Project Management UNIT II

PROJECT IDENTIFICATION
Project identification is concerned with collection, compilation and analysis of economic data for the eventual purpose of locating possible opportunities for investment and with the development of such opportunities Project identification is the first step of a new venture.

Criteria for selecting a project

1. Investment size

Location 3. Technology 4. Equipment 5. Marketing

2.

Project Ideas- Scanning of Environments and Identifying a Project

Sources of Project Ideas: (a) Analysis of Industries Performance (b) Analysis of inputs and outputs of industry (c) Analysis of imports and exports (d) Five yr plans and govt. policies (e) Suggestions of financial institutions (f) Survey of local resources (g) Analysis of social trends (h) New technology (i) consumption pattern (j) Analysis of unsatisfied needs of consumers (k) International and national trade fairs and industry exhibitions.
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Importance of Project Identification

1.

2.
3.

4.
5. 6. 7.
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They become the catalytic agents for economic development They initiate the process of development in terms of employment and income generation They have long term beneficial consequences Project usually involve substantial financial outlays They also initiate development of basic infrastructure Project commitments cannot be easily reversed Project accelerates the process of socio cultural development

Feasibility Analysis
A project feasibility analysis includes market analysis, technical analysis, and financial analysis of a project. Although every feasibility analysis is different and tailored to suit the product, its goal is to identify the existing strengths and weakness of the project.

 Market Analysis:

A market analysis is a method of screening project ideas as well as means of evaluating a projects feasibility in terms of the market. A market analysis should cover the following areas: A brief market description including the market area, methods of transportation, existing rates of transport, channels of distribution, and general trade practices. An analysis of past and present demand, determination of quantity, value of consumption and identification of the major consumers of the product.
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 An analysis of past and present supply as well

as information to assist in determining the competitive position of the product, such as selling prices, quality and marketing practices of competitors. Technical Analysis: A description of the product relating to its physical, mechanical and chemical properties. A description of the selected manufacturing process. A determination of the plant size and production schedule.
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Selection of machinery and equipment. An identification of plant location. A design of the plant layout. Financial Analysis: Statements of total project cost, initial capital requirements, income statements including cash flows, and balance sheet. Collection period of sales, inventory levels, payment period of purchases and expenses, and the element of cost, selling administrative and financial expenses.

 For all projects, a financial analysis showing

returns on investments, returns on equity, break- even volume, and price analysis. For all projects, if necessary, a sensitivity analysis to identify items which have a substantial impact on profitability or possibly a risk analysis.

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PROJECT FORMULATION OR PREPARATION

Project Formulation involves the Development of the concept of the project, defining its various parameters, conducting feasibility study, undertaking investment appraisal and making the decision to invest in the project. Project Formulation is defined as taking a first look carefully and critically at a project idea by an entrepreneur to build up an all-round beneficial to project after carefully weighing its various components. It is formulated by the entrepreneur with the assistance of specialists or consultants. Project formulation is, therefore,
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a process whereby the entrepreneur makes an objective and independent assessment of the various aspects of an investment proposition of a project idea for determining its total impact and also its liability. The aim of project formulation is to achieve the project objectives with the minimum expenditure and adequate resources.

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STAGES OF PROJECT FORMULATION

FEASIBILITY ANALYSIS TECHNO-ECONOMIC ANALYSIS
PROJECT DESIGN & NETWORK ANALYSIS

INPUT ANALYSIS
FINANCIAL ANALYSIS

SOCIAL COST-BENEFIT ANALYSIS

PRE-INVESTMENT ANALYSIS
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FEASIBILITY ANALYSIS
At this stage the project idea is examined from the point of view of whether to go in for a detailed investment proposal or not. As project idea is examined in the context of internal and external constraints three alternatives could be considered. First, the project idea seems to be feasible, second, the project idea is not a feasible one and third, unable to arrive at a conclusion for want of adequate data. If it is feasible, we proceed to the next step otherwise drop that idea.
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TECHNO-ECONOMIC ANALYSIS
In this step the estimation of project demand potential and choice of optimal technology is made. As the project may produce goods or services, it is imperative to know the market for such goods or services produced. Techno- Economic analysis indicates the technical requirements (material inputs, manufacturing process, machinery and equipments) and economic requirements of the project.
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PROJECT DESIGN & NETWORK ANALYSIS

