UNIT-4

What Is Cost Estimation in Project

Management?
A project can only come together with all the necessary materials and labor, and those materials
and labors cost money. Putting together a budget that keeps costs to a minimum, while
maximizing the project’s quality and scope can be challenging. This is why proper cost
estimation is important.

Cost estimation in project management is the process of forecasting the financial and other
resources needed to complete a project within a defined scope. Cost estimation accounts for
each element required for the project—from materials to labor—and calculates a total amount
that determines a project’s budget. An initial cost estimate can determine whether an
organization greenlights a project, and if the project moves forward, the estimate can be a factor
in defining the project’s scope. If the cost estimation comes in too high, an organization may
decide to pare down the project to fit what they can afford (it is also required to begin securing
funding for the project). Once the project is in motion, the cost estimate is used to manage all
of its affiliated costs in order to keep the project on budget.

Elements of cost estimation in project management

There are two key types of costs addressed by the cost estimation process:

1. Direct costs: Costs associated with a single area, such as a department or the project
itself. Examples of direct costs include fixed labor, materials, and equipment.
2. Indirect costs: Costs incurred by the organization at large, such as utilities and quality
control.

Within these two categories, here are some typical elements that a cost estimation will take into
account:

• Labor: The cost of team members working on the project, both in terms of wages and
time
• Materials and equipment: The cost of resources required for the project, from
physical tools to software to legal permits
• Facilities: The cost of using any working spaces not owned by the organization.
• Vendors: The cost of hiring third-party vendors or contractors.
• Risk: The cost of any contingency plans implemented to reduce risk.
What is project cost estimation?

Cost estimating, by definition, is the practice of predicting the final total cost of a project that

has an outlined sc ope. It is the fundamental part of

project cost management (a discipline used by project managers since 1950 to manage costs).
Cost estimation validates the project budget and enables the monitoring and controlling of
project costs when the project is in progress. The approximate project cost is then being referred
to as a cost estimate or a planned price. It includes all project expenses and is fairly difficult to
forecast, since the project scope is an ever-changing phenomenon. Oftentimes, project cost
estimation is much like looking into a crystal ball.

Why project cost estimation is important

There are many reasons why cost estimation is an indispensable part of project management.

A cost estimate reflects if the project is financially viable. First things first, an accurate cost
estimate is essential for deciding if the project is feasible or not for the company at the moment.
In this light, a cost estimate answers if the project can be completed with available resources
in the given time period and still bring value to the organization.

Cost estimation helps to stay on schedule and on track. At the end of the day, sound project
estimates are important to ensure that actual effort, once the project is in progress, matches the
estimated targets that were set at the beginning of the project to the greatest possible extent.
Thus estimates are one of the foundational pillars for safeguarding client expectations and your
company’s bottom line.

It's essential to note that it doesn't matter whether you're using PMI, PRINCE2 or something
else for project control or Scrum, Waterfall, etc. for project execution. The estimates of the
work to be performed will always be the foundation for your project. Unless you of course have
a client with an unlimited supply of cash and in that case you're probably the luckiest (and only)
supplier in the world.
Factors involved in project cost estimation

It won’t hurt to repeat that cost estimation should cover each small element required for the
project - labor, material, training, you name it. And since it’s difficult to account for all, initial
cost estimates can rarely be called credible and reliable. They are typically revisited and
modified when the project’s scope becomes more explicit.

In all cases, ensuring that you have priced your project correctly requires that you have
estimates you are fairly certain will hold water. When the client has accepted the project and it
starts going over time and budget it can quickly turn your client and other stakeholders
extremely sour. So let's try to avoid this as best we can.

When calculating your project’s cost, you might benefit from distinguishing between direct
and indirect costs, as eventually your project price will have to factor in both.

Direct & indirect costs

Direct costs are expenses closely related to your project. They will include labor needed to
complete the project together with software, equipment and raw materials, depending on the
industry you’re in. While the labor (your employee’s salaries) is less fluctuating, the prices on
equipment will most likely vary.

