PROJECT MANAGEMENT

&
ENTREPRENEURSHIP

KHU-702

UNIT-4

BY
UMA SHARMA
 Content – Unit IV

Project Financing:
• Project cost estimation & working capital
requirements, sources of funds, capital
budgeting, Risk & uncertainty in project
evaluation, preparation of projected financial
statements viz. Projected balance sheet,
projected income statement, projected funds
& cash flow statements, Preparation of
detailed project report, Project finance.
 Financial Feasibility
Financial feasibility is the process of identifying
the overall investment outlay, determining
expected rate of returns and evaluating project
financially. Financial feasibility is crucial for any
organization as:
It influences the firm’s growth in long term.
It affects risk of the firm into consideration.
It involves huge quantum of funds generally.
 A wrong decision with regard to investment of
huge sum of funds may prove fatal for an existing
firm.
 Financial Feasibility

A careful analysis of cash outflows and

inflows is essential before applying any
capital budgeting technique.
Capital budgeting is the process of
identifying, evaluating and selecting a
project that requires large sums of funds
and generates long-term benefits in
future.
Steps in financial analysis
 Steps in financial analysis…
The various steps involved in financial analysis are:
Estimation of cost of project: There are various
components of the cost of project. It mainly consists of
two types of costs, fixed investment and working
capital. The cost of project includes all costs incurred
before commissioning of commercial production
(manufacturing projects) or operations (service
projects).

Working Capital=Current Assets-Current Liabilities

Indicates short term financial position of organisation.
And, it is important to run business properly.
 Steps in financial analysis…

Estimation of project cash flows: This

estimate involves all the project cash flows
during the life cycle of the project. It includes
the initial investments, cash flows generated
during operations, and at the termination of a
project.

Cash flow is net amount of cash being

transferred into and out of a business in terms
of income and expenditure.
A positive cash flow is desired.
 Steps in financial analysis…
Estimation of expected rate of return: For financing
a project, there are many sources of funds. After careful
evaluation, we design optimum capital structure for the
firm. The expected return from the project includes two
components, risk free component (generally
weighted average cost of capital, low return) and risk
component (risk premium due to the investments,
high return).
Return=(Vf-Vi)/Vi
Vf: Final value
Vi=Initial value
Rate of return is net gain or loss of an investment over
a period of time.
 Steps in financial analysis…

Application of decision rule: The last

stage of financial analysis is to apply various
tools for checking the financial feasibility of
a project.
Capital budgeting techniques are applied to
ascertain profitability and expected returns
from the project.
 Components of cost of project and its
estimation

Project includes all expenses incurred

before commercialization of the project.
It includes capital investments and all
other recurring expenses (like salary,
interest, etc) incurred before the
completion of a project or before the
project is handed over for operations.
The various components of cost of project
as per the guidelines of various financing
and appraising authorities are as follows:
 Components of cost of project and its
estimation…
 Land and site development: It includes all expenses
incurred on the acquisition of land and making it
suitable for implementation of the project. The various
subcomponents are:
 Purchase price of land
 Legal and registration charges
 Levelling of land
 Laying of internal and approach roads
 Boundary wall/fencing of land
 Gates and site office
 Tubewell and electrification for project implementation
 Any other expenses of similar nature
 Components of cost of project and its
estimation…
Construction cost: This cost includes expenses
incurred on the construction of factory/non-factory
buildings of all nature including RCC, PCC, etc.
Different factory buildings are:
• Production shed • Boiler house • Transformer
room / generator room • Workshop • Laboratory,
etc.
The various non-factory buildings are:
• Warehouse • Stores • Security house • Workers’
rest room • Parking • Time office/excise room •
Administrative block • Essential quarters for
workers • Canteen
 Components of cost of project and its
estimation…

