Proj. Apprl. Financial Projections

FINANCIAL PROJECTIONS Introduction: Once the commercial and technical feasibility of the project is established, leading to the development of the sales plan, the administration plan and the manufacturing plan, the project has to be assessed with regards to its financial viability measured in terms of costs and benefits. The various steps in financial analysis are indicated in the flow chart. While defining the costs and benefits of a project, various projections have to be made, starting with the cost of project and ending with the preparation of the pro forma balance sheet. Based on the data derived from these projections , various appraisal criteria are used to assess the financial viability of the project. If the project is found to be technically feasible, commercially viable and financially sound, the final investment proposal is prepared by the company assimilating all these factors.

Sales Plan

Financial Analysis Flow Chart Administration Plan

Estimate Total Project Cost

Estimate Financial Needs

Pro forma Balance sheet

Manufacturing Plan Pro forma Income Statement

Cash flow Projections

Evaluate Project Feasibility

Does Project Satisfy investment Decision Criteria?

No Terminate

Yes Analyze Projections of Operating Conditions No No

Is Project Feasible? (No) Terminate

Is Sensitivity Analysis Necessary? Yes (Conduct) Is Risk Analysis Necessary? Yes ( Conduct)

(Yes) Prepare Investment Proposal

Cost of Project: This is the first step in conducting financial analysis and should be done with great care as all the other projections are based on this. To get an idea, let us take a look at a current project: Ms Textured Vegetable Protein(TVP) Cost of Project (Rs. in millions) Land and site development 0.39 Building 1.50 Plant and Machinery 6.20 Miscellaneous Fixed Assets 0.40 Preliminary Expenses 0.20 Pre-0perative Expenses [including 1.15 interest during construction IDC)] Contingencies 0.75 Margin for Working Capital 0.85 Total 11.44

Means of Finance : (Rs. in millions) 4.00 6.40

Share Capital Term Loans State Government Special Incentive Loan (Repayable in 6 instalments after 12 years) 1.04 Total 11.44 Note on Some items of Cost of Project: 1. Pre-operative Expenses: • Promotional expenses including advertisement • Organizational and training cost • Rent and taxes • Travelling expenses • Postage,printing, stationery, telephone expenses • Guarantee commission • Insurance during construction • Interest during construction

2. Provision for Contingencies Contingency provision is made on the basis of project implementation schedule. Firm costs : relating to those items which have been procured or likely to be procured within the estimated cost. Non-firm costs:: All other costs likely to get escalated. Provision: i. Firm Costs 5% ii. Non-firm costs – 10% 3. Preliminary expenses:  Cost of preparing feasibility report  Conducting market survey  Legal charges  Capital issue  Underwriting commission  Brokerage Charges for drafting, printing and issue of prospects etc.

4. Estimation of Bank Finance and Margin Money: STEPS: 1. Estimation of the current assets required to be held 2. Reduce margin money required to be brought in by the promoter from the current assets 3. Reduce the current liabilities other than bank finance presently sought from the remaining amount Means of Finance: Once the cost of the project has been estimated, the next step is to find how best to finance it. The means of finance and the financing mix chosen are bound to have a far reaching effect on the profitability and also risk associated with the project. Therefore, all the available avenues should be evaluated and the means and pattern should be fixed carefully. Selecting from the various equity and debt options will help in establishing financial viability of the project.

Some of the instruments of raising long term finance to fund the project are:  Equity Capital  Preference Capital  Debenture Capital  Term Loans  Deferred Credit  Bill Rediscounting Scheme  Seed Capital Assistance  Unsecured Loans  Deposits  Leasing and Hire Purchase  Letter of Credit Estimation of Revenue Expenses and Profits:  Product Mix  Installed Capacity  Capacity Utilization  Cost of Production

The various components of total cost of projection are: a. Raw materials b. Chemicals c. Components d. Consumables I Total Raw Material Cost (a+b+c+d) e. Utilities f. Power g. Water h.Fuel II. Total Utilities Cost (e+f+g+h) i. Wages j. Factory supervision salaries k. Bonus and Provident Fund, Welfare III. Total Labor Cost (i+j+k) l. Repairs and Maintenance m. Light n. Rent and taxes on factory assets o. Insurance on factory assets p. Misc. factory overheads and contingencies

IV. Total factory Overheads (l to p) V. Manufacturing Cost/Operating Cost I+II+III+IV VI. Total Administration Expenses VII. Total Sales Expenses VIII. Royalty and know-how payable IX. Total Cost of Production Other Expenses Interest on Term Loans on Bank Borrowing (Working Capital) on Deposits Guarantee Charges Commission Provision for Depreciation Provision for Taxation Projection of Financial Statements - Projected Income Statement - Projected Sources and Uses of Funds - Projected Balance Sheet

Summary The financial projections of a project are very essential to make a forecast about its expected costs and benefits . The amount required for various components contributing to the cost of project such as land including site development and building, plant and machinery, pre-operative expenses, fixed assets, preliminary expenses is decided. Besides this, a provision for contingencies is also made. Then an estimate is also made about various sources from which the cost of the project is to be financed. The expected profitability is calculated by estimating the sales value and cost of production. A great deal of care is necessary in making financial projections because based on these decisions, one can determine whether the project is financially viable or not.