This important step defines individual activities which constitute the project and their interrelationship with each other. The sequence of events of the project is presented. A detailed work plan of the project is prepared with time allocation for each activity and presented in a network drawing. It is concerned with the detailed work plan of the projects and its time schedule. Program Evaluation Review Technique (PERT) and Critical Path Method (CPM) are the two branches of the network planning technique
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INPUT ANALYSIS
The step assesses the input requirements during the construction of the project and also during the operation of the project. A project is divided into several activities. Now it is better to see the inputs required for each activity and sum it up to get at the total input requirements on qualitative and quantitative terms. Input includes material and human resources.

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FINANCIAL ANALYSIS
This stage mainly involves estimating the

project costs, estimating its operating costs and fund requirements. Financial analysis also helps in comparing various project proposals on a common scale. Some of the analytical tools used in financial analysis are discounted cash flow, cost-volume-profit relationship, and ratio analysis.

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COST-BENEFIT ANALYSIS
The overall worth of a project is the main

consideration here. When we talk of costbenefit analysis, we not only take into account the apparent direct costs and direct benefits of the project but also the costs which all entities connected with the project have to bear and the benefits which will be enjoyed by all such entities.

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PRE-INVESTMENT ANALYSIS
The project proposal gets a formal and final shape at this stage. All the results obtained in the above steps are consolidated and various conclusions arrived at to present a clear picture. At this stage, the project is presented in such a way that the project-sponsoring body, the project-implementing body, and the external consulting agencies are able to decide whether to accept the proposal or not.

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NEED FOR PROJECT FORMULATION

Selection of Appropriate Technology

Influence of External Economies

Dearth of Technically Qualified Personnel Resource Mobilization

Knowledge about Government Regulations

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MARKET AND DEMAND ANALYSIS

In most cases, the first step in project analysis is to estimate the potential size of the market for the product proposed to be manufactured (or service planned to be offered) and get an idea about the market share that is likely to be captured. Put differently, market and demand analysis is concerned with two broad issues: What is the likely aggregate demand for the product/service? What share of the market will the proposed project enjoy?
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KEY STEPS IN MARKET AND DEMAND ANALYSIS

Collection of Secondary information Demand Forecasting

Situational Analysis and Specification of Objectives

Characterization of the Market

Conduct of Market Survey

Market Planning

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 SITUATIONAL ANALYSIS & SPECIFICATION OF OBJECTIVES

In order to get a feel for the relationship between

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the product and its market, the project analyst may informally talk to customers, competitors, middleman, and others in the industry. Wherever possible, he may look at the experience of the company to learn about the preferences and purchasing power of customers, actions and strategies of competitors, and practices of the middleman. If such a situational analysis generates enough data to measure the market and get a reliable handle over projected demand and revenues, a formal study need not be carried out. In most cases a formal study of the

market and demand is warranted. To carry out such a study, it is necessary to spell out its objective clearly and comprehensively. A helpful approach to spell out objectives is to structure them in the form of questions. Suppose that a small but technologically competent firm has developed an improved air cooler based on a new principle that appears to offer several advantages over the conventional air cooler. The chief executive of the firm needs information about where and how to market the new air cooler. The objectives of market and demand analysis in this case may be to answer the following question: Who are the buyers of the air coolers? What is the total current demand for the air coolers?
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 How is the demand distributed temporally (pattern of sales over

the year) and geographically? What is the break-up of demand for air coolers of different sizes? What price will the customers be willing to pay for the improved air cooler? How can potential customers be convinced about the superiority of the new cooler? What price and warranty will ensure its acceptance? What channels of distribution are most suited for the air cooler? What trade margins will induce distributors to carry it?