In turn, indirect costs, also known as ‘overhead’ and ‘administrative’ entail the spending on
supplies that fuel your company’s day-to-day operations as a whole, not appointed to the
delivery of a particular project or service. Office equipment, rent, and utilities can all be
considered indirect costs. Just like direct, indirect costs can be either fixed or variable.

Both types of costs are important and should be taken into account when estimating a project.

Assuming that you’re in a company that provides professional services, the typical cost
categories include, but are not limited to human resources, travelling spendings, training fees,
material resources, research expenses, contigency reserves, etc.

Common project cost estimation techniques

Depending on your project type and size, stakeholder expectations, potential billing method,
and other project-related factors, various techniques and tools can be applied to make an
educated guess about the project’s price. We’ve gathered them in one table together with
recommendations.
 Estimation
Definition Recommendations
technique

Assigning costs to the individual Best for estimating projects with defined
Bottom-up elements of the project plan, such expectations and specific requirements in
estimation as tasks, milestones, or phases, line with stakeholders who won’t expect
and putting the bucks together major changes in the scope

Figuring out the project’s total Commonly used to estimate elements on

Top-down
price and determining the scope fixed price projects when the price is
estimation
of work that can be done initially specified by the client

Relying on data from previous

Analogous Recommended when there’s limited
similar projects to forecast the
estimation information about the project
cost

Taking specific cost variables and

Parametric data points from other projects to Usually called in for use when the
estimation figure out the ultimate project previous project data you have is scalable
cost

Doing the average from the best,

Three-point Well-advised when the risk of going over
worst, and most likely case
estimation budget is high
estimations

Fore more information on each technique, check out this article with a detailed perspective on
each.
Prime reasons for inaccurate project cost estimates

More often than not, project cost estimates turn out to be off-the-mark. The main reason being
the timing when they’re made - during the proposal phase - that is when you know the least
about the project, plus many other factors that compromise the quality of cost estimates. The
common pitfalls to watch out for that can destroy the accuracy and reliability of your estimates
are:

• Farsighted predictions. Seasoned project managers know that every estimate is a premature
estimate if it’s made a long time in advance, let’s say to predict the budget three years ahead.
It immediately turns into a guess estimate that will hardly be relevant then.
• Shortage of expertise on similar projects. There is no denial of the fact that better cost
estimates come with experience on comparable initiatives. Analogous projects inform your
next estimation decisions by giving you a clearer understanding of how the new project can
be better scoped out and which milestones take longer than usual.
• Lack of requirements. Having an idea what the project is all about is not enough. To provide
an accurate estimate, every element in the project should be specified per client’s request.
Staying on the same page with the client will help you break the project down into manageable
chunks of work and ensure that you don't miss out on anyone’s expectations.
• Splitting one task across multiple resources. When more than one person works on a task,
clear processes should be set in place, which in turn requires additional planning and
management time, often not taken into account. Not only does it make the task last longer,
but it also increases chances of overshot deadlines and estimates. In the end, one task divided
between multiple team members turns out to be more costly than you initially thought.
• Expecting that resources will work at full battery. Total efficiency at workplace is a utopia we
all want to believe in. There will always be “dead time” or unexpected non-billable work. A
more reasonable number to target would be 70-80%. Don’t forget to include that when
scoping your next project.

Using spreadsheets for cost estimation in project management

Spreadsheets are still widely used to estimate costs. However, before entering the wonders of
Excel spreadsheets again, we suggest weighing all its positives and negatives.