Plant and machinery: This is generally the

biggest cost in manufacturing projects. It
comprises the overall cost of imported and
indigenous machinery including its erection and
foundation cost. The following costs are included
under this head:
• Basic cost of equipment
• Excise/custom duty and sales tax
•Transshipment cost (from vendor to site) and
insurance during transportation
• Erection and foundation cost
• Piping cost
 Components of cost of project and
its estimation…
 Technical know-how: Whether generated or
transferred, technology has its own cost. This technical
know-how cost includes:
• Basic cost of technology development or purchase •
Training cost for employees • Royalty paid (if lump sum)
Utility: Utilities are common facilities used for various
plants of the same organization. This seems similar to
plant and machinery cost, but the difference lies in the
fact that utilities are used for various plants whereas
plant and machinery is for individual plant.
• Boiler • Compressor • Generator/transformer •
Underground/overhead water tank • Effluent treatment
plant
 Components of cost of project and its
estimation…
Miscellaneous fixed assets: There are various costs
which are not included in the costs, mentioned before.
They are termed miscellaneous fixed assets: •
Furniture/fixtures • Computers/fax/printers and
accessories • Vehicles • Weigh bridge
Preliminary expenses: These include market survey
expenses, public issue expenses and interest during
implementation.
Preoperative expenses: These include the normal
expenses such as salary and rent incurred by an
enterprise prior to commercial production. This also
includes travelling expense, company formation
expense, commissioning expense, trial run costs, etc.
Components of cost of project and
its estimation…
Contingency: This is cushion fund kept for
some foreseen over expenditures or some
unforeseen expenses.
 Margin money for working capital:
Working capital is generally financed
through short-term sources of finance.
 Working Capital Estimations
Working capital is referred to as operating
capital. Working capital should just be adequate:
A higher working capital will mean
underutilization of funds and a lower working
capital may hinder smooth operations.
Various determinants of working capital are:
• Raw material inventory (less creditors)
• Work in progress inventory
• Finished goods inventory
• Debtors
• Cash (less bills payables)
 Project cash flows
Project cash flows differ from financial
cash flows during operations. Project cash
flows can be classified into three types,
viz. initial outlay, operating cash flow,
and terminal cash flow.
 Project cash flows…
Operating cash flow is calculated without considering
interest as an expense.
Initial outlay is generally before the project starts, but
when there is capacity enhancement or increase in sales,
there is additional outlay in next years.
One should be careful in computing working capital. It
should be made available one year in advance.
For example, working capital of Rupees 2 millions is
needed in the second year. There is working capital
available for Rupees 1.5 millions in the first year,
additional Rupees 0.5 millions should be considered in the
first year’s cash flow as first year’s cash flow is basically
at the end of first year or starting of second year.
 Project cash flows…
Initial outlay is generally in the zero’s year, but
sometimes additional working capital requirement
in succeeding years or reduction in working capital
in succeeding years may incur addition or
subtraction.
Operating cash flow is non cash expenditure (like
depreciation) added to net profit after tax.
Salvage value and redemption of working capital is
considered as terminal cash flow in the last year of
project life.
The sum of the three cash flows in corresponding
years is project cash flow.
Project cash flows…
 Project cash flows…
FI is fixed investment;
WC is working capital;
Depr. Is depreciation;
SV is salvage value.
 It should be noted that only real expenses
are considered in cash flows and not the
accounting expenses like preliminary
expenses written off or written down over
heads.
 Risk & uncertainty in project
evaluation

Risk: A risk is an unplanned event that may affect

one or some of your project objectives if it occurs.
• The risk is positive if it affects your project
positively, and it is negative if it affects the project
negatively.
 There are separate risk response strategies for
negatives and positives.
 The objective of a negative risk response
strategy is to minimize their impact or probability,
while the objective of a positive risk response
strategy is to maximize the chance or impact.
 Risk & uncertainty in project
evaluation…

You might also hear two more risk terms:

known and unknown. Known risks are
identified during the identify risks process
and unknown risks are those you couldn’t
identify.
A contingency plan is made for known risks,
and you will use the contingency reserve to
manage them. On the other hand, unknown
risks are managed through
a workaround using the management
reserve.
 Risk & uncertainty in project
evaluation…