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COLLECTION OF SECONDARY INFORMATION

In order to answer the questions listed while delineating the objectives of the market study, information may obtained from secondary and/ or primary sources. Secondary information is information that has been gathered in some other context and is already available. Secondary information provides the base and the starting point for the market and demand analysis. It indicates what is known and often provides leads and cues for gathering primary information required for further analysis.
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General Sources of Secondary Information Census of India National Sample Survey Reports Plan Reports Statistical Abstract of the Indian Union India Year Book Statistical Year Book Economic Survey Guidelines to Industries Annual Survey of Industries The Stock Exchange Diary

 Monthly Studies of Production of Selected

Industries Monthly Bulletin of RBI Publications of Advertising Agencies

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CONDUCT OF MARKET SURVEY

Secondary information, though useful, often does not provide a comprehensive basis for market and demand analysis. It needs to be supplemented with primary information gathered though a market survey, specific to the project being appraised. The market survey may be a census survey or a sample survey. In the census survey the entire population is covered. Census surveys are employed principally for intermediate goods and investment goods when such goods are used by a small no. of firms. In other cases the census survey is costly and may also be infeasible.

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For example; it would be expensive and impossible to cover every user of Lifebuoy or every person in the income bracket Rs. 10000 Rs. 15000. The information sought in a market survey may relate to one or more of the following: Total demand and rate of growth of demand Demand in diff. segments of the market Income and price elasticities of the demand Purchasing plans and intentions Satisfaction with existing products Unsatisfied needs Attitudes towards various products

Steps in Sample Survey

Define the Target Population Select the Sample Scheme and Sample Size Develop the Questionnaire Recruit and Train the Field Investors Obtain Information as per the Questionnaire from the Sample of the Respondents Scrutinize the Information Gathered Analyze and Interpret the Information

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SOME PROBLEMS IN MARKET SURVEY Heterogeneity of Country Multiplicity of Languages Design of Questionnaire

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CHARACTERIZATION OF THE MARKET

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Based on the information gathered from secondary sources and through the market survey, the market for the product / service may be described in terms of the following: Effective demand in the past and present Breakdown of demand Price Methods of distribution and sales promotion Consumers Supply and competition Government policy

DEMAND FORECASTING

After getting information about various aspects of the market and demand from primary and secondary sources, an attempt may be made to estimate future demand. A wide range of forecasting methods is available to the market analyst. Mainly there are two types of demand forecasting : Opinion Polling Method Statistical Method
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1. Opinion Polling Method:- In this method the

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opinion of the buyers, sales force and experts could be gathered to determine the emerging trend in the market. The opinion polling methods are of three kinds: Consumer Survey Method: The most direct method of forecasting demand in the short run is survey method. Surveys are conducted to collect information about future purchase plans of the probable buyers of the product. Sales Force Opinion Method: This is also known as the Collective Opinion Method. In this method, instead of consumers, the opinion of the salesman is sought. It is sometimes referred as the grass

is a bottom-up method that requires each sales person in the company to make an individual forecast of his or her particular sales territory. Delphi Method: This method is also known as Expert opinion method of investigation. In this method instead of depending upon the opinions of buyers and salesmen, firm can obtain the views of the specialists or experts in their respective fields.

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2. Statistical

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Methods: Statistical methods are considered to be superior techniques of demand estimation because this is the scientific method of estimation. In this method estimation involves less cost. The frequently used statistical methods for demand projections are: Trend Projection Method: An old firm can use its own data of past years regarding its sales in past years. These data are known as time series of sales. A firm can predict sales of its product by fitting trend to the time series of sales. Barometric Method: It is also known as leading indicators forecasting. The analyst should establish relationship between the sales of the product and the economic indicators to project the correct sales and to measure to what extent these indicators affect the sales.

 Regression Method: This a very common method

of forecasting demand. Under this method a relationship is established between quantity demanded (dependent variables) and independent variables such as income, price of the good, prices of the related goods etc. Simultaneous Equation Methods of Forecasting: This method is also known as econometric model and a complete system approach to forecasting. This technique uses sophisticated mathematical and statistical tools.