The pros of using a spreadsheet for cost estimation

• Almost an industry standard

• Low barrier for entry (Most people have access to it and know how to use it)
• Very adaptable and customizable
• Easy to analyze, present, and pivot data (for a single project at least)
• Easy to copy and distribute

The cons of using a spreadsheet for cost estimation

• Very adaptable and customizable

• Error-prone due to its manual nature
• Only accessible locally and not by multiple people at the same time
• Easy to copy and distribute (How do you easily merge input from 10 people?)
 • Almost impossible to consolidate input of data due to its delicate nature
• No easy way to learn from previous projects and take advantage of historic data
• Rubbish at comparing projects and their data without substantial manual effort
• No version control (Which always results in substantial rework)
• Very hard to track Key Performance Indicators (KPIs) in a timely manner to react to them

The list above indicates why it can make sense to grab a tool at hand like Excel, but this on the
other hand is also the major drawback of using spreadsheets as they very fast end up being very
complex and fragile due to this ‘ease.’ The nature of spreadsheets makes them very delicate,
especially when multiple people have to work on the same sheet without any form of version
control. And yes, using a document repository (with or without file locking) is still not a good
solution.

Quickly a lot of manual rework needs to be done to make it work. Compiling data across
projects is also a process that is error-prone and needs substantial manual effort if spreadsheets
are the weapons of choice. Easily taking advantage of previous project history and track record
is thus, to our experience, almost never done because it requires too much manual work.

Why a solution is needed to replace spreadsheets

Drawing on our experience with companies using Excel spreadsheets in large projects (130+
people), spreadsheets rarely have happy endings. Cost estimates start going worng in the
middle of the project, where no one can agree on what the estimated baseline was. Of course,
this problem only becomes really prevalent once the project has started slipping and everyone
is scrambling for the contract.
All in all using spreadsheets to manage this process is very much like starting all over again
whenever a new project is initiated, this also makes it impossible to improve the process and
reduce lead time from client interest to actual project initiation.

Why not do it the right way from the beginning and start improving over time (even without
any additional work). Your bottom line and you clients will thank you for it.

How to incorporate AI into project cost estimation

The main challenge of cost estimating is that it’s done as early as possible with little
information about the project. On the other hand, we only know the most about the project
when it’s complete. Tricky, isn’t it? Incorporating artificial intelligence into the process of
project cost estimation could help you solve this problem by informing your decisions with
hidden insights on completed projects.

Forecast's AI, for instance, puts the cumulative skills and learnings from hundreds of thousands
of projects to work for every user, every day. The Auto Schedule feature automatically
estimates tasks, assigns and optimizes resources, and sets deadlines perfectly tailored to the
individuals. It helps to reduce lead time and achieve 90% accuracy when scoping and
estimating project cost. Here’s an example of how it might look:

For starters, you can try using the Scoping page in Forecast as your project cost estimation
template. There, it’s easy to break the project down into milestones and tasks and then apply
Auto Schedule to bulk estimate all the tasks and assign people to them. Each task will get a
unique estimate based on similar tasks that were completed in the system. Additionally, Auto
Schedule will turn your work breakdown structure into a project timeline, where you’ll be able
to track project progress in the future.
After a few months with Forecast, the platform will also learn enough about your people and
the tasks they usually complete and you won’t need to worry that it will assign random people
to your tasks the next time you use Auto Schedule. Just below the timeline view, you’ll get a
heatmap with your resources and their workloads to see if nobody is overbooked and use
capacity intelligently. The more you work with Forecast, the more accurate your cost estimates
become and the less administrative work sits on your desk.

In line with the project timeline, there’s a Budget tab that will allow you to keep track of your
project budget, and many more features to ensure that projects and operations are carried out
as optimally as possible.

In the end, the success of your project depends on the estimate quality. So what are the signs
your project estimates are actually holding water? We’ve got this checklist made by our CEO,
so you can quickly check it up.
 PROJECT
MANAGEMENT

UNIT- II

By
Dr. Prateek Gupta
UNIT- II – Risk Analysis

Risk & Uncertainty

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Risk
Risk is the possibility of outcome being different form the expected outcome.