Uncertainty: Uncertainty is a lack of complete

certainty.
In uncertainty, the outcome of any event is entirely
unknown, and it cannot be measured or guessed; you
don’t have any background information on the event.
 Uncertainty is not an unknown risk.
 In uncertainty, you completely lack the background
information of an event, even though it has been
identified.
 In the case of unknown risk, although you have the
background information, you missed it during the
identify risks process.
 Risk & uncertainty in project
evaluation…

 Managing risks is easier because you can identify

them and develop a response plan based on your
experience.
 However, managing uncertainty is very difficult, as
previous information is not available, too many
parameters are involved, and you cannot predict the
outcome.
 Conventionally risk (and uncertainty) management
involves two components:
 (a)assessment comprising threat identification,
classification, prioritizing, and devising controls, and
 (b) applying the controls.
 Risk & uncertainty in project
evaluation…

 There are several types of risks that occur frequently,

regardless of the specifics of the project. These common
types of risk include:
 Cost: The risk of events that impact the budget, especially
those that cause the project to be completed over budget.
Errors in cost estimation commonly generate risk in
addition to external factors.
 Schedule: The risk of unplanned scheduling conflicts, such
as events that cause the project to be delayed. Scope
creep is a common reason for scheduling issues and project
delays.
 Performance: The risk of events that cause the project to
produce results that are inconsistent with the project
specifications.
 Risk & uncertainty in project
evaluation…

 To protect a project from unplanned risk, project managers typically

follow an ongoing risk management process which helps them
identify, understand, and respond to threats and opportunities.
 Before beginning this process, however, it’s important to fully
understand your organization’s practices and how you will conduct
your risk work for that project.
 This plan then will drive the following steps:
 Identify the risks
 Assign ownership
 Analyze each risk
 Prioritize
 Respond
 Monitor
 Risk & uncertainty in project
evaluation…

 Identify the risks that could potentially impact your project.

 Assign ownership of each identified risk to a team member
who will be charged with overseeing that threat or
opportunity. Although some project managers prefer to
assign ownership after the risks have been analyzed and
prioritized, taking this step early can be beneficial. “Many
times I assign an owner to the risk very early on because I
want that person to drive the analysis of the risk,” Emerson
notes.
 Analyze each risk to fully understand the driving factors
involved and potential impacts. Be sure to consider the
breadth and depth of each threat at this stage in order to
evaluate the severity of each risk in the context of the overall
project
 Risk & uncertainty in project
evaluation…

 Prioritize project risks according to urgency and

the severity of the impact they could cause.
 Respond to your identified risks in accordance
with your risk management approach, either by
taking steps to prevent the risk event from
occurring or to minimize the impact if it does
occur. This step should include building the
response as well as taking action.
 Monitor your risk management strategy and make
changes as needed.
 Capital Budgeting

Capital budgeting is the process of identifying,

evaluating and selecting a project that requires
large sums of funds and generates long-term
benefits in future.
Techniques of Capital Budgeting:
There are various techniques used for capital
budgeting. They can broadly be classified as:
 Non-discounting and discounting techniques.
Non-discounting techniques are those techniques
which do not consider time value of money.
Discounting techniques take time value of money
into account.
Capital Budgeting…
 Capital Budgeting…
 Pay Back Period Method: Payback period is the easiest
method to assess financial feasibility. Payback period is the
time period in which the investor gets back his invested
money in fixed assets from the project.
 For example, Mr. Mehta invests Rs. 200 lacs in a project
and he is projecting cash flow of Rs. 50 lacs every year.
Then, his payback period is 4 years. A better project
always has a lower pay back period.

where Y0 is the year just before the pay back is attained.

Cu.CF0 is cumulative cash flow of Y0
CF1 is cash flow of pay back year
 Capital Budgeting…
Average Rate of Return: It considers the cash flows
after the payback period and considers working
capital and salvage value. The average return is the
ratio of average return and average investment.