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MARKET PLANNING

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A market plan usually has the following components: Current Market Situation: This deals with size, the growth, the consumer aspirations and buying behavior in the market under consideration. Opportunity and Issue Analysis: In this section a SWOT is conducted for the project and the core issues before the product identified. Objectives: Objectives have to be clear-cut, specific and achievable. As, achieve break-even in three yrs., attain sales of 20 million in the first year. Marketing Strategy: The marketing Strategy covers the target segment, positioning, product line, price, distribution, sales force, sales

 Action Programme: Action programme

operationalizes the strategy.

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TECHNICAL ANALYSIS
Analysis of technical and engineering aspect is done continually when a project is being examined and formulated. Other types of analysis are closely intertwined with technical analysis. The broad purpose of technical analysis is (a) to ensure that the project is technically feasible in the sense that all the inputs required to set up the project are available and (b) to facilitate the most optimal formulation of the project in terms of technology, size, location, and so on. Technical analysis broadly involves a critical study of the following factors or aspects:
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Technical Factors
MATERIAL INPUTS AND UTILITIES An important aspect of tech. analysis is concerned with defining the materials and utilities required, specifying their properties in some detail and setting up their supply programme. Material inputs and utilities can be further classified into four broad categories: Raw Materials Processed Industrial Materials and Components Auxiliary Materials and Factory Supplies Utilities
1.

(i) (ii)

(iii)
(iv)
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(i) Raw materials processed or semi-processed may

be classified into three types: Agricultural Products Mineral Products Livestock and Forest Products (ii) Processed Industrial Materials and Components: In studying them the following questions need to be answered: What are their properties? What quantity would be available from the domestic sources? What has been the past trend in prices?
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(iii) Auxiliary Materials and Factory Supplies: in addition to the basic raw material and industrial materials and components, a manufacturing project requires various auxiliary materials and factory supplies like chemicals, additives, packaging materials, paint, oils, grease, cleaning materials etc. so the requirements of these materials should be considered in feasibility analysis. (iv) Utilities: A broad assessment of utilities (power, water, steam, fuel etc.) may be made at the time of input study through a detailed assessment can be made only after formulating the project with respect to location, technology, and plant capacity.

2. TECHNOLOGY / MANUFACTURING

PROCESS
For manufacturing a product / service, often two or more alternative technologies are available. For example; Cement can be made either by the dry process or the wet process. Soda can be made by the electrolysis method or the chemical method. Soap can be manufactured by semi boiled process or fully boiled process.

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Choice of Technology: The choice of technology is influenced by a variety of considerations: Plant Capacity Principal Inputs Investment outlay and production cost Use by Other Units Latest Developments Ease of Absorption

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3. PRODUCTION OR PRODUCT MIX

The choice of product mix is guided by market requirements. In the production of most of the items, variations in size and quality are aimed at satisfying a broad range of customers. For example, a garment manufacturer may have a wide range in terms of size and quality to cater to different customers. while planning the production facilities of the firm, some flexibility with respect to the product mix must be sought. Such flexibility enables the firm to alter its product mix in response to changing market conditions and enhances the power of the firm to survive and grow under different situations.
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4. PLANT CAPACITY

Plant capacity or production capacity refers to the volume or number of units that can be manufactured during a given period. Plant capacity may be defined in two ways: Feasible Nominal Capacity: It refers to the capacity attainable under normal working conditions. Nominal maximum Capacity: It is the capacity which is technically attainable and this often corresponds to the installed capacity guaranteed by the supplier of the plant.

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Several factors have a bearing on the capacity decisions: Technological Requirement Input Constraints Investment Cost Market Conditions Resources of the Firm Government Policy

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5. LOCATION AND SITE

The choice of location and site follows an assessment of demand, size and input requirements. Location refers to a fairly broad area like a city, an industrial zone, or a coastal area whether site refers to a specific piece of land where the project would be set up. The choice of location is influenced by a variety of considerations: proximity to raw materials and markets, availability of infrastructure, labor situations, governmental policies, and other factors as climate conditions, general living conditions and proximity to ancillary units.
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6.