If the probabilities of possible outcome of a given problem are known, we can

conclude that the problem contains Risk, i.e. the problem is risky.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Uncertainty
If the probabilities of possible outcome of a given problem are not known, we can
conclude that the problem has an element of uncertainty, i.e. the outcome can not
be predicted.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Types of Risk

• Completion Risk (if the project seems not to be completed in time)

• Technical Risk (if it seems failure to meet a particular performance)

• Social Risk (seems to have social cost / against customers or society)

• Economic Risk (increase in inflation, policies, income level etc.)

• Political Risk (political instability, change in policy, trade restriction)

• Production Risk (shortage in inputs, increase in costs)

• Marketing Risk (failure of product in satisfying the demand)

• Financial Risk (bad debts, change in interest rate, wrong investment)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Risk Analysis
A process of identifying and quantifying the risk involved in a project
and developing measures to avoid and manage such risk.

Risk analysis can be classified in two

heads:
Risk Analysis

Risk Assessment

Risk Management

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Risk Assessment

A process of identifying and quantifying the risk.

To find out the To know the

reasons / sources of probability of
risk occurring of risk.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Risk Assessment
Evaluate the risks
Consequence
Extreme Very high Moderate Low Negligible
Almost
Severe Severe High Major Moderate
certain
Likelihood

Likely Severe High Major Significant Moderate

Moderate High Major Significant Moderate Low
Unlikely Major Significant Moderate Low Very low
Rare Significant Moderate Low Very low Very Low

You must define what these risk levels mean to you.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Methods of Risk Assessment

Methods :

•Sensitivity Analysis
• Scenario Analysis
• Break – Even Analysis
• Decision Tree Analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Sensitivity Analysis

Also Known as “What if” Analysis.

To find the sensitivity of the project to various individual factors effecting

project like:

• change in demand,
• cost, In sensitivity analysis,
only one variable is
• availability of labor etc. varied at time.

To study the effect of deviations in expected values of factors on which viability is based

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Steps in Sensitivity Analysis

Step 1:
Find out the effect of change in each individual variable on the original decision about
the project.

Step 2:
If effect of change in any variable is opposite to the original decision, it shows the need
of revised study of the particular variable for surety.

Step 3:
Finally original decision is revised on the basis of probability of change in such variable
and its calculated impact of project. More sensitive projects are treated as more risky
and vice versa.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Scenario Analysis

In sensitivity analysis, only one variable is varied at time but generally all
variables are inter-related. Studying all variables are not feasible or correct.
Therefore, few scenarios are set or developed.

Factors Scenario 1 Scenario 1 Scenario 1

Demand M H L
Price M L H
Cost M H H
Probability 0.5 0.25 0.25
Result A B C

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Steps in Scenario Analysis

Step 1:
List out the factors forming a scenario.

Step 2:
Form different scenario (as formed in previous example)

Step 3:
Estimates the results (NPV etc.) in all scenarios.

Step 4:
Calculate the probability for each scenario.

Step 5:
Select the best one as per Risk-Return Trade off.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Another Method of Scenario Analysis

Best Scenario High Demand, High Price, Low Cost

Normal Scenario Avg. Demand, Avg. Price, Avg. Cost

Worst Scenario Low Demand, Low Price, High Cost

Another Approach may have three scenarios:

• Boom condition of Economy
• Normal condition of Economy
• Recession in Economy

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Break-Even Analysis
A Point of ‘No profit No Loss’.
Total revenue = Total cost

In Modified way:

B.E.P stands where

Present value of Cash Inflow = Present value of Cash Outflow

To find out the probability of achieving the break-even sales.

• If Probability of achieving Break-even sales is High = Project is less Risky

• If Probability of achieving Break-even sales is low = Project is Risky
• If Probability of achieving Break-even sales is moderate = Project is avg. Risky

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Decision – Tree Analysis

To analyze the situation where sequential decision making regarding risk is
involved. It is a step-by-step decision making with their probabilities.