Average investment = 1/2 (Initial investment +

Terminal cash flow) = 1/2{(FI + WC) + (WC + SV)} =
WC + 1/2(FI + SV)
FI is Fixed Investment, WC is Working Capital and SV
is Salvage Value.
 Capital Budgeting…
 Time Value of Money: Rs.20,000 after 3 years or Rs.20,000
now. Which offer will one select?
 Certainly, everyone will go for the money now. That shows
that time matters.
 Present value of money is more than equivalent amount in
future.
 The time value of money is money’s potential to grow in value
over time.
 Money available today is worth more than the same amount of
money in the future, based on its earning potential.
 This principle asserts that money can earn interest and grow,
and so any amount of money is worth more the sooner a
person has it so that that person can put it to use now rather
than later.
 Capital Budgeting…
 Profitability Index and Net Present Value: Net
present value is the most common approach used in
the field of financial investment analysis.
 It is very simple to use and evaluates on the basis of
wealth maximization objective.
 It is defined as the difference between the present
value of cash inflows and the present value of cash
outflows.
 Profitability index is the ratio of inflows and
outflows whereas net present value (NPV) is the
difference between the two.
 Net Present Value…

The advantage of NPV are:

1. Considers all cash flows.
2. Considers time value of money.
3. Computes contribution towards wealth
creation.
4. Allows expected change in cost of capital.

The limitation of NPV is, it requires pre-

determination of discounting factor.
 Capital Budgeting…

Present value: Any value that occurs at the

beginning of the problem is a present value.
As zero is good baseline, all cash flows are
converted into their present value for
analysis.
Future value: The last cash flow is generally
called future value. It can be understood as
the cash transaction taking place after
certain duration of time. If the same amount
is transacted after a regular interval, it is
termed annuity
 Capital Budgeting…

 Annuity payment: As per literary meaning, an

annuity payment means the yearly payment that
occurs every year for more than one year.
 But in financial terms, the duration may not be
yearly, it may be less as well, say quarterly,
monthly, weekly, etc., but the duration between two
successive payments remains constant.
 Each payment, if taken alone, is a future value, but
together they make an annuity.
 It is important that annuity value is the sum of
present values for the interest rate for n years and
it starts from the first year.
 Capital Budgeting…

Discounting factor (r): It offers a way to

calculate the net present value.
It is a weighing term, multiplying future
income or losses to determine the precise
factor by which the value is multiplied to get
today’s net present value.
This takes into account time value for money.
 Capital Budgeting…
Internal Rate of Return: Internal rate of
return is defined as the discounting rate
which delivers a net present value equal to
zero.
It is the true interest yield from an
investment.
A simple decision-making criterion can be
stated to accept a project if its internal rate
of return exceeds the cost of capital and
rejected if this IRR is less than the cost of
capital.
Internal Rate of Return…
 Project Financing
(Sources of Funds)