STRUCTURES AND CIVIL WORKS

Structures and civil works may be divided into three categories: Site Preparation and Development: This covers the following: (i) grading and leveling of the site, (ii) demolition and removal of existing structures, (iii) relocation of the existing pipelines, cables, roads, power lines etc. (iv) other site preparation and development works Buildings and Structures: Buildings and structures may be divided into: (i) factory or process buildings (ii) ancillary buildings required for stores, warehouses, and laboratories etc.
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(iii) administrative buildings (iv) staff welfare buildings, cafeteria, and medical service buildings (v) residential building Outdoor Works: Outdoor works cover: (i) supply and distribution of utilities ( water, electric power, communication, steam and gas) (ii) handling and treatment of emission wastages (iii) transportation and traffic signals (iv) outdoor lighting (v) enclosure and supervision (boundary wall, fencing, barriers, gates, doors, security posts etc.)
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7. PROJECT CHARTS AND LAYOUTS

Once data are available on the principal dimensions of the project market size, plant capacity, production technologies, machineries and equipments, buildings and civil works, and supply of inputs to the project project charts and layouts may be prepared. These define the scope of the project and provide the basis for detailed project engineering and estimation of investment and production costs. The important charts and layouts are briefly described as: (i) General Function Layout: this shows the general relationship between equipments, buildings, and civil works. In preparing this layout, the primary consideration

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is to facilitate smooth and economical movement of raw materials, work in process, and finished goods. (ii) Material Flow Diagram: This shows the flow of materials, utilities, final products, and by-products. Along with the material flow diagram, a quantity flow diagram showing the quantities of flow may be prepared. (iii) Production Line Diagrams: These show how the production would progress along with the main equipments. (iv) Transport Layout: This shows the distances and means of transport outside the production line.
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(v) Utilities Consumption Layout: this shows the

principal consumption point of the utilities (power, water, gas, compressed air etc.) (vi) Communication Layout: This shows how the various parts of the project will be connected with telephone, internet, intercom etc. (vii) Organizational Layout: This shows the organizational set up of the project along with information on personnel required for various departments and their inter-relationship. (viii) Plant Layout: The plant layout is concerned with the physical layout of the factory. In certain industries, particularly in process industries, the plant layout is dictated by the production process adopted.
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8. WORK SCHEDULE The work schedule as the name suggests, reflects the plan of work concerning installation as well as initial operations, the purpose of the work schedule is: To anticipate problems like to arise during the installation phase and suggest possible means for coping with them. To establishing the phasing of investments taking into account the availability of finances. To develop a plan of operations covering the initial period (the running in period)

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COST OF PROJECT
Conceptually the cost of the project represents the total of all items of outlay associated with a project which are supported by long-term funds. It is the sum of the outlays on the following: Land and Site Development Buildings and Civil Works Plant and Machinery Technical know-how and Engineering Fees Expenses on Foreign Technicians and Training of Indian Technicians Abroad

1.

2.
3. 4.

5.

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6. Miscellaneous Fixed Assets 7. Preliminary and Capital Issue Expenses 8. Margin Money for Working Capital 9. Initial Cash Losses

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1. LAND AND SITE DEVELOPMENT

The cost of land and the site development is the sum of the following: Basic cost of land Premium payable on leasehold Cost of leveling and development Cost of laying approach roads and internal roads Cost of compound wall and gates Cost of tube wells

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2.

BUILDINGS AND CIVIL WORKS

Building and Civil Works cover the following: Factory or process buildings Ancillary buildings required for stores, warehouses, and laboratories etc. Administrative buildings Staff welfare buildings, cafeteria, and medical service buildings Residential building Garages The cost of the building and the civil works depends on the kinds of structures required which in turn, are dictated largely by the requirements of the manufacturing process.

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3.

PLANT AND MACHINERY

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The cost of plant and machinery, typically the most significant component of the project cost, consists of the following: Cost of imported machinery: This is the sum of shipping freight, insurance cost, import duty, clearing, loading, unloading, and transportation charges. Cost of indigenous machinery: This consists sales tax, octroi, and other taxes, railway freight, and transportation charges to the site. Cost of stores and spares Foundation and installation charges

4.