Step 1:
Identifying the problem and their possible sequential outcomes with their probabilities.

Step 2:
Represents all the outcomes step-by-step in diagrammatic form along with their
individual probabilities.

Step 3:
Calculate the combined probability of happening the even and affecting the project by
multiplying the individual probabilities.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Decision – Tree Analysis

Less Profit
(0.6)

Costly raw
Material
(0.4)

Inflation (0.5)

Increase in per
capita Income No change in
(0.6) profit
(0.4)
No Costly raw
Growth Material
(0.6)
in
Economy
No inflation
(0.5)

No increase in
per capita
Income (0.4)

Probability of effect = 0.6 x 0.5 x 0.4 x 0.6 = 0.072

If High probability = Rejected; low Probability = Accepted

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Risk Management
The process of avoiding or minimizing the impact of assessed risk. Risk
management at the time of project evaluation may be done as:

At the time of Project At the time of Project

Evaluation Implementation

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Risk Management

At the time of Project Evaluation

• Judgmental Evaluation
(without using any formal method, accepting/rejecting project)
• Pay Back Period Requirement
(Risk is a function of time, use of PBP along with NPV or IRR risk)
• Risk Adjusted Discount Rate
(r = i + d; r = risk adjusted discount rate, I = normal discount rate, d = risk factor )
• Collecting more and more information
(by updating self)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

UNIT- II – Risk Analysis

Risk Management

At the time of Project Implementation

• Converting Fixed cost to Variable Cost

• Sequential Investment
(start with small and later expand)
• Reduced Financial Leverage (Using less debt capital)
(r = i + d; r = risk adjusted discount rate, I = normal discount rate, d = risk factor )
• Insurance
• Long Term Arrangements
• Strategic Alliance

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

END OF UNIT- II
THANKS

21
PROJECT MANAGEMENT By: Dr. Prateek Gupta
How to assess your Working Capital
Requirement (WCR)
7 June 2021
Do you know how much working capital is required to run your business? The more money
you are obliged to spend covering your obligations, the less money and flexibility you will
have to seize opportunities, such as expanding your product line to meet new demand. In this
article, we examine how to assess working capital requirement and its implications for your
business.

Why working capital is essential

Working capital is the lubricant that keeps your company’s finances running. In
accounting terms, it is current liquid assets - such as cash, inventories and accounts receivable
- minus current liabilities, such as accounts payable. Too little working capital can signal
liquidity problems; too much working capital suggests you are not using your assets efficiently
to increase revenues.

The question is: do you hoard cash and keep your working capital robust or run it low to take
advantage of opportunities? Finding the right balance for this measure of assets to liabilities
has become a moving target during the Covid-19 crisis. No matter how good your prospects
are, your company will face bankruptcy if you can’t pay the bills; but you will shrivel up in the
long term if you don’t invest.

Assessing and determining working capital requirements for your company can help you find
that balance.

How to assess the Working Capital Requirement or WCR?

What is the working capital requirement (WCR)?

The Working Capital Requirement (WCR) is a financial metric showing the amount of
financial resources needed to cover the costs of the production cycle, upcoming operational
expenses and the repayments of debts. In other words, it shows you the amount of money
needed to finance the gap between payments to suppliers and payments from customers.

Working capital requirement calculation

The key components of the working capital requirement formula are accounts receivable
(measured through the DSO, for Days Sales Outstanding), inventory (measured through the
DIO, for Days Inventory Outstanding) and accounts payable (measured through the DPO, for
Days Payable Outstanding).

Logically, the working capital requirement calculation can be done via the following formula:
WCR = Inventory + Accounts Receivable – Accounts Payable.
Understanding a change in working capital requirement

If you’re wondering how to assess your working capital requirement, look at its components
first. A rise in WCR comes either from a higher number of accounts receivable, a higher
inventory, or a lower number in accounts payable. And the reverse – that is, if the result of your
working capital requirement calculation shows a drop – comes from either a lower DSO or
DIO, a higher DPO, or a combination thereof.

