Mussolini was certainly aware of the limitations of the Italian Army. At the same time he seems to have grown more and more convinced that a general European conflict was inevitable. Hence the idea that his action could be aimed at "moderating" and restraining his German ally, exerting his influence for a - convenient - delay of the incumbent conflagration. Of course, there were many ambiguous points in this sort of political strategy.

What's more or less apparent from an examination of the various exchanges between Mussolini and his ministries, is the presence of a sort of implicit admission of the Italian weakness - by 1939 the diplomatic position of Italy is such that most of the possible developments give good reasons for concern, or even for fear.

On August 10^th 1939, the Italian Foreign Minister, G. Ciano noted in his diary:

the Duce is more than ever persuaded of the necessity to delay the conflict. [...] He insisted with me that I have to remind the Germans how it is necessary to avoid conflict with Poland, since it is by now impossible to contain it, and a general war would be disastrous.

The visit of Count Ciano proved unsuccessful in persuading the Germans. But while the evolution of European affairs caused a deep discomfort in the fascist leadership, which understood the intrinsic danger of the situation, it did little to alter the course of events. Now, it's hard to say whether the Italian leadership - and Mussolini first among them - had misjudged the German intentions or the actual ability of Fascist Italy to play a decisive role in an upcoming conflict. In all likelihood both aspects played a role in the Italian intervention, with the Regime discovering its weakness both in the circumstance of a German defeat and in that of a German victory achieved without the Italian support.

Already in weeks between the annexation of Bohemia and the declaration of the Pact of Steel, Mussolini had met with Göring (April 16^th ) and had come out of the meeting aware that “in a few years, there was going to be war between the Axis on one side and French and GB on the other”. According to Ciano, Mussolini agreed with Göring that it was necessary to “talk of peace and prepare for war”.

That Mussolini had taken the German Minister's words seriously is shown by a memorandum that he drafted for Ciano and was given to the latter on May 4^th in preparation for his meeting with German Foreign Minister Ribbentrop of the 6^th and 7^th . There Mussolini explained that Italy (and Germany) needed, in order to make ready for war of “a period of peace […] no shorter than three years” that was “necessary” in order to [the list is Mussolini's]:

a) to make military preparations in Libya, Albania and pacify Ethiopia, from which an army of half a million men needs to be withdrawn;

b) to finish the building and ongoing renovation of the six ships of the line

c) to renovate all our artillery pieces of middle to large caliber

d) to develop the autarchy plans that will make any attempt of blockade pointless

e) to complete the World Exposition of 1942, which can, besides showcasing the first twenty years of the Regime, provide us with value reserves

f) to repatriate the Italians from France, an issue of very serious military and moral nature

g) to accomplish the transfer of many war industries from the Po valley to Southern Italy

h) to develop the relations not only between the governments but also between the peoples of the Axis nations; for which purpose a relaxation of the relations between the Church and the Nazism would be beneficial [...]

“For all these reasons” wrote Mussolini “fascist Italy had no desire to hasten an European war, despite being certain of its inevitability”.

There is therefore little doubt that the Germans were aware of the various technical necessities of the Italian Army (thoroughly illustrated by the Italians in the following years), as well as of the general requirements of the Regime. They didn't appear to pay much attention to them though, as the war was first and foremost a German issue; and especially during the first year and a half of the conflict, which was decisive for the Italian intervention and for establishing the character of subordination of the Italian political and military action, the events moved at such a rapid pace that it's difficult to establish a general "strategic" view in the Italian action.

After the rapid victory over Poland, everything was on the table: a composed peace, another negotiation akin to those for the Sudetes and Czechoslovakia involving Danzig, a prosecution of the war, an Italian intervention... All dangerous chances.

On September 1^st Mussolini had met with his ministries and showed proof of the concordance between Germany and Italy in their coordinated action - that is, evidence that the Italian neutrality did not alarm the ally but rather was the result of a previous coordination. Hitler had in fact replied to Mussolini's inquiry with the following:

Duce, thank You [...] for the diplomatic and political assistance you have offered Germany and Her rightful aspirations during these latest weeks. I am convinced that I can achieve the mission set upon us by means of the military forces of Germany. I believe therefore that I have no need for the time being of the Italian help. [...]

The telegram served as reassurance, and for Mussolini to keep his Ministries in check - as a few of them had taken the German action as a violation of the "agreement" not to start the war before Italy could be ready (there again, whether Italy had the means and the intention to ever be ready, is something that the Germans might have doubted). Mussolini had to concede on this point, if we follow Bottai's recollection of the meeting:

Our position is clear and has been clearly defined with the Fuhrer: Italy was not going to be ready before the end of 1942. And I explained why: the Germans could not give us what we needed for a possible action before 1942: neither fuel nor iron... 1942 was for us a term of absolute necessity. But, since I don't want to pass for faithless, I sent a telegraph to Hitler so that he explained how he had, with the untimely initiative, relieved Italy of any immediate commitment. [...]

Dino Grandi - the former Minister of Foreing Affairs and Ambassador to London - noted in his diary that Italy "may have to run the same risk of 1914 [...] Germany has failed to uphold the pacts, which established that Germany wasn't going to start any war before 1943. Italy has therefore the right to denounce the alliance pact".

Grandi's point of view appeared to have been a minoritarian one among the fascist leadership - and anyways, dictated again by contingent arguments.

The German victory, the French and British hesitation, all worked in favor of the party which supported an Italian intervention. Mussolini especially, appeared convinced of the eventual British defeat: "inexorably", as he told Ciano on March 7^th 1940. With this in mind, and given the Italian supply and financial shortages as well as the poor state of the Army, the key problem was to find the exact right time for the intervention.

Again, Mussolini in his "secret memorandum" of March 31^st 1940

Italy can't remain neutral for the full duration of the war, without giving up on her role, without disqualifying herself, without falling to the level of a Switzerland times ten. The problem therefore is not whether Italy will or will not join the war [...] but only when and how; it's all about delaying the intervention as long as possible, in a way compatible with our honor and dignity: a) to get ready so that our intervention determines the outcome; b) because Italy can't sustain a long war, can't afford to spend hundreds of billions like the current belligerent are

The practical realization of the inability of Fascist Italy to truly impact the course of European events paired with the personal frustration of her leader: "It's humiliating to sit on our hands while others are writing history" - he again confided to Ciano on April 11^th 1940. Even for the purpose of internal propaganda this was bad: "The Italians, after listening to my warrior propaganda for eighteen years, can't see a reason why I would become the new herald of peace. There is no other explanation but the military impreparation of the Country; but that's on me as well, since I have always proclaimed the might of our armed forces.

I’m not sure if this is allowed since I’m not OP, but if anyone can respond to this could they also elaborate on how Mussolini’s estimates differed from those of his own generals?

I know in particular with regards to Italy’s invasion of France in 1940 there were stark differences between what Mussolini thought his army was capable of versus what his own generals believed to be the case.