TECHNICAL KNOW HOW & ENGINEERING FEES

Often it is necessary to engage technical consultants or collaborators from India and / or abroad for advice and help in various technical matters like preparation of the project report, choice of technology, selection of the plant and machinery, detailed engineering and so on. The amount payable for obtaining the technical know-how and engineering services for setting up the project is a component of a project cost.

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5. EXPENSES ON FOREIGN TECHNICIANS

AND TRAINING OF INDIAN TECHNICIANS ABROAD

Services of foreign technicians may be required in India for setting up the project and supervising the trial runs. Expenses on their travel, boarding and lodging along with their salaries and allowances must be shown here. Likewise, expenses on Indian technicians who required training abroad must also be included here.

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6.

PRELIMINARY AND CAPITAL ISSUE EXPENSES

Expense incurred for identifying the project, conducting the market survey, preparing the feasibility report, drafting the memorandum and articles of association and incorporating the company are referred to as preliminary expenses. Expense borne in connection with the raising of capital from the public are referred to as capital issue expenses. The major components of capital issue expenses are: underwriting commission, brokerage, fees to managers and registrars, printing and postage expenses, advertising and publicity expenses, listing fees and stamp duty.
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7.

PRE-OPERATIVE EXPENSES

Expenses incurred till the commencement of the commercial production are referred to as preoperative expenses: establishment expenses, rent, rates and taxes, interest on borrowings, insurance charges, interest on deferred payments and miscellaneous expenses etc. Pre-operative expenses are directly related to the project implementation schedule. So delays in project implementation, which are fairly common, tend to push up these expenses.

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8.MARGIN MONEY FOR WORKING CAPITAL

The principal support for working capital is provided by commercial banks and trade creditors. However, a certain part of the working capital requirement has to come from long-term sources of finance. Referred to as the margin money for working capital, this is an important element of the project cost.

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9.

INITIAL CASH LOSSES

Most of the projects incur cash losses in the initial years. Yet promoters typically do not disclose the initial cash losses because they want the project to appear attractive to the financial institutions and the investing public. So firm has to make the provisions for such cash losses.

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MEANS OF FINANCE

To meet the cost of the project the following means of finance are available: Share Capital Term Loans Debenture Capital Deferred Credit Incentive Sources Miscellaneous Sources

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1.

SHARE CAPITAL

There are two types of capital - equity capital and preference capital. Equity capital represents the contribution made by the owners of the business., the equity shareholders, who enjoy the rewards and bear the risk of ownership. Equity capital being risk capital carries no fixed rate of dividend. Preference capital represents the contribution made by preference shareholders and the dividend paid on it is generally fixed.

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2.

TERM LOANS

These are provided by the financial institutions and commercial banks. Term loans represent secured borrowings which are very important source (and sometimes the major source) for financing the new projects as well as for the expansion, modernization, and renovation schemes of existing firms. There are two broad types of term loan: Rupee term loan Foreign currency term loan

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3.

DEBENTURE CPITAL

Debentures are promissory notes that are used for raising debt capital. There are two broad types of debentures: Non-Convertible Debentures Convertible Debentures

4. DEFERRED CREDIT Many time the suppliers of plant & machinery offer a deferred credit facility under which payment for the purchase of the plant and machinery can be made over a period of time.
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5.

INCENTIVE SOURCES

The government and its agencies may provide financial support as an incentive to certain types of promoters or for setting up industrial units in certain locations. These incentive may take the form of seed capital assistance (provided at a nominal rate of interest to enable the promoter to meet his contribution to the project), or capital subsidy (to attract industries to certain locations), or tax deferment or exemption (particularly from sales tax) for a certain period.

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6.

MISCELLANEOUS SOURCES

A small portion of the project finance may come from miscellaneous sources like unsecured loans, public deposits, and leasing and hire purchase finance.