Sources of long-term finance: The major

classification of long-term sources is debt
financing (outsider’s liability) and equity
financing (insider’s liability)
 Project Financing
(Sources of Funds)
 Debt Financing: Debt funds are the outsider’s liability.
 The funding agencies evaluate the project and provide
finance for the same with predetermined terms of returns
and repayments.
 The repayment schedule is predetermined and so is the
interest rate.
 The term, or time limit to pay a debt, is generally
commensurate with the value of an item or investment.
Business and governmental bodies carry long-term debt in
the form of loans or bonds.
 Loans are taken from institutes or banks and are paid back
with an agreed interest rate. Bonds or debentures are similar
to loans, but are usually purchased by individuals or other
businesses.
 Project Financing
(Sources of Funds)
 Types of Debts: There are two broad classifications of
debts: loans and debentures
 Loans: Loans are the most common source of financing.
 There are several development banks/institutions and
commercial banks providing finance with a predefined
rate of interest.
 The repayment schedule is also predefined. Repayments
are generally made in installments (quarterly/semi
annually/annually) whereas interest payment is
generally on quarterly basis in India.
 There are various banks/institutes providing loans.
Some of them are:
 Project Financing
(Sources of Funds)
 Central financial institutions/development
banks: Financial intuitions like IFCI (Industrial
Financial Corporations of India), IRBI (Industrial
Reconstruction Bank of India), and development
banks like IDBI (Industrial Development Bank of
India), ICICI Bank, SIDBI, GIC, EXIM, etc.
 State Financial Corporations (SFCs): All major
states have their own SFC for funding medium
sized projects. They all are refinanced by IDBI. For
example, APSFC (Andhra Pradesh State Financial
Corporation) in Andhra Pradesh, UPFC (Uttar
Pradesh Financial Corporation), etc.
 Project Financing
(Sources of Funds)
 State Industrial Development Corporations
(SIDCs): The role of SIDC is not restricted to
financing but they are also responsible for zones for
industrial developments and infrastructural facility.
 Pithampur (near Indore) and Mandideep (near
Bhopal) are developed by MPAKVN (Madhya
Pradesh Audhyogic Kendra Vikas Nigam),
 Similarly, MIDC (Maharashtra Industrial
Development Corporation) and GIDC (Gujarat
Industrial Development Corporation) have developed
a number of industrial areas in their respective
states and contributed towards its development.
 Project Financing
(Sources of Funds)
Commercial banks: All commercial banks
finance long-term debt at a predefined rate
of interest, generally with collateral
security. Both nationalized and private
commercial banks are playing a major role
in financing agro industries and service
projects.
Private financing: Private companies and
NBFC are also providing longterm loans for
projects.
 Project Financing
(Sources of Funds)
 Debentures: Debentures are loans that are usually
secured and are said to have either fixed or floating
charges with them. They are different from loans as
loan is provided by a bank or an institution whereas
debenture is funded by public or group of people.
 A secured debenture is one that is specifically tied to
the financing of a particular asset such as a building or
a machine. Then, just like a mortgage for a private
house, the debenture holder has a legal interest in that
asset and the company cannot dispose of it unless the
debenture holder agrees. If the debenture is for land
and/or buildings, it can be called a mortgage
debenture.
 Project Financing
(Sources of Funds)
 Debenture holders have the right to receive their
interest payments before any dividend is payable to
shareholders and, most importantly, even if a
company makes a loss, it still has to pay its interest
charges.
 If the business fails, the debenture holders will be
preferential creditors and will be entitled to the
repayment of all of their money before the
shareholders receive anything. This provides safety
to the holders of debentures.
 Project Financing
(Sources of Funds)
 Equity Financing Although owners of equity instruments
are the owners of a company, it is actually equity
shareholders who are the real owners of the company.
There are various sources of equity financing.
• Preference shares • Equity shares • Returned
earnings
 Preferential Shares: Preference shares offer their owners
preferences over ordinary shareholders. There are two
major differences between ordinary and preference shares:
 1. Preference shareholders are often entitled to a fixed
dividend even when ordinary shareholders are not.
 2. Preference shareholders cannot normally vote at general
meetings.
 Project Financing
(Sources of Funds)
 Equity Shares Equity shareholders are the true
owners of the company.
 They have the voting rights and right on all the
remainder profit after paying interest to debt and
preferential dividends. Who owns Reliance Industries?
Mukesh Ambani? No, he is just holding majority stake
of the company, and so is controlling the company.
 All shareholders of Reliance industries are the owners
of the company.
 The equity shares are generally not subjected to buy
back and under no circumstances can an equity
shareholders be forced for the buy back.
 Project Financing
(Sources of Funds)
 Companies may offer a buy back but can never
force buy back on shareholder.
 Returns to shareholders are in the form of
dividends, right shares or bonus shares.
 Generally, the return expected by shareholders is in
the form of increased market prices.
 Future aspects, profits, reserves and all the aspects
of the company are depicted by its share prices.
 The value of the company is determined by market
price/share x No. of shares issued.
 Project Financing
(Sources of Funds)
 Retained Earnings: Retained earnings is the
cheapest of equity source of capital.
 Companies do not declare dividends equal to their
earnings; they retain some portions of their
earnings for various reasons.
 One of the major reasons is future prospects. Such
reserves are used as source of funding of a new
project (generally in the case of brown field
projects).
 Project Financing
(Sources of Funds)
 Short-Term Sources for Working Capital
The various short term sources of funds are:
 Cash credit limit/overdraft by banks: This is a form of
loan provided by a bank. This is a cheaper means of fund
as interest is payable on the amount which is withdrawn
on a particular date. Banks offer a drawing limit to
business for meeting its requirement of funds for
working capital needs for raw material storage, work in
progress, finished goods stock and debtors.
 Commercial papers: Commercial paper is an
unsecured, short-term debt instrument issued by a
company, typically for the financing of accounts
receivable, inventories and meeting short-term liabilities.
 Project Financing
(Sources of Funds)
 Factoring: Factoring is a financial option used for the
management of receivables.
 Hundies: It is very ancient source of financing short-term
funds. A firm needing short-term funds for meeting its
working capital needs raise the funds privately at a
predefined rate of interest through money market. This is
generally dependent on the goodwill earned by the borrower.
 Trade credit: Firm do take advantage of their good will
during purchasing goods on credit thus reducing working
capital requirement. Many firms also take deposits from
their distributors which in turn provide them funds for
working capital. Some firms also sell their product after
receiving advances, which also provide funds for their
working capital requirement.
 Project Financing
(Sources of Funds)
Newer Sources of Finance
 International financing: The International Finance
Corporation (IFC), the Multilateral Investment
Guarantee Agency (MIGA), and International Project
Financing Agency (IPFA) give loans to promote
private sector, corporate investment in developing
countries, under the theory that such investment will
provide economic growth.
 Other major sources of international financing include
Euro Currency loans, Euro Bonds, Global Depositary
Receipt and American Depository Receipts.
 Project Financing
(Sources of Funds)
 Leasing: Lease is an agreement between two
parties, the lessee and the lessor. The lessor
purchases capital goods for the use of the lessee and
the lessee uses it by payment of predefined rentals.
The lessee continues to be the owner of the asset.
Leasing is generally used for financing capital goods.
 Hire purchase: It is a form of installment credit.
Hire purchase is similar to leasing with the exception
that ownership of the goods passes to the hire
purchase customer as soon as the final installment is
paid, whereas a lessee never becomes the owner of
the goods.
 Project Financing
(Sources of Funds)
 Venture Capital Financing: Venture capital is the capital
provided by outside inventors for financing of new,
innovative or struggling business.
 Venture capital investments generally are high risk
investments, but offer the chance for above average
returns. A venture capitalist (also called angel investor) is
a person who makes such investments.
 A venture capital funds is a pooled investment vehicle
(often a partnership) that primarily invests the financial
capital of third-party investors in enterprises that are too
risky for the standard capital markets or bank loans.
 A venture capitalist is an expert not only in acquiring
capital, but can also provide support and direction to early
startups.
 Financial Statements

