Sedco Project Evaluation Format
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PROJECT REPORT Introductory information Name of project Project location Type of ownership Type of business Loan amount recommended Period of loan recommended Grace period recommended
Project Description Brief description of business and nature of project financed Going concern or new start up Assessment of project risk from the point of view of newness, something common in the industry in local economy or general project risk perception (like minibuses at one time were a definite no go area! But this was later reversed after seeing the performance of UDC loans)
Management of the project Description of the organisation structure of the business and its personnel requirements The structure and qualifications and depth of experience of the management team Assessment of management training needs Assessment of management risk from the point of view of depth and breadth of experience of senior management personnel in line of business or similar project, and analyst’s perception of management capability in the project being financed Market Assessment Description of key target market; any methods of segmentation Distribution channels for a manufacturing/production business
Means of effectively targeting and reaching out for customers; promotional activities Estimation of market size and the assumptions behind the sales forecasts Any published industry and market data to support market size estimates Forecast sales for year 1 Market risk assessment (I can’t remember the basis for risk assessment here. It might just have been the caprice of the individual analyst!)
Project Size Project requirements in terms of physical assets (Fixed, movable and liquid assets) The cost of the project’s requirements Owners’ contribution Loan finance required
Financial Analysis Key assumptions to the financial statements An overview of results of analysis on financial forecasts covering key decision criteria such as cash flow analysis, debt service ratio, profitability analysis (internal rate of return, net present value and payback period). Recommendations Recommended decision Recommended terms of the loan (repayment period, loan amount, grace period, monthly instalment) Any special conditions for disbursement (registration of SEDCO interest on assets used as security, proof of equity contribution, later – whole life policies as an excuse for HIV testing loan applicants, and other conditions deemed necessary by the evaluating analyst)
FINANCIALS
Loan amortisation schedule Loan amount Loan term
$x000.00
x years
Grace periodx months Interest rate x% per annum Monthly instalment $x000.00
Year Principal Repayment Payment for Year
Interest Payment
(a)
(c)
0 1 2 3 Etc.
(b)
(d)
Balance
Total (e)=(b) + (c)
Income Statement Assumptions to the income statement, especially the level of forecast sales generated were predominantly dealt with in the main report.
Year 1 Sales
Year 2
X
Cost of sales
-X
Gross Profit
X
Expenses Salaries and wages X Depreciation
X
Transport
X
Rent
X
Packaging
X
Insurance
X
Interest
X
Electricity
X
Telephone
X
Licences
X
Etc
X
Net profit
X X
Corporate tax
-X
Profit after tax
X
Dividends/Drawings
-X
Retained profit for year
X
Year 3
etc
Balance Sheet Year 0
Year 1
Liabilities (= capital + long term loans) Equity/Share capital
X
Retained profit brought forward
X
Retained profit for the year
X
Loan balance
X
Other long term loans
X
Total liabilities
X
Assets Land and fixed assets Equipment
X
X
Motor vehicles
+X
Accum. Depreciation
-X
Current assets Raw materials
X
Consumables
X
Stock
X
Cash (match cashflow)
X
Total current assetsX Current Liabilities Current part of loan
X
Trade creditors
X
Bank o/d (cashflow)
X
Other short term debts
X
=
X
Year 2
Year 3
etc
Total current liabilities
X
Net current assets (= total current assets less total Current liabilities)
X
Total assets
X
Cashflow Statement Month0
Month1
Month2
...
Month12
Total for
year Inflows Equity
X
0
0
0
0
X
Loan
X
0
0
0
0
X
Other cash sourcedX
0
0
0
0
X
Sales (cash receipts) X
0
X
X
X
X
Total for month X
X
X
X
X
X
X
0
0
0
0
Outflows Assets bought X Purchases
X
X
X
X
X
X
Salaries and wages 0
X
X
X
X
X
Transport
0
X
X
X
X
X
Rent
0
X
X
X
X
X
Packaging
0
X
X
X
X
X
Insurance
0
X
X
X
X
X
Loan payments X
0
0
0
X
X
Electricity
0
X
X
X
X
X
Telephone
0
X
X
X
X
X
Licences
0
X
X
X
X
X
Etc (cash)
0
X
X
X
X
X
Taxes paid
0
0
0
0
X
X
Dividends/drawings X
0
0
0
0
X
Total outflows -X
-X
-X
-X
-X
-X
Net inflow
X
X
X
X
X
X
Balance b/f
+0
+X
+X
+X
+X
+0
Balance c/f
X
X
X
X
X
X
Notes on the cash flow statement (a) b/f = brought forward (b) c/f = carried forward (c) Month 0 is when everything is brought into place in terms of finance, assets and all the necessities for starting the business. (d) Month 1 onwards: payments are assumed to be made as they are consumed for simplicity’s sake and according to the agreements with both customers and our suppliers of goods and services (e) Month 12 balance c/f = Total for Year net inflow = cash/bank overdraft for year in the Balance Sheet (Remember ndiyo part yaiti onesa moto ku SEDCO!) & the Balance Sheet should balance. (f) Taxes and dividends are assumed to be paid in Month 12, but this can be varied in line with both legislation and reality (g) Net inflow = Total inflows – Total outflows
Debt Service Ratios
DSR
=
Profit after tax + Depreciation Principal repayment + Interest payment + Dividends/Drawings
(I understood the DSR as the capability of a business to meet the requirements of the providers of capital (owners and lenders) from its cash generation capacity).
