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Financial Estimations and Projections

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Financial Estimations and ProjectionsSameer Khirpurikar,Ujjwal Goyal,NPTI-14th Batch

Financial Estimations and Projections1

2Financial Estimations and Projections5 facets of Project Analysis

Financial Analysis is the assessment of the viability, stability and profitability of a business, sub-business or project.

It seeks to ascertain the financially viability of a project

It assures weather the proposed project is financially viable or not

Financial Analysis3Financial Estimations and Projections

The aspects which have to be looked into while conducting financial analysis are:

Project Cost & Investment Outlay

Means of Financing

Capital Cost

Projected Profitability

Level of Risk

Break-Even Point

Cash flows of the project

Investment worthwhileness4Financial Estimations and Projections

Cost of ProjectThe cost of project represents the total of all items of outlay associated with long-term fields.It is the sum of the outlays on the following:

Land and Site DevelopmentBuildings and Civil WorksPlant and MachineryTechnical know-how and Engineering FeesExpenses on Foreign Technicians and Training of Technicians AbroadMiscellaneous Fixed AssetsPreliminary and Capital Issue ExpensesPre-operative Expenses:Provision for Contingencies:Margin Money for Working CapitalInitial cash Losses5Financial Estimations and Projections

1. Land and Site Development: The costs of land site development are- - Cost of development - Cost of compound wall and gates

2. Buildings and Civil Works: Building and civil works covers the following- - Buildings for the main plants and equipments - Warehouse, Open yard facilities & Godowns - Garage - Sewers, drainage6Financial Estimations and Projections

3. Plant and Machinery: The plant and machinery consists the following costs- i) Cost of Imported Machinery: This is the sum of a) FOB (Freight on Board) Value b) Imported dutyc) Clearing, loading and unloading charges. ii) Cost of Indigenous Machinery: This consists of a) FOR (Free On Rail) cost b) Sales tax and other taxes iii) Cost of Stores and Spares: Provision of Escalation = (Latest rate of annual inflation to the plant and machinery X (Length of the delivery period)

4. Technical and Engineering Fees: The technical know-how and engineering fees for setting up the project is a component of the project cost which is taken into account as cost of capital.

7Financial Estimations and Projections

5. Expenses on Foreign Technicians and Training of Technicians Abroad: Expenses on foreign technicians like traveling, boarding and lodging are considered as a cost of project.

6. Miscellaneous Fixed Assets: Fixed assets and machinery which are not part of the direct manufacturing process may be referred to as miscellaneous fixed assets. Like furniture, office machinery and equipment.

7. Preliminary and Capital Issue Expenses: Preliminary expenses are- - Identifying the project - Market survey - Articles of association Capital Issue Expenses are- - Underwriting commission - Brokerage - Stamp duty 8Financial Estimations and Projections

Financial Estimations and Projections98. Pre-operative Expenses: These types of expenses are the following- i) Establishment expenses ii) Traveling expenses iii) Insurance charges iv) Mortgage expenses v) Miscellaneous expenses

9. Provision for Contingencies: There are 2 procedures that are followed for provision for contingencies. These are- i) Divide the cost items into 2 categories - Firm cost items - Non-firm cost items ii) Set the provision for contingencies at 5% to 10%.

10. Margin Money for Working Capital: Margin money for working capital is an important element of the project cost which is provided by commercial banks and trade creditors.

11. Initial cash Losses: Most of the projects incur cash losses in the initial years. Failure to make a provision for such cash losses in the project cost affects the liquidity position and impairs the operations.

Means of FinanceTo meet the project cost, following are the means of finance:

Share Capital

Term Loans

Debenture Capital

Deferred Credit

Incentive Sources

Miscellaneous Sources10Financial Estimations and Projections

To meet the cost of the project, the following means of finance are available-1. Share Capital: Two types of share capitals are- i) Equity capital, represents the contribution made by the owners of the business and equity shareholders. ii) Preference capital, represents the contribution made by preference shareholders.

2. Term Loans: Term loans provided by financial institutions and commercial banks. There are 2 types of term loans. - Native Term Loans - Foreign Currency Term Loans

3. Debenture Capital: There are 2 types of debenture capital. These are- i) Non- convertible debentures, are straight debt instruments which maturity period of 5 to 9 years. ii) Convertible debentures, are debentures which are convertible wholly or partly into equity shares.

11Financial Estimations and Projections

4. Deferred Credit: The credit which is provided by suppliers (for plant and machinery) as a deferred credit facility is deferred credit.

5. Incentive Source: Government provides different types of incentives for financing. These are- - Tax exemption - Capital subsidy

6. Miscellaneous Sources: Miscellaneous sources are- - Unsecured loans - Public deposits - Leasing and hire purchase finance

12Financial Estimations and Projections

Estimates of Sales and ProductionIn estimating sales revenues, the following considerations should be kept in mind:

It is not advisable to assume a high capacity utilization level in the first year of operation. It is sensible to assume that capacity utilization would be some what low in the first year and rise there after gradually to reach the maximum level in the third or fourth year of operation.

It is not necessary to make adjustments for stocks of finished goods.

The selling price considered should be the price realizable by the company net of excise duty.

The selling price used may b the present selling price- it is generally assumed that changes in selling price will be matched by proportionate changes in cost of production.13Financial Estimations and Projections

Cost of ProductionThe major components of cost of production are :

Material cost Utilities cost

Labor cost

Factory overhead cost

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Materials : The most important element of cost , the material cost comprises of the cost of raw materials, chemicals, components and consumable stores required for production. It is a function of the quantities in which these materials are required and the prices payable for them.

Utilities : Utilities consist of power , water , and fuel. The requirements of power , water, and fuel may be determined on the basis of norms specified by the collaborators, consultants, etc or the consumption standards in the industry, whichever is higher.

Labor : Labor cost is the cost of all manpower employed in the factory. labor cost naturally is a function of the number of employees and the rate of remuneration.

Factory Overhead : The expenses on repairs and maintenance, rent, taxes, insurance on factory assets , and so on are collectively referred as factory overhead.

15Financial Estimations and Projections

Working Capital Requirement and Its FinancingIn estimating the working capital requirement and planning for its financing, the following pints have to be kept in mind:

The working capital requirement consists of the following:

(i) Raw materials(ii) Stocks of goods in process(iii) Stocks of finished goods(iv) Debtors (v) Operating expenses (vi) Consumable stores

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The principal sources of working capital finance are:

(i) Working Capital Advances (ii) Trade Credit (iii) Accruals and Provisions (iv) Long term Sources of Financing

The margin requirement varies with the type of current assets as follows: Current Assets Margin Raw materials 10-25 percent Work-in-process 20-40 percent Finished Goods 30-50 percent Debtors 30-50 percent

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Profitability Projections (Estimates of Working Results)The Profitability Projection or Estimates of Working Results are prepared along the following lines:-

Cost of ProductionTotal administrative expensesTotal sales expensesRoyalty and know-how payableTotal cost of production (A + B + C + D)Expected salesGross profit before interestTotal financial expensesDepreciationOperating Profit (G H I)Other incomePreliminary expenses written offProfit /Loss before taxation (J + K L)Provision for taxationProfit after tax (M N) Less Dividend on Preference capital or Equity capitalRetained profitNet Cash accrual (P + I + L)Financial Estimations and Projections18


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