There are 3 basic financial statements

that exist in the area of Financial
Management.
1. Balance Sheet.
2. Income Statement.
3. Cash Flow Statement.
4. Fund Flow Statement
 Financial Statements…

The first two statements measure one aspect

of performance of the business over a period
of time.
Cash flow statements signify the changes in
the cash and cash equivalents of the business
due to the business operations in one time
period.
Funds flow statements report changes in a
business's working capital from its operations
in a single time period, but have largely been
superseded by cash flow statements.
 Projected Balance sheet

 A projected balance sheet is also referred to as a pro

forma balance sheet. It shows the estimation of the total
assets and total liabilities of any business. A pro forma
balance sheet is a tabulation of future projections. As a
result, it will help your business manage your assets
now for better results in the future.
 The asset will contain long-term assets (non-current
assets) and current assets.
 The long-term assets will include the building, land,
machinery, and vehicles.
 Whereas the current asset includes the cash in
hand/bank, receivables, and stock for the short term.
 Projected Balance sheet…

On the liability side, we have non-current liabilities

and current liabilities.
In the non-current liabilities, it includes the term loan
and current liabilities include the account payable
and short-term loan such as a working capital loan.
You may need to prepare a projected balance sheet if
you have applied for a business loan for your new
project or you are interested to buy new fixed assets.
By showing a well-crafted projected balance sheet ,
the bank will get the confidence that the business
unit is worth viable to invest/provide the loan.
 How to Prepare Projected Balance
Sheet