DSR
Year 1
Year 2
Year 3
etc
X
X
X
X
=
∑DSR/n years
Average DSR = Sum of all DSR Number of years
Other Financial Analysis (a) Project sensitivity analysis (covered in the PROEMP Excel Spreadsheet attached was never used at SEDCO) (b) Accept project if net present value (NPV) is positive (calculated using financial calculator) (c) Accept project if internal rate of return (IRR) is greater than SEDCO loan interest (25%), but this was rarely used for as long as NPV was positive (IRR calculated using financial calculator & later MS Excel) (d) Accept project if payback period is less than or equal to the period of the loan (How long it took for accumulated profit after tax to equal or exceed initial investment, in this case SEDCO loan) (e) Accept project if average DSR is greater than or equal to 1.5. If it less than 1.5 in any given year, it should be greater than 1 and should not be less than 1.5 for two or more consecutive years. (f) Accept project if Year 1 net cash flows are positive from month to month. (g) Minimum equity contribution was 15% for SEDCO (h) Accept project if adequately secured. Security cover was 1 and above (if I remember well). Security was assessed at value = 85% market value less legal costs (I can’t remember percentage – 1.5 or 3% or a fixed figure, I am not sure). (i) Liquidity ratios : Accept project if Current ratio (Current assets/Current liabilities) is greater than or equal to 1.5 Quick ratio (Cash/Current liabilities) = 1 (Was no longer used when we joined)
These are all I can remember. I don’t think there is anything else that was important that I might have left out.
Project Description Brief description of business and nature of project financed Going concern or new start up Assessment of project risk from the point of view of newness, something common in the industry in local economy or general project risk perception (like minibuses at one time were a definite no go area! But this was later reversed after seeing the performance of UDC loans)
Management of the project Description of the organisation structure of the business and its personnel requirements The structure and qualifications and depth of experience of the management team Assessment of management training needs Assessment of management risk from the point of view of depth and breadth of experience of senior management personnel in line of business or similar project, and analyst’s perception of management capability in the project being financed Market Assessment Description of key target market; any methods of segmentation Distribution channels for a manufacturing/production business
Means of effectively targeting and reaching out for customers; promotional activities Estimation of market size and the assumptions behind the sales forecasts Any published industry and market data to support market size estimates Forecast sales for year 1 Market risk assessment (I can’t remember the basis for risk assessment here. It might just have been the caprice of the individual analyst!)
Project Size Project requirements in terms of physical assets (Fixed, movable and liquid assets) The cost of the project’s requirements Owners’ contribution Loan finance required
Financial Analysis Key assumptions to the financial statements An overview of results of analysis on financial forecasts covering key decision criteria such as cash flow analysis, debt service ratio, profitability analysis (internal rate of return, net present value and payback period). Recommendations Recommended decision Recommended terms of the loan (repayment period, loan amount, grace period, monthly instalment) Any special conditions for disbursement (registration of SEDCO interest on assets used as security, proof of equity contribution, later – whole life policies as an excuse for HIV testing loan applicants, and other conditions deemed necessary by the evaluating analyst)
FINANCIALS
Loan amortisation schedule Loan amount Loan term
$x000.00
x years
Grace periodx months Interest rate x% per annum Monthly instalment $x000.00
Year Principal Repayment Payment for Year
Interest Payment
(a)
(c)
0 1 2 3 Etc.
(b)
(d)
Balance
Total (e)=(b) + (c)
Income Statement Assumptions to the income statement, especially the level of forecast sales generated were predominantly dealt with in the main report.
