EIRC - ICAI

KOLKATA

Wednesday
28th April 2010
at
R. Singhi Hall

Project
Management &
Finance
by

Vikash Jain FCA

Partner
B. Jain & Co.
Chartered Accountants
Kolkata

 Let us work hard, my brethren; this is

no time for sleep. On our work
depends the coming of India for the
future. She is there ready waiting, she
is only sleeping. Arise, and awake, and
see her seated on her eternal throne,
rejuvenated more glorious than she
ever was, this motherland of ours
Swami Vivekananda

FINANCIAL MANAGEMENT
- An interpretation
Managing the world of money

and making more and more

of it for the business

Deliverables for the Day

Project Life Cycle
Project viability - techniques, evaluation

and appraisal
Preparation of Techno Economic
Feasibility Report & Financial
Projections vis--vis financial analysis
a critical examination to assess the
project with respect to capital budgeting
& investment decisions

PROJECT LIFE CYCLE

Conceptualisation
Project Proposal
Feasibility Study

CONCEPTUALISATION

Planning

Organisational Structure
Resources
Establishment of
standards

Implementation

Monitoring & Controlling

Termination

Disposal & Redeployment

PLANNING
IMPLEMENTATION
TERMINATION

CONCEPTUALISATION
includes

Project Proposal

prepared to set out clearly, the rationale,

proposed methods, costs and benefits
Feasibility Study

resulting from careful examination of

practicability, costs, markets and
associated costs

Important Ps
Product / Project Identification
Process
Place
Partners
Promoters

Feasibility Studies
Evaluation of risks &
returns
Managerial potential
Economic considerations
Commercial feasibility
Financial capability
Technical Feasibility

Feasibility Studies contd.

Social Factors
Marketability
Compliance with statutory
regulations
Insurance

KEY FACTORS
Location of the project
- raw material availability
- infrastructure facilities, etc
Size & Capacity levels
- large plants are more economical
- idle capacity is a huge loss
Technological Aspects
- Production process, machinery
Management policies
- Personnel, Sales, etc.

 The final choice in all

business decisions is, of
course, intuitive. It must be.
Otherwise, it is not a
decision, just a conclusion a printout
. . . Bruce D. Henderson

 Intuition is in fact the

subconscious integration of
all the experiences,
conditioning and
knowledge of a life . . .
. . . Bruce D. Henderson

Successful business strategies

result not from rigorous analysis
(which is necessary) but from a
particular state of mind. In the mind
of the strategist, insight and a
consequent drive for achievement
fuel a thought process which is
basically creative and intuitive rather
than rational

- Kenichi Ohmae

Examples of business visions

Bajaj Auto - Global Player
AV Birla Group - Diversified empire in

the core sector

TELCO - Technological Competence
IBM - Value added leadership position
Honda - No.1 producer of the best
motorcycles in the world
ITC - India International
Bell System - Our business is service

PLANNING

...includes

Project Report
prepared formally after conceptualizing

the project & consists of write-up on

the fine-prints of the project and
financials of the project

Project Appraisal & Evaluation

for the purpose of acquisition of

resources

PROJECT REPORT
A project report is a preinvestment and comprehensive
study of investment proposals
of an organisation.
Project report encompass a
thorough investigation relating
to economic, technical,
financial, social, managerial
and commercial aspects

FEATURES OF A PROJECT
Separate Entity
Specific Purpose & Objectives
Limited Duration
Target dates for Commencement & completion

Fine-prints of the
Project Report
Data collection, capacity determination
Promoters Information
Locational Advantages
Technical Arrangement
Marketing & Selling Arrangement
Schedule of Implementation
Project Cost & Means of Finance
Profitability

Essentials for drafting a Techno

Economic Feasibility Report
(TEFR)
Comprehensive
Clarity
Elaborate
Informative
Synchronized
User friendly

Preparation of TEFR
Detailed description of the

project, product description

and uses
Promoters background &
management profile
Infrastructure
Analysis of the schedule of
implementation
Manufacturing processes,
technical arrangement and
process flow chart

Preparation of TEFR contd.

Marketing
Financial summary of the promoters,

group companies
Organisation Structure
Basic assumptions underlying the
preparation of the TEFR
Analysis of the project cost
Structuring the means of finance

Components of Project Cost

Land & Land Development
Shed & Building
Plant & Machinery- imported &

indigenous
Miscellaneous Fixed Assets
Electrical installation
Margin money for working capital
Preliminary & pre-operative expenses
Provisions & Contingencies

Prospective Means of Finance

Share Capital - Equity or Preference
Term Loans - Domestic/External

Commercial Borrowings or FCNR (B)

Debentures
Unsecured Loans & Deposits
Lease
Internal Accruals
Sops & Incentives

Prospective Means of Finance

contd.
Venture Capital
Grants & Subsidies
Seed Capital Assistance
Deferred Payment Guarantee
Debt Securitisation
Forfaiting
Factoring