A rise in WCR usually means companies are spending a lot of their financial resources just
running the business and therefore have less money to pursue other objectives such as new
product development, geographical expansion, acquisitions, modernisation or debt
reduction. The higher your working capital requirement, the more constraints you face in
making forward-looking investments. So monitor any change in working capital requirement
closely!

The working capital ratio: another key metric

Another metric showing the ability of your company to pay for its current liabilities with its
current assets is the working capital ratio. However, instead of resulting in a hard number, as
does the working capital requirement, the working capital ratio is a percentage, showing the
relative proportion of your company’s current assets to its current liabilities.

A good working capital ratio is considered to be 1.5 to 2, and suggests a company is on solid
financial ground in terms of liquidity. Less than one is taken as a negative working capital
ratio, signalling potential future liquidity problems. An exception to this is when negative
working capital arises in businesses that generate cash very quickly and can sell products to
their customers before paying their suppliers.

As Philippe Vammale, Head of Risk Underwriting at Euler Hermes France also warns:
“Although the working capital is a key metric, more and more companies improve their
working capital and in fine their cash position by using financing structured as factoring and
reverse factoring. Faced with these financial technicalities, the working capital analysis
requires more attention and rigor as illustrated recently with the bankruptcy of the speciality
finance firm Greensill Capital.”

What is affecting your working capital requirement?

The biggest drain affecting your working capital requirement is payment delays. Late
payments can force many companies to draw on their working capital to pay the bills in the
best of times, and in fact payment delays are the leading cause of insolvencies.

“Cash is king; cash flow is and will remain the sinews of war,” says Philippe. “25% of business
failures are the result of suspension of payments. It is therefore essential that companies
manage their cash flow rigorously.”

For example, monitor customer payments by requesting acknowledgement of invoices sent

and follow up with reminders when payment terms have been breached. But be flexible before
taking costly legal actions and maintain good customer relationships..
Determining working capital requirements to ensure future
business growth
Over the past year, liquidity from government stimulus and tax supports injected much-
needed cash into the economy and helped keep businesses afloat. Small business loans with
attractive lending terms have allowed companies to benefit from the current low-interest-rate
environment and upgrade, invest in projects, or make acquisitions that will ensure future
profitability.

Before taking the investment step, bring in expert trade and risk analysis to help you find
the balance between being too aggressive because of FOMO (fear of missing out) and being
too conservative, with the risk of being overtaken by the competition. In addition, the recovery
could be different from country to country. That’s something to keep in mind as you choose
your investment targets. For example, an expert trade credit insurer can advise and help you
make better-informed decisions.

Determining working capital requirements and understanding any changes will provide some
margin for your company to manoeuvre and help you develop a forward-looking view and
ensure future growth.
 PROJECT
MANAGEMENT

UNIT - III

By
Dr. Prateek Gupta
Unit III – Project Appraisal

Project Appraisal

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Project Appraisal

• Meaning and definition

• Various aspects of project appraisal

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Appraisal

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Appraisal or Pressure???

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Project Appraisal
Meaning and definition
• Assessment of a project in terms of its economic, social and financial
viability

• A lending financial institution makes an independent and objective

assessment of various aspects of an investment proposition

• It is defined as taking a second look critically and carefully at a project

by a person who is in no way involved or connected with its
preparation. He is able to take independent, dispassionate and
objective view of the project in totality, along with its various
components

It is a detailed study of several aspects of a given project before recommending it.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Project Appraisal
Steps for project appraisal/Aspects of project appraisal

• Economic Aspects

• Technical Aspects

• Organizational Aspects

• Managerial Aspects

• Financial Aspects

• Market/Commercial Aspects

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Project Appraisal
Economic Aspects

It measures the effect of the project on the whole economy.

