Presentation on theme: "Project Planning, Analysis and Management"— Presentation transcript:
1 Project Planning, Analysis and Management Financial Viability
2 Project Planning, Analysis and Management Financial ViabilityAnswering three important questions will help a finance manager toknow about the viability of a project.What are they?Can the company produce the goods or services as desired?Can the goods or services be marketed and sold?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 thecost incurred for raising the sources and leave a surplus for thecompany for future investments?Within what period of time?What are the two important tools for finding out the above?Break-evenDSCR
3 Project Planning, Analysis and Management Financial ViabilityWhat are the steps involved in finding out the financial viability?Estimation of requirements and means of financing, projecting thefinancials and analysisWhat are all the costs of the project?How does the company raise the resources for funding the project?What are the arrangements for working capital finance?What are the projected sales, expenses and profits?What are the estimated funds flow and cash flow?What are the projected financials?What are the various costs for a project and means of funding?
4 Project Planning, Analysis and Management Financial ViabilityVarious costs for a project and means of fundingCostsLand and land developmentConstruction of factory and other buildingsPlant and machineryTechnical know-how and connected expensesMiscellaneous fixed assetsPreliminary and pre-operative expensesProvision for contingencies and cost over runMargin for working capitalProvision for initial cash losses
5 Project Planning, Analysis and Management Financial ViabilityWhat are the various means of finance?Share capitalTerm LoansDebenturesDeferred CreditGovernment IncentivesForeign Currency LoansMiscellaneous sourcesHow does the company choose a particular means of finance?It depends upon two factors:Regulatory norms and rules of financial institutions andcredit climateKey business considerations of the company namelya) costb) riskc) control andd) flexibilityWith this exercise, cost and means are crystalised.
6 Project Planning, Analysis and Management Financial ViabilityEstimation of production and salesHow this is done?Projection for future yearsI II III IV V VI VII VIIIInstalled capacityNo of working daysNo of shifts per dayEstimated production per dayEstimated production per yearEstimated production as % No 1Sales (in quantity)Sales (in value)To find out the profitability and estimate the working capitalrequirements, cost of production is calculated.
7 Project Planning, Analysis and Management Financial ViabilityEstimation of production and salesEstimate 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 overheadsThen, estimate the working capital requirements.
8 Project Planning, Analysis and Management Financial ViabilityWhat is working capital and what are its components?It is the amount of finance required to carry on production, salesand 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 thetime of buying materials, to producing, selling and realising the salevalue.What are the components of working capital?Raw materialsStock in processFinished goodsConsumable storesSundry debtorsExpenses
9 Project Planning, Analysis and Management Financial ViabilityNormally working capital requirements are calculated as under:Monthly salesRaw materials80%expensescost of productionRequirement Margin Permissible financeRaw material %(2 months)Stock in process %(2 weeks)Finished goods %Receivables %(1 month)Expenses %TotalAfter this, profitability estimates and balance sheet projections are made
10 Project Planning, Analysis and Management Financial ViabilityEstimates of profitabilityWhat does it contain?It is actually a profit and loss account projected for the whole of theproject 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 togenerate 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.
11 Project Planning, Analysis and Management Financial ViabilityEstimates of profitabilityLet us compare two project ideas.In both the projects the products, process of production, materialsrequired 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 inSalem and it will have lot of managerial advantage .The other location suggested is Tirunelveli, which is a new place forthe management.A brief estimates of profitability are prepared for both the projects asover.
12 Project Planning, Analysis and Management Financial ViabilityEstimates of profitabilitySalem Location(Rs in crores)I II III IV V VISalesExpensesNet resultTirunelveli LocationSalesExpensesNet resultWhy the difference in projection of the three profitability items whenall the production factors remain the same?
13 Project Planning, Analysis and Management Financial ViabilityEstimates of profitabilityWhat are the items considered while preparing profitability estimates?SalesCost of productionGross profitSales and administrative expensesPBIDTInterestDepreciationPBTProvision for taxPATThen cash flow statement is prepared
14 Project Planning, Analysis and Management Financial ViabilityEstimates of profitabilityWhat is the difference between cash flow and funds flow statements?Funds flow considers the total volume of funds generated and spentduring a period (receivable and payable), whereas cash flow restrictsitself 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 needsCash 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”?
15 Project Planning, Analysis and Management Financial ViabilityEstimates of profitabilityFor a new project, what are the projected sources of funds and theiruses during pre implementation stage?SourcesPromoters’ capitalPublic issuePublic borrowingTerm loanTrade creditDeferred paymentsUsesInitial expendituresCapital expenditureRevenue expensesFunds flow for a new project mainly focus on the estimated time thefunds are needed and the time, funds may be available.
16 Project Planning, Analysis and Management Financial ViabilityEstimates of profitabilityAn exerciseLiabilities AssetsShare capital Fixed assetsReserves& surplus Current assetsSecured advances cashUnsecured advance receivablesCurrent liabilities inventoryProvisionsProjectionsSalesCost of goods soldDepreciationInterestTax provisionPATDividend
17 Project Planning, Analysis and Management Financial ViabilityEstimates of profitabilityDuring the first year, the company has the following plans:Raises a fresh secured loan ofRepayment of installment of earlier loanIncrease in unsecured loanIncrease in fixed assetsIncrease in inventoryIncrease in receivablesDividend outgoPlease construct a projected funds flow statement & balance sheet.Let us do another exercise for a new project during construction periodand two subsequent years.
18 Project Planning, Analysis and Management A new project has the following outlays (Rs in crores)Outlays Construction period year I Year IIPPOEFixed assetsCurrent assets(other then cash)FundingShare capitalTerm loanWorking capital loanProjected profit & lossSalesCost of saleInterestDepreciationLosses (absorbed)PBT (6.8)TaxPAT (6.8)