THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA EIRC

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					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-à-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       PLANNING
  – Resources
  – Establishment of
    standards                    IMPLEMENTATION
 Implementation
  – Monitoring & Controlling
                                  TERMINATION
 Termination
  – Disposal & Redeployment
       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 pre-
investment 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

                        Working Capital


        Fund Based                        Non Fund Based


         - Cash Credit           - Letters of credit(inland or import)
           - Overdraft                    - Bank gurantees
- Working Capital Demand Loan
       - Bill Discounting
       Financial Projections
 Sales Forecast    Pooling of Capital
 Material Costs    Term Loan
 Labour            Investment
 Power & Fuel      Acquisition of Fixed
                     Assets
 Freight
                    Working Capital
 Interest Costs
                    Miscellaneous
 Depreciation       Expenditure
 Taxation          Deferred Revenue
 Dividend           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
         Results…contd
 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
    Implementation…contd
 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
    PLANNING       Assessment of firm's fortunes and ability of
                   the management to exploit the opportunity

                   Techniques- Payback method, Return on
    EVALUATION
                   Investment, Discounted Cash flow


    SELECTION      Risk & Return proposition
                   Maximum return to shareholders

                   Acquisition of necessary funds and purchase
  IMPLEMENTATION
                   of assets

                   Monitoring of progress reports
     CONTROL       Post completion audit

                   Performance reports & comparing it with
     REVIEW        standards set, Change in plan & evaluation
CAPITAL BUDGETING TECHNIQUES
                       Capital Budgeting Techniques


 Traditional or Non- Discounting      Time Adjusted or Discounted Cash Flows


        Payback Period                           Net Present Value


    Accounting Rate of Return                    Profitability Index
  or Return on Investment(ROI)


                                            Internal Rate of Return(IRR)


                                                  Terminal Value


                                             Discounted payback Period
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       - Contd.




       Valuation
        – Revenue Model
        – IPR
        – Customer Base
       Exit Options
        – Trade Sale
        – Merger
        – IPO
      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

				
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