Presentation on theme: "Project Planning, Analysis and Management Financial Viability."— Presentation transcript:
Project Planning, Analysis and Management Financial Viability
Project Planning, Analysis and Management Financial Viability Answering three important questions will help a finance manager to know about the viability of a project. What are they? 1.Can the company produce the goods or services as desired? 2.Can the goods or services be marketed and sold? 3.Can the income generated service the cost and leave a margin? What is meant by financial viability? Whether the project will generate enough income to service all the cost incurred for raising the sources and leave a surplus for the company for future investments? Within what period of time? What are the two important tools for finding out the above? Break-even DSCR
Project Planning, Analysis and Management Financial Viability What are the steps involved in finding out the financial viability? Estimation of requirements and means of financing, projecting the financials and analysis 1.What are all the costs of the project? 2.How does the company raise the resources for funding the project? 3.What are the arrangements for working capital finance? 4.What are the projected sales, expenses and profits? 5.What are the estimated funds flow and cash flow? 6.What are the projected financials? What are the various costs for a project and means of funding?
Project Planning, Analysis and Management Financial Viability Various costs for a project and means of funding Costs Land and land development Construction of factory and other buildings Plant and machinery Technical know-how and connected expenses Miscellaneous fixed assets Preliminary and pre-operative expenses Provision for contingencies and cost over run Margin for working capital Provision for initial cash losses
Project Planning, Analysis and Management Financial Viability What are the various means of finance? 1.Share capital 2.Term Loans 3.Debentures 4.Deferred Credit 5.Government Incentives 6.Foreign Currency Loans 7.Miscellaneous sources How does the company choose a particular means of finance? It depends upon two factors: 1.Regulatory norms and rules of financial institutions and credit climate 2.Key business considerations of the company namely a) cost b) risk c) control and d) flexibility With this exercise, cost and means are crystalised.
Project Planning, Analysis and Management Financial Viability Estimation of production and sales How this is done? Projection for future years I II III IV V VI VII VIII 1.Installed capacity 2.No of working days 3.No of shifts per day 4.Estimated production per day 5.Estimated production per year 6.Estimated production as % No 1 7.Sales (in quantity) 8.Sales (in value) To find out the profitability and estimate the working capital requirements, cost of production is calculated.
Project Planning, Analysis and Management Financial Viability Estimation of production and sales Estimate of cost of production (cop) What are the costs included to find out COP? Cost of production will include cost of -- materials -- utilities -- labour -- factory overheads Then, estimate the working capital requirements.
Project Planning, Analysis and Management Financial Viability What is working capital and what are its components? It is the amount of finance required to carry on production, sales and recovery of sale value. It is other wise called as finance required to run working capital cycle. What is working capital cycle? It is called as “cash to cash” meaning the finance required from the time of buying materials, to producing, selling and realising the sale value. What are the components of working capital? Raw materials Stock in process Finished goods Consumable stores Sundry debtors Expenses
Project Planning, Analysis and Management Financial Viability Normally working capital requirements are calculated as under: Monthly sales 2400 Raw materials80% 1920 expenses 240 cost of production 2160 Requirement Margin Permissible finance Raw material % (2 months) Stock in process % (2 weeks) Finished goods % (2 weeks) Receivables % (1 month) Expenses % (1 month) Total After this, profitability estimates and balance sheet projections are made
Project Planning, Analysis and Management Financial Viability Estimates of profitability What does it contain? It is actually a profit and loss account projected for the whole of the project period. What is the purpose? It provides an idea related to sales, expenses and profits. It enables the company to know whether the project will be able to generate profit and if so, how much and when? How this is made use of for decision making? Let us compare two project ideas and discuss.
Project Planning, Analysis and Management Financial Viability Estimates of profitability Let us compare two project ideas. In both the projects the products, process of production, materials required and market for the end product are all the same. Materials are fully imported. One is planned to come up in Salem, because the promoters are in Salem and it will have lot of managerial advantage. The other location suggested is Tirunelveli, which is a new place for the management. A brief estimates of profitability are prepared for both the projects as over.
Project Planning, Analysis and Management Financial Viability Estimates of profitability Salem Location (Rs in crores) I II III IV V VI Sales Expenses Net result Tirunelveli Location Sales Expenses Net result Why the difference in projection of the three profitability items when all the production factors remain the same?
Project Planning, Analysis and Management Financial Viability Estimates of profitability What are the items considered while preparing profitability estimates? 1.Sales 2.Cost of production 3.Gross profit 4.Sales and administrative expenses 5.PBIDT 6.Interest 7.Depreciation 8.PBT 9.Provision for tax 10.PAT Then cash flow statement is prepared
Project Planning, Analysis and Management Financial Viability Estimates of profitability What is the difference between cash flow and funds flow statements? Funds flow considers the total volume of funds generated and spent during a period (receivable and payable), whereas cash flow restricts itself to actual realisation of funds and its outflow. What is the importance of cash flow and funds flow? -- helps in financial planning -- helps in identifying the areas of movement of funds and taking a view -- helps to manage liquidity needs Cash flow statement is very important during project plan period. Why? To avoid any delay in implementation and the consequent cost over run. What is the term “financial closure”?
Project Planning, Analysis and Management Financial Viability Estimates of profitability For a new project, what are the projected sources of funds and their uses during pre implementation stage? Sources Promoters’ capital Public issue Public borrowing Term loan Trade credit Deferred payments Uses Initial expenditures Capital expenditure Revenue expenses Funds flow for a new project mainly focus on the estimated time the funds are needed and the time, funds may be available.
Project Planning, Analysis and Management Financial Viability Estimates of profitability An exercise Liabilities Assets Share capital 100 Fixed assets 180 Reserves& surplus 20 Current assets 180 Secured advances 80 cash 20 Unsecured advance 50 receivables 80 Current liabilities 90 inventory 80 Provisions Projections Sales 400 Cost of goods sold 300 Depreciation 20 Interest 20 Tax provision 30 PAT 30 Dividend 10
Project Planning, Analysis and Management Financial Viability Estimates of profitability During the first year, the company has the following plans: Raises a fresh secured loan of 20 Repayment of installment of earlier loan 5 Increase in unsecured loan 10 Increase in fixed assets 30 Increase in inventory 10 Increase in receivables 15 Dividend outgo 10 Please construct a projected funds flow statement & balance sheet. Let us do another exercise for a new project during construction period and two subsequent years.
Project Planning, Analysis and Management A new project has the following outlays (Rs in crores) Outlays Construction period year I Year II PPOE Fixed assets Current assets (other then cash) Funding Share capital Term loan Working capital loan 12 6 Projected profit & loss Sales Cost of sale Interest Depreciation Losses (absorbed) PBT (6.8) 4 Tax PAT (6.8) 1.6