Financial Analysis

A project management core function is to successfully execute a project within the

estimated budget, time, and scope of the project. Where time and scope may be of
equal importance in the life cycle of a project, everything hinges on the
availability and good governance of finances, and that requires a well-executed
financial analysis by the project manager.

When carry out a financial analysis, they do so to ascertain whether a project will
be a profitable undertaking and would warrant financial investment. Financial
analysis is not only to be done in the planning stages of a project, but throughout
every stage of the project. It remains within the purview of the project manager to
be up-to-date with the project’s finances based on the initial estimates, and to keep
an eye on it throughout the duration of the project.

Before starting a new project, carrying out a proper financial analysis is vital to
determining whether the project will be financially viable or not. There are
several ways to determine this.
Finance is one of the most important prerequisites to establish an
enterprise. It is finance only that facilitates an entrepreneur to bring
together the labour, machines and raw materials to combine them to
produce goods. In order to adjudge the financial viability of the project, the
following aspects need to be carefully analysed:

• Cost of capital • Means of finance

• Estimates of sales and production • Cost of production
• Working capital requirement and its financing
• Estimates of working results • Break-even point
• Projected cash flow • Projected balance sheet.

The activity level of an enterprise expressed as capacity utilization needs to

be well spelled out. However the enterprise sometimes fails to achieve the
targeted level of capacity due to various business vicissitudes like unforeseen
shortage of raw material, unexpected disruption in power supply, instability
to penetrate the market mechanism etc.
 cost benefit analysis
• Capital expenditures refer to funds that are used by a
company for the purchase, improvement, or
maintenance of long-term assets to improve the
efficiency or capacity of the company. Long-term assets
are usually physical, fixed and non-consumable
assets such as property, equipment, or infrastructure,
and that have a useful life of more than one accounting
period.
• Also known as CapEx or capital expenses, capital
expenditures include the purchase of items such as new
equipment, machinery, land, plant, buildings or
warehouses, furniture and fixtures, business vehicles,
software, or intangible assets such as a patent or license.
 Importance of Capital Expenditures

• Long-term Effects
• Irreversibility
• High Initial Costs
• Depreciation
 Challenges with Capital Expenditures

• Measurement Problems
• Unpredictability
• Temporal Spread
Criteria and Investment strategies
• Projects must be understood as investments.
It’s not enough to say that a project is like an
investment. A project is an investment, In the
world of projects, the asset isn’t purchased
directly—it’s created by the project. The asset
is exactly the result of the project. The
purpose of the project is to create the asset.
The asset is exactly project scope.
• The asset is project scope
• The price paid is project cost
• The return is the presumed benefit of project
scope
• And a project has all the same investment risk
that any investment might have
 Capital Investment Appraisal Techniques
(Non DCF and DCF)
• Project would be selected in the order in
which they are ranked and cut off point would
be reached when the cumulative total cost of
the projects become equal to the size of the
plan funds. A wide range of appraisal criteria
have been suggested for selection of a project.
They are divided into two categories viz, non-
discounting criteria and discounting criteria.
1. Non discounting criteria
• The method of capital budgeting are the techniques
which are used to make comparative evaluation of
profitability of investment.
The non-discounting methods of capital are as follows :
• Pay back period method (PBP)
• Accounting rate of return method (ARR)
2. Discounting Criteria
• Net present value method (NPV)
• Internal rate of return method (IRR)
• profitability index method (PVI)
 Discounting factor calculation
• PBP ARR

• NPV: DISCOUNTING FACTORS WHILE CALCULATING

CASH INFLOWS OF THE PROJECT

• (10%) 110/100*100
• 0.909 FOR FIRST YEAR
• .909/110*100=.8
• IRR
• PIM
Non-Discounted Cash Flow Techniques
Discounted Cash Flow Techniques
 Risk analysis
• Risk analysis is the process of identifying and
analyzing potential issues that could
negatively impact key business initiatives or
projects. This process is done in order to help
organizations avoid or mitigate those risks.
 Cost and Financial Feasibility
• Financial feasibility
• Before investment of resources in selecting and carrying out a potential project can
proceed, two sets of questions need to be considered:
• Will the investment of resources in a particular project be worthwhile when
compared with the cost associated with those resources? How worthwhile will it be?
• Where there are several alternative opportunities for investing resources, which one
gives the best rewards?
• Cost–benefit analysis
• The technique that should almost certainly be used during any feasibility study
is cost–benefit analysis. This means:
• identifying, specifying and evaluating the costs, including purchase, construction,
maintenance, repair, running costs such as energy consumption and
decommissioning, of the proposal for its projected lifetime
• identifying, specifying and evaluating the benefits of the proposal over its projected
lifetime.
• No matter what the size and nature of a proposal, the methods of evaluation
are always the same: the specification of costs and benefits is the first stage.
The types of cost and types of benefit involved in a particular project obviously
depend upon the nature of the proposal and can vary as much as the
proposals themselves.
• For every item of proposal cost and every item of proposal benefit, you need
to specify:
• its value in money terms or its value in terms of desirability (using some
numeric scale)
• whether it is capital or revenue in nature (see below)
• its likely timing (when it occurs)
• whether it occurs once or recurs
• whether recurring items will remain constant or vary as time goes by (e.g.
because of inflationary factors)
• where recurring items are expected to vary, for what reasons and by how
much.
 Evaluating Proposals Financially
• Capital costs
• Revenue costs
• Depreciation Costs
• Financing costs
• Effects of time on values
• Cash flow statements
Cost of Project and Means of Financing
• Cost of Project:
• Cost of project is the aggregate of costs
estimated to be incurred on various heads for
bringing the project into existence.
Establishing the cost of project constitutes a
critical step in project planning, on the basis of
which means of finance is worked out.
 The cost of project usually comprises the
following items
• (a) Land and site development,
• (b) Factory building,
• (c) Plant and machinery,
• (d) Escalation and contingencies,
• (e) Other fixed assets or miscellaneous fixed assets,
• (f) Technical know-how fees,
• (g) Interest during construction,
• (h) Preliminary and pre-operative expenses, and
• (i) Margin money for working capital.
• Means of Finance:
• For implementation of the project, it is required to
raise finance from various sources of finance. After
consideration of various aspects attached to
different sources of finance, the scheme of finance
will be determined.
• (a) Equity share capital.
• i. Promoters, and
• ii. Public.
• (b) Term loans from all India or state level financial
institutions.
• (c) Debentures.
• (d) Unsecured loans.
• i. Promoters, and
• ii. Others.
• (e) Others.
Revenue estimation – Income determinants
 Revenue estimation
• Revenue estimation involves calculating the amount of money your
project is likely to earn. Revenue estimation is usually calculated over a
fixed accounting period, such as a quarter or even a financial year.

• The charge total for all eligible opportunities in the project.

• A bar that shows the split of the percentage of how much each eligible
opportunity makes up of the project charge total.
• Total rental, sale, and service charges for eligible opportunities across the
project.
• Total provisional costs, actual costs, and overall predicted profit for eligible
opportunities.
Revenue and Income determinants
• Planning
• Skills
• Communication tools
• Process
• Management
• Team work
• Price of the product/service
• Cost control