Working Capital
W o r k in g C a p it a l
Fund B ased

N on Fund B ased

- C a s h C r e d it
- O v e r d r a ft
- W o r k in g C a p it a l D e m a n d L o a n
- B ill D is c o u n t in g

- L e t t e r s o f c r e d it ( in la n d o r im p o r t )
- B a n k g u ra n te e s

Financial Projections
Sales Forecast
Material Costs
Labour
Power & Fuel
Freight
Interest Costs
Depreciation
Taxation
Dividend

Pooling of Capital
Term Loan
Investment
Acquisition of Fixed

Assets
Working Capital
Miscellaneous
Expenditure
Deferred Revenue
Expenditure

RISK
Assumption of Capital Budgeting
The projected cash flows occur in the
same quantum as forecasted by the
appraiser.
Quantification of Risk
Variation of the actual return from what
was expected during the time of
projections.

RISK ANALYSIS
STANDARD DEVIATION
PROBABILITY TREE METHOD
SIMULATION METHOD
SENSITIVITY ANALYSIS
CERTAINTY EQUIVALENTS
ADJUSTED DISCOUNT RATE
CAPITAL ASSET PRICING MODEL
(CAPM)

Sensitivity Analysis
GOAL - Identification of variables of
a project which could have an
adverse effect on the overall outcome
of an investment proposal.
Variables commonly used
- Selling Price
- Cost of Factors of Production
- Initial Outflow
- Project Life

Role of Financial Instutions

Critical Appraisal
Lending
Visits & Interactions
Conducting feasibility tests
Evaluation of credit worthiness
Structuring Finance
Period of Loan
Grant of Moratorium
Credit Rating
Monitoring & Follow-up

Interactions with Financial

Institutions
Conviction
Evaluation
Attitude
Credit worthiness of promoters
Knowledge of the project
Detailed study of the TEFR
Cordial & Positive Approach

Sanction & Disbursal by

Financial Institutions
Clearance by legal department
Acceptance of terms & conditions
Documentation
Creation of Charges
Disbursal

Term Loan Procedure

- In a nutshell
Submission of loan application
Processing
Appraisal
Issue of sanction letter
Acceptance of terms & conditions
Execution of loan agreement
Disbursement of Loan
Creation of security
Monitoring

Analysis of Financial Results

Profitability
Balance Sheet - portrayal & scrutiny
Cash Flows
Break-even Point and Margin of Safety
Debt Service Coverage Ratio
Fixed Assets Coverage Ratio
Sensitivity Analysis
Pay-back period
Internal Rate of Return

Analysis of Financial
Resultscontd
Important Qualitative Ratios
Return on capital Employed
Profit Margin
Assets Turnover Ratio
Inventory Turnover Ratio
Pay-out Ratios
Liquidity Ratios
Current Ratio
Debt Equity Ratios
Interest Coverage Ratios
Debt - Service Coverage Ratios
Analysis of Financial & Operating Leverage

Quantitative Ratios
Units sold or consumed as raw

materials
Unit realisation price
Trends in key ratios like sales, fixed
assets, working capital & operating
margin
Annualizing numbers especially for
companies changing accounting years
Inter & Intra firm companies

Guidelines for Project

Appraisal
Provision for Cost Escalation
Scrutinise sources of finance
Profitability adjustments
Examine Financial viability
Project Preference

Appraisal & Evaluation

Qualitative Factors
Intuition
Vision
Intangible Benefits
Strategic Aspects
Linkage between business planning
and capital budgeting
Approach to decision making
Strategic Planning & Financial Analysis
Organisational Considerations

Summarizing Appraisal &

Evaluation
Marketing

Technical
Financial
Economical
Managerial
Quality Control & Improvements
SWOT Analysis

Monitoring

...includes

Periodical Review
Updating/Revision of plans

Monitoring during
Implementation
Adequate formulation
Sound project organisation
Proper implementation planning
Advance Action
Timely availability of funds
Judicious equipment, tendering &

procurement

Monitoring during
Implementationcontd
Better contract management
Effective monitoring
Applying network techniques like
CPM & PERT model

Disposal of Assets
includes

Redeployment of resources having

alternative usage

CAPITAL BUDGETING
planning for investment in
capital assets. It involves
proper project planning and
commercial evaluation of
projects to know in advance
technical feasibility and
financial viability of the project

Capital Budgeting Process

depends on
Size of the organisation
Number of projects
Direct financial benefit
Composition of assets
Timing of expenditure

Process of Capital Budgeting

P L A N N IN G

E V A L U A T IO N

S E L E C T IO N

IM P L E M E N T A T IO N

C O N TR O L

R E V IE W

A s s e s s m e n t o f f i r m ' s f o r t u n e s a n d a b i li t y o f
t h e m a n a g e m e n t t o e x p lo i t t h e o p p o r t u n i t y
T e c h n iq u e s - P a y b a c k m e th o d , R e tu rn o n
I n v e s t m e n t , D i s c o u n t e d C a s h f lo w
R is k & R e tu r n p r o p o s itio n
M a x i m u m r e t u r n t o s h a r e h o ld e r s
A c q u is itio n o f n e c e s s a r y f u n d s a n d p u r c h a s e
o f a s s e ts
M o n ito r in g o f p r o g r e s s r e p o r ts
P o s t c o m p le t i o n a u d i t
P e r f o r m a n c e r e p o r ts & c o m p a r in g it w ith
s t a n d a r d s s e t , C h a n g e i n p la n & e v a lu a t i o n