The following steps will help prepare the projected

balance sheet:
 Step 1: Calculate cash in hand and cash at the
bank
 If you have no booking record of your cash, you
can show cash in hand after checking your cash
balance in the business’s pocket.
 You can check also the available balance at the
bank. Both will be your current assets on the
balance sheet.
 How to Prepare Projected Balance
Sheet…

 Step 2: Calculate Fixed Assets

 See everything around you. Make the list of assets whose
benefits are you taking more than one year. Check its price
from cash memo or past bills. Try to calculate the time of
its use.
 If you have used it for 3 years. Its value will surely
decrease due to depreciation.
 Charge 10% to 20% per year on every fixed asset up to the
used period with any method of depreciation.
 Now, you will get the current cost of the fixed asset. Show
it on the asset side of the balance sheet.

 How to Prepare Projected Balance
Sheet…

 Step 3: Calculate Value of Financial Instruments

 If you invested your money in shares, bonds, and other financial
instruments. Write its purchase price. If it has decreased, then
you can also show the current market price of financial
instruments.
 Step 4: Calculate your Business Earning
 If you have not made a profit and loss account. You can compare
your expenses and your incomes. If your incomes are more than
your expenses, it will be your net profit. That will be transferred
to the liability side of the balance sheet. You should only deduct
expenses whose benefits, you have obtained in one year.



 How to Prepare Projected Balance
Sheet…

 Step 5: Calculate Business’s Liabilities

 In these liabilities, you can add bank loans,
secured loans, and other loans. That will be added
to the liability side of the projected balance sheet.

 Step 6: Calculate Business’s Capital

 Business’s capital, you can calculate by subtracting
outside liabilities from total assets. That will also
add to the balance sheet on the liabilities side.
 Projected Income Statement

 A projected income statement shows profits and

losses for a specific future period – the next quarter
or the next fiscal year, for instance. It uses the same
format as a regular income statement, but
guesstimating the future rather than crunching
numbers from the past. It's also known as a budgeted
income statement.
 our projected income statement is important for
making business plans and for attracting investors. It
has to be as accurate as possible, even though it's
about events that haven't happened yet. Strategies
for making projections depend on the age of your
business and your own experience:
 Projected Income Statement…

If you're making projections for an

established business, past sales and expenses
give you a guide to the future.
If your company is a startup but you have
experience in the industry, use that
experience to make your projections.
If you don't have experience, hire an
accountant who does, or extrapolate from the
market research you did for your startup.
 Projected Income Statement…

If your company is new, it's a good idea to make

projections for the next three years. The first
year's projections should include monthly
budgeted income statements. After that you can
go quarterly.
Sales and Expenses
To begin making your projections, look at sales.
How many customers do you expect over the
projection period? How many units sold, or hours
of service, if you're providing services? What price
are you charging? Project the cost of goods sold as
well.
 Projected Income Statement…

 Next, extrapolate your expenses. These include fixed

costs such as leasing a vehicle and variable costs such
as marketing expenses. You don't have to break
everything down item by item; a single item for "office
supplies" is probably enough, without detailing price
per ream of printer paper.
 Drawing up the Statement
 Say you're making a projection for the next quarter.
Start with the business's projected sales income.
Subtract the cost of goods sold to get the gross margin.
Subtract other operating expenses to get net operating
income, then subtract any interest payments due to get
your net income.
 Projected Income Statement…

 Using Your Knowledge

 Use the projected income statement to decide
whether your plans need changing. Is your
projected sales income too low? Then find a way to
amp up the income, for example, by moving more
units or increasing unit prices.
 If the projections show your business running in the
red at first, that's not surprising: Lots of businesses
start out operating at a loss. However, the losses
shouldn't be so deep they'll shut you down. It's a
good idea to draw up a projected balance sheet so
you can see how much debt you'll be carrying.
 Projected funds & cash flow
statements