Year 1 Sales
Year 2
X
Cost of sales
-X
Gross Profit
X
Expenses Salaries and wages X Depreciation
X
Transport
X
Rent
X
Packaging
X
Insurance
X
Interest
X
Electricity
X
Telephone
X
Licences
X
Etc
X
Net profit
X X
Corporate tax
-X
Profit after tax
X
Dividends/Drawings
-X
Retained profit for year
X
Year 3
etc
Balance Sheet Year 0
Year 1
Liabilities (= capital + long term loans) Equity/Share capital
X
Retained profit brought forward
X
Retained profit for the year
X
Loan balance
X
Other long term loans
X
Total liabilities
X
Assets Land and fixed assets Equipment
X
X
Motor vehicles
+X
Accum. Depreciation
-X
Current assets Raw materials
X
Consumables
X
Stock
X
Cash (match cashflow)
X
Total current assetsX Current Liabilities Current part of loan
X
Trade creditors
X
Bank o/d (cashflow)
X
Other short term debts
X
=
X
Year 2
Year 3
etc
Total current liabilities
X
Net current assets (= total current assets less total Current liabilities)
X
Total assets
X
Cashflow Statement Month0
Month1
Month2
...
Month12
Total for
year Inflows Equity
X
0
0
0
0
X
Loan
X
0
0
0
0
X
Other cash sourcedX
0
0
0
0
X
Sales (cash receipts) X
0
X
X
X
X
Total for month X
X
X
X
X
X
X
0
0
0
0
Outflows Assets bought X Purchases
X
X
X
X
X
X
Salaries and wages 0
X
X
X
X
X
Transport
0
X
X
X
X
X
Rent
0
X
X
X
X
X
Packaging
0
X
X
X
X
X
Insurance
0
X
X
X
X
X
Loan payments X
0
0
0
X
X
Electricity
0
X
X
X
X
X
Telephone
0
X
X
X
X
X
Licences
0
X
X
X
X
X
Etc (cash)
0
X
X
X
X
X
Taxes paid
0
0
0
0
X
X
Dividends/drawings X
0
0
0
0
X
Total outflows -X
-X
-X
-X
-X
-X
Net inflow
X
X
X
X
X
X
Balance b/f
+0
+X
+X
+X
+X
+0
Balance c/f
X
X
X
X
X
X
Notes on the cash flow statement (a) b/f = brought forward (b) c/f = carried forward (c) Month 0 is when everything is brought into place in terms of finance, assets and all the necessities for starting the business. (d) Month 1 onwards: payments are assumed to be made as they are consumed for simplicity’s sake and according to the agreements with both customers and our suppliers of goods and services (e) Month 12 balance c/f = Total for Year net inflow = cash/bank overdraft for year in the Balance Sheet (Remember ndiyo part yaiti onesa moto ku SEDCO!) & the Balance Sheet should balance. (f) Taxes and dividends are assumed to be paid in Month 12, but this can be varied in line with both legislation and reality (g) Net inflow = Total inflows – Total outflows
Debt Service Ratios
DSR
=
Profit after tax + Depreciation Principal repayment + Interest payment + Dividends/Drawings
(I understood the DSR as the capability of a business to meet the requirements of the providers of capital (owners and lenders) from its cash generation capacity).
DSR
Year 1
Year 2
Year 3
etc
X
X
X
X
=
∑DSR/n years
Average DSR = Sum of all DSR Number of years
Other Financial Analysis (a) Project sensitivity analysis (covered in the PROEMP Excel Spreadsheet attached was never used at SEDCO) (b) Accept project if net present value (NPV) is positive (calculated using financial calculator) (c) Accept project if internal rate of return (IRR) is greater than SEDCO loan interest (25%), but this was rarely used for as long as NPV was positive (IRR calculated using financial calculator & later MS Excel) (d) Accept project if payback period is less than or equal to the period of the loan (How long it took for accumulated profit after tax to equal or exceed initial investment, in this case SEDCO loan) (e) Accept project if average DSR is greater than or equal to 1.5. If it less than 1.5 in any given year, it should be greater than 1 and should not be less than 1.5 for two or more consecutive years. (f) Accept project if Year 1 net cash flows are positive from month to month. (g) Minimum equity contribution was 15% for SEDCO (h) Accept project if adequately secured. Security cover was 1 and above (if I remember well). Security was assessed at value = 85% market value less legal costs (I can’t remember percentage – 1.5 or 3% or a fixed figure, I am not sure). (i) Liquidity ratios : Accept project if Current ratio (Current assets/Current liabilities) is greater than or equal to 1.5 Quick ratio (Cash/Current liabilities) = 1 (Was no longer used when we joined)
These are all I can remember. I don’t think there is anything else that was important that I might have left out.
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