1. Project Planning, Analysis and Management
Financial Viability

2. 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?
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 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

3. 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
What 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 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

5. Project Planning, Analysis and Management
Financial Viability
What are the various means of finance?
Share capital
Term Loans
Debentures
Deferred Credit
Government Incentives
Foreign Currency Loans
Miscellaneous sources
How does the company choose a particular means of finance?
It depends upon two factors:
Regulatory norms and rules of financial institutions and
credit climate
Key business considerations of the company namely
a) cost
b) risk
c) control and
d) flexibility
With this exercise, cost and means are crystalised.

6. 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
Installed capacity
No of working days
No of shifts per day
Estimated production per day
Estimated production per year
Estimated production as % No 1
Sales (in quantity)
Sales (in value)
To find out the profitability and estimate the working capital
requirements, cost of production is calculated.

7. 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.

8. 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

9. Project Planning, Analysis and Management
Financial Viability
Normally working capital requirements are calculated as under:
Monthly sales
Raw materials80%
expenses
cost of production
Requirement Margin Permissible finance
Raw material %
(2 months)
Stock in process %
(2 weeks)
Finished goods %
Receivables %
(1 month)
Expenses %
Total
After this, profitability estimates and balance sheet projections are made

10. 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.

11. 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.

12. 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?

13. Project Planning, Analysis and Management
Financial Viability
Estimates of profitability
What are the items considered while preparing profitability estimates?
Sales
Cost of production
Gross profit
Sales and administrative expenses
PBIDT
Interest
Depreciation
PBT
Provision for tax
PAT
Then cash flow statement is prepared

14. 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”?

15. 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.

16. Project Planning, Analysis and Management
Financial Viability
Estimates of profitability
An exercise
Liabilities Assets
Share capital Fixed assets
Reserves& surplus Current assets
Secured advances cash
Unsecured advance receivables
Current liabilities inventory
Provisions
Projections
Sales
Cost of goods sold
Depreciation
Interest
Tax provision
PAT
Dividend

17. 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
Repayment of installment of earlier loan
Increase in unsecured loan
Increase in fixed assets
Increase in inventory
Increase in receivables
Dividend outgo
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.

18. 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
Projected profit & loss
Sales
Cost of sale
Interest
Depreciation
Losses (absorbed)
PBT (6.8)
Tax
PAT (6.8)