 Funds Flow Statement states the changes in the

working capital of the business in relation to the
operations in one time period.
 The main components of Working Capital are:
 Current Assets
 1. Cash
 2. Receivables
 3. Inventory
 Current Liabilities
 1. Payables
 Projected funds & cash flow
statements…

 Net working capital is the total change in the business's

working capital, calculated as total change in current
assets minus total change in current liabilities.
 FOR EXAMPLE:
 If the inventory of the business increased from Rs 1,40,000 to
Rs 1,60,000, then this increase of Rs 20,000 is the increase in
the working capital for the corresponding period and will be
mentioned on the funds flow statement. But the same would
not be reflected in the cash flow statement as it does not
involve cash.
 So the Fund Flow Statement uses all the above four
components and shows the change in them. While a cash flow
statement only shows the change in cash position of the
business.
 Projected funds & cash flow
statements…

 A Cash Flow Statement is a statement showing

changes in cash position of the firm from one period
to another.
 It explains the inflows (receipts) and outflows
(disbursements) of cash over a period of time.
 The inflows of cash may occur from sale of goods,
sale of assets, receipts from debtors, interest,
dividend, rent, issue of new shares and debentures,
raising of loans, short-term borrowing, etc.
 The cash outflows may occur on account of purchase
of goods, purchase of assets, payment of loans loss on
operations, payment of tax and dividend, etc.
 Projected funds & cash flow
statements…

•Cash flow statements have largely superseded

funds flow statements as measurements of a
business's liquidity because cash and cash
equivalents are more liquid than all other current
assets included in working capital's calculation.
•The statement of cash flows uses information from
the other two statements (Income Statement and
Balance Sheet) to indicate cash inflows and outflows.
A Cash Flow Statement comprises information
on following 3 activities:
1. Operating Activities
2. Investing Activities
3. Financing Activities
 Projected funds & cash flow
statements…

1. Operating Activities: Operating activities include

cash flows from all standard business operations.
 Cash receipts from selling goods and
services represent the inflows.
 The revenues from interest and dividends are also
included here.
 The operational expenditures are considered as
outflows for this section.
 Although interest expenses fall under this section but
the dividends are not included.
 Dividends are considered as a part of financing activity
in financial accounting terms.
 Projected funds & cash flow
statements…

2. Investing Activities: Investing activities include

transactions with assets, marketable securities and
credit instruments.
 The sale of property, plant and equipment or
marketable securities is a cash inflow.
 Purchasing property, plant and equipment or
marketable securities are considered as cash
outflows.
 Loans made to borrowers for long-term use is
another cash outflow. Collections from these loans,
however, are cash inflows.
 Projected funds & cash flow
statements…

3. Financing Activities: Financing activities on the

statement of cash flows are much more defined in
nature.
• The receipts come from borrowing money or
issuing stock.
• The outflows occur when a company repays loans,
purchases treasury stock or pays dividends to
stockholders.
• As the case with other activities on the statement
of cash flows depend on activities rather than
actual general ledger accounts.
 Detailed Project Report (DPR)

Detailed Project Report (DPR): The contents of a

detailed Project Report as per the norms of
financial institutions are mentioned below in
brief.
General information: Name, form of
organization, sector, nature of products,
promoters and their contribution.
Background and experience of promoters
Marketing and selling arrangements: Application
of proposed products or service, growth rate,
existing players and competitors
 Detailed Project Report (DPR) …

 Details of the proposed project which include:

 Proposed products and their capacity
 Process of manufacture, and its source (contract with
the supplier for the support)
 Details about major equipment needed for the above
process
 Management team with their qualification and
experience
 Details of land and building
 Details of water and power
 Effluents (if any) and its treatment and disposal system
as per plan
 Detailed Project Report (DPR) …

Raw material availability

Manpower requirement
Technical arrangements
Production process
Environmental aspects
 Schedule of implementation
Cost of project
Means of finance
 Detailed Project Report (DPR) …

Profitability and cash flow statement (for ten

year generally)
Appraisal based on profitability estimates
Economic considerations
Appendices which include estimate of
working results, calculation of working
capital requirement and margin money,
coverage ratios and sensitivity analysis.
Thanks!