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Planning the Means of Finance

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The key business considerations that should be borne in mind for the planning the means of finance are as follows: 1. COST: In general the cost of debt funds is lower than the cost of equity funds. Because the interest payable on debt capital is tax deductible expense whereas the dividend payable on the equity capital is not. 2. RISK: The two main sources of risk for a firm or project are: business risk and financial risk. Business risk refers to the variability of return on invested capital and arises mainly from fluctuations in demand and variability of prices and costs.

Financial risk represents the risk arising from financial leverage. It must be emphasized that while debt capital is a cheaper source of finance it is also a riskier source of finance because of the fixed financial burden associated with it. 3. CONTROL: From the point of view of the promoters of a project, the issue of control is important. They would ordinarily prefer a scheme of financing which enables them to maximize their control over the affairs of the firm.
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4. FLEXIBILITY: This refers the ability of firm or project to raise further capital from any source it wishes to tap to meet the future financing needs. Flexibility means that firm does not fully exhaust its debt capacity, it maintains reserve borrowing powers to enable it to raise debt capital to meet largely unforeseen future needs.

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FINANCIAL PROJECTIONS
Projected financial statement analysis is a central strategy implementation technique because it allows an organization to examine the expected results of various actions and approaches. This type of analysis can be used to forecast the impact of various implementation decisions as: To increase promotion expenditure by 50 per cent to support a market development strategy. To increase salaries by 25 per cent to support a market penetration strategy To increase R & D expenditure by 70 per cent to support product development.
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Nearly, all financial institutions require at least three years of projected financial statements whenever a business seeks capital. A projected income statement and balance sheet allow an organization to compute projected financial ratios under various strategy implementation scenarios that provide valuable insights into the feasibility of various strategy implementation approaches.

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Uses of Projected Financial Statements

Estimates the Effect of Proposed Operating

Changes Provide Better Guidance Help Management in Establishing Reasonable Targets Anticipate Future Financing Needs

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Advantages of Projected Financial Statements

Measuring Short term Solvency

Measuring Long term Solvency

Measuring Operating Efficiency Measuring Profitability Comparison of Inter-firm Position Forecasting, Budgeting and deciding Future Line

of Action Assessing Growth Potential of the Business

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Components of Projected Financial Statements

1. Statement of Profit and Loss or Income

Statement 2. Balance Sheet 3. Cash Flow Statement

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1. PROJECTED INCOME STATEMENT

The projected income statement is a projection of income for a period of time in the future. The analyst may wish to evaluate each component of the cost of goods sold. A detailed analysis of purchases, production wages and overhead costs is likely to produce the most accurate forecasts. Often, however, costs of goods sold are estimated on the basis of past ratios of costs of goods sold to sales.

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2. PROJECTED BALANCE SHEET

Projected balance sheet is the forecasting of flow of funds and according to this the estimation of every items should be made and checked. The preparation of proforma balance sheet is made on the basis of proforma income statement and supporting schedules and budgets. for the preparation of the projected balance sheet we need the following information: The balance sheet at the end of year n The projected income statement for the year n+1 The proposed repayment of debt capital The changes in the level of current assets and fixed assets

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3. PROJECTED CASH FLOW

Cash plays a very important role in the entire economic life of a business. A firm needs cash to make payments to its suppliers, to incur day to day expenses and to pay salaries, wages, interest and dividends etc. A statement of changes in the financial position of the firm on cash basis is called a cash flow statement. Such a statement enumerates net effects of the various business transactions on cash and takes into account receipts and disbursement of cash. A cash flow statement is a statement of changes of financial position in business due to inflow or outflow of cash.
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Sources or inflows of funds: Share issue Increase in medium and long term secured borrowings Increase in unsecured loans and deposits Increase in liabilities for deferred payment Sale of fixed assets and investments Disposition or outflow of funds:s Capital expenditure for the project Decrease in medium and long term secured borrowings Decrease in unsecured loans and deposits Decrease in liabilities for deferred payments Interest on term loans and borrowings Payment of taxation and dividend Purchase of fixed assets and investments