as only transactions that occurred before December 31, 2022, are presented in the annual financial reports. Therefore, at this moment, entrepreneurs can only act in accounting categories, primarily on depreciation and value adjustments
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Since the business year 2022 has already ended, entrepreneurs currently have a limited number of options in terms of adjusting financial reports for the past year, as only transactions that occurred during the year, i.e., before December 31, 2022, are presented in the annual financial reports.
Therefore, at this moment, entrepreneurs can only act in accounting categories, primarily on depreciation and value adjustments, thus ensuring that business income exceeds business expenses, which often appears as one of the eligibility conditions in EU competitions. Additionally, one of the most common conditions in previous EU competitions for entrepreneurs has been positive EBITDA, and it is important to keep this in mind if the entrepreneur plans to apply for investment from EU funds. EBITDA (operating profit, or earnings before interest, taxes, and depreciation) is a financial indicator often used in analyzing the financial performance of companies and approximating profits from core business, and in the context of competitions, it is important for determining the financial sustainability of the company and its ability to contribute to achieving the goals of the call. Positive EBITDA in the previous year will almost certainly be one of the conditions in future competitions, so ensuring this can significantly improve the chances of obtaining funds from EU funds.
In addition to the above, one of the most common conditions is the minimum share of capital in liabilities, which aims to analyze the sufficiency of the financial capacity of the applicant or the ability of the entrepreneur to successfully implement the proposed project. In previous iterations of calls for entrepreneurs, this condition was 15 percent, which the applicant could satisfy, for example, by converting given loans into capital or through recapitalization, thereby increasing the likelihood of eligibility for upcoming competitions.
Why additional data is important
Furthermore, adequate and accurate representation of actual business events during the financial year is crucial for ensuring eligibility, particularly in terms of precisely presenting additional data in annual reports.
It is important to ensure the correct representation of all additional data despite the absence of a public disclosure obligation, as additional data often represent the starting position in the application. For example, foreign income, as an item of additional data in the annual financial report, can be crucial for applications for EU fund competitions, especially in the context of international cooperation and partnerships between companies in multiple countries.
Companies with experience in doing business abroad and developed international partnerships can be more attractive partners in projects aimed at international cooperation. Additionally, the increase in the exchange of goods and services with foreign countries is one of the possible goals of the competition, which is why it is important to ensure that all transactions with foreign countries are detailed in the additional data (AOP 253) and to timely and accurately record such data in the future.
Very, very important
Energy costs (AOP 262) can also be important for applications for EU fund competitions, especially in the context of calls related to the green transition. Reducing energy consumption and using renewable energy sources can be crucial for achieving the goals of projects aimed at reducing CO₂ emissions and protecting the environment. Therefore, companies that can demonstrate that they can reduce energy costs and increase the use of renewable energy sources may be more attractive candidates for obtaining funds from EU funds aimed at the green transition. At the same time, in the previous call focused on the green transition of the manufacturing sector, one of the conditions was a minimum share of two percent of energy costs in sales revenue. In this sense, it is important for entrepreneurs to accurately record all energy costs incurred in the previous year, i.e., all costs related to one of the following: electricity, gas, steam, motor oil, fuel oil, heating oil, coal, wood, and other types of energy sources used in the production of goods and services and in administration, management, and sales.
Despite the unfavorable position of entrepreneurs regarding the availability of quality labor, one of the fundamental conditions for preparing competitive projects is employment, i.e., the creation of new jobs. When determining the starting position, relevant data from the reference page GFI-POD related to the number of employees based on hours worked is crucial, so it is necessary to ensure the correct representation of the starting position.
Conditions related to digital and green transitions are also very important when preparing projects. EU funds are increasingly focused on projects that contribute to digital and green transitions, so it is important for entrepreneurs to consider how they can adapt their business and projects to these goals. In this sense, entrepreneurs should clearly define how the conceived project proposal will contribute to the digital and green transition of the business.
It is crucial to be cautious
When closing the financial year and generally managing the financial aspects of the business, it is important to pay special attention to compliance with the most common conditions of entrepreneur eligibility and accurately presenting the results of the previous financial year on the additional data form, as well as adhering to existing legal and accounting frameworks.
Optimally utilizing all available co-financing opportunities for business development can be extremely demanding and time-consuming, and adequately closing the financial year to ensure eligibility is just one of the many aspects that need attention. Ultimately, in developing a strategy for utilizing EU funds, specialized knowledge is often required, which depends on the specific case and entrepreneur, so seeking help from experts is certainly the safest and most cost-effective option in the long run.