CAPITAL BUDGETING TECHNIQUES

C a p it a l B u d g e t in g T e c h n iq u e s
T r a d it io n a l o r N o n - D is c o u n t in g

T im e A d ju s t e d o r D is c o u n t e d C a s h F lo w s

P a y b a c k P e r io d

N e t P r e s e n t V a lu e

A c c o u n t in g R a t e o f R e t u r n
o r R e tu rn o n In v e s tm e n t(R O I)

P r o fit a b ilit y I n d e x

In te rn a l R a te o f R e tu rn (IR R )
T e r m in a l V a lu e
D is c o u n t e d p a y b a c k P e r io d

PROJECT CASH FLOWS

defined as the financial costs
and benefits associated with a
project

COSTS & BENEFITS EVALUATION

Capital Costs
Operating Costs
Revenue
Depreciation
Residual Value

Principles used in developing

Projected Cash Flows
Incremental principle
Long Term Funds principle
Exclusion of Financing Costs

principle
Post Tax principle

INFLATION
Inflation has the tendency to cause a
major impact on the ultimate success
or failure of capital projects. The
timing of project appraisal is
significant from the point of view of
appraisers. In the likelihood that the
presumed normal conditions seldom
exist for a project, inflation is bound
to affect the project appraisal and
implementation process.

EFFECT OF INFLATION
Change in Projected Statement of

Profitability and Cash Flows

Increase in rate of interest by lending
institutions.
Increase in all Expenditure heads:
Labour, Raw Material, Fixed Assets,etc
Remuneration to technicians & managerial
personnel

Dealing with Inflation

Build into each Cash Flow element
estimated rate of inflation on the basis
of information available

Role of VC

Venture Capitalist fills this gap by

providing Value Added Finance

What is Venture Capital

Spirit of partnership
Alignment of interest

Active participation and Value Addition

Long term perspective
Returns linked to performance
Risk - Reward sharing

Investment and not Assistance

Approaching VC
Evolve Long Term Growth Strategy
Strong Value Proposition
High probability of Commercealisation

Scalable Business Model

Prepare well thought-out Business Plan

Business Focus & Growth Strategy

Milestones
Realistic Projections
Exit Options

Approaching VC

- contd.

Prepare to dilute
Owning Large Part of a Small
Business or Small Part of a Large one

Select a Partner (Strategic / VC) that

Shares Vision and Objective
Provides Strategic Inputs &
Complementary Relationship

BUSINESS PLAN - WHAT VCFs LOOK FOR

SIMPLE -CLEARLY HIGHLIGHTING :

CORE STRENGTHS
Promoters & Team
Value Proposition, Competitive Advantage
Key Customers, Market,Growth Potential

GROWTH PLANS
STRATEGY & TIME FRAME TO ACHIEVE SET MILESTONES
FUND REQUIREMENTS & DEPLOYMENT PLAN
REALISTIC FINANCIAL PROJECTIONS
Exit Options

Investment Criteria
Risk Analysis
Promoters Background / Quality of
Management
Vision
Experience
Ability to Innovate / Change Rapidly
Ability to Build Team
Marketing and Branding Skills

Investment Criteria

- Contd

Product / Service / Idea

Product Concept / Value proposition
Stage of Development / Level of
Acceptance
Competitive Advantage and its
sustainability / Entry Barrier
Scalability

Investment Criteria
Valuation
Revenue Model
IPR
Customer Base

Exit Options
Trade Sale
Merger
IPO

- Contd.

Value Addition
Implementation of Business Plan
Using Network
Team Building
Resource Planning

Implementation of systems
Evolving Growth Strategy
Provide Outside View

VC Expectation
Post Investment
Transparency / Corporate Governance
Openness to Constructive suggestions
Growth Appetite
Organic / Non Organic Growth

Build Team
Build System
Preparedness to dilute and
facilitate Exit

Social Cost Benefit

Analysis(SCBA)
Urgency to fulfill long-term interest of the

nation
Planning Commission decided to include
social rate of return in feasibility study in
case of public sector projects
Private Sector projects may be easily
acceptable to Govt. institutions while
granting various licenses & approvals
A project with monetary loss but social
benefit may be acceptable.

Indicators of Social
Desirability
Employment Potential Criterion
Capital Output Ratio
Value added per unit of capital
Foreign Exchange benefit criterion
Cost benefit ratio criterion

Relationship
Among employees
Between management, executives

and work force

With financial institutions, banks
and suppliers of capital

- customers

- competitors

- government bodies

- suppliers of resources

THANK YOU