• Analyses if the benefits will justify the project cost/investment done

• A successful project gives following benefits:

– Increased output
– Enhanced services
– Increased employment
– Larger government revenue
– Higher earnings
– Higher standard of living
– Increased national income
– Improved income distribution
PROJECT MANAGEMENT By: Dr. Prateek Gupta
Unit III – Project Appraisal

Project Appraisal
Technical Aspects

It measures the effect of the project on the basis of techniques used as:

• Site and Location: RM supply, proximity to markets, transportation

facility, power supply, manpower, water, government policies, labour
laws, climate, taxes

• Size of plant/scale of operations: Technological capacity is

standardised for achieving economies of scale, low demand or less
resource availability result in economies of scale

• Technical feasibility: Technology selected, availability of

infrastructure, plant layout, project implementation schedules etc

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Technical Aspect
Various aspects are measured under this head as:

• Selection of appropriate Technology (This must satisfy the following questions)

• Does the Technology make use of the locally available Raw Material?
• Can the technology implement and maintained by the locally available man power?
• Is the technology in tune with the local social and cultural conditions?
• Does the technology protects ecological balance etc?

Example:
As cement can be manufactured wither by wet process or by the dry process.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Technical Aspect
Contd:

• Scale of Operations (signified by the size of the plant)

• Raw Material (may be replaced by alternative Raw Material, hence alternative process
may be required)
• Technical Know-How (expert consultant must have knowledge and experience and
such project earlier successfully)
• Collaboration Agreements (the agreement should be specified as to the part played
by know-how supplier)
• Product Mix (Variation in product according to the customers)
• Selection and Procurement of Plant and Machinery
• Plant layout (For steady flow of production and minimizing overall cost)
• Location of Project (regional Factor, Site Factor)
• Project Scheduling (Scheduling of activities)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Project Appraisal
Organizational Aspects

• Organization structure, recruitment and training aspects are studied

• Appraisal done to see if project is adequately staffed, initial

recruitment is done

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Project Appraisal
Managerial Aspects

• Financial institutions check if promoters are competent and have

business sense

• They can appoint nominee directors on board

• The Companies Act and Industries Act empower government to

exercise control over management

• They can also take over the management in case it is needed

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Project Appraisal
Financial Aspects

• Cost analysis: Finding out the cost of production

• Pricing: Deciding price of the product after considering demand,

profit and competition

• Financing: Raising funds and efficient use of the same

• Income and Expenditure: Concerned with predicting profit and costs

involved

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Project Appraisal
Market / Commercial Aspects

• Analysis of market opportunities

• Specification of marketing objectives

• Planning and organizing of marketing process

• Controlling of implementation of marketing plan

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

COST of Projects

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Cost of Project

Direct: Direct costs are expenses that come out of the project
budget directly. For example, if you have outsourced some of your
development work, the developers are expected to put in a specific
amount of time, which is then billed for. The developer salaries are
direct costs.

Indirect: Indirect costs are those that are shared across multiple
projects. Indirect costs are sometimes also referred to as Oversight
costs. For example, in software development projects, it is common
for a project manager or an architect to be partially allocated across
several projects. Hence, the cost of the project manager or
architect will be shared among the projects they are allocated to.
Project managers are usually an indirect cost to the project. This is
because their work is to supervise.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Cost of Project

Non-Recurring: non-recurring cost. Unusual charge, expense, or

loss that is unlikely to occur again in the normal course of a
business. Non recurring costs include write offs such as design,
development, and investment costs, and fire or theft losses, lawsuit
payments, losses on sale of assets, and moving expenses.

Fixed: Fixed costs are those that do not change throughout the life-
cycle of a project.

Variable: as the name suggests, are costs that change during the
project life-cycle. Construction projects usually have a long duration
and can easily span several years.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Cost of Project

Normal: Normal cost is the lowest possible direct cost required to

complete an activity.

Expedite costs: These are costs are routine costs associated with
completing the scheduled work agreed upon by the stakeholders at
the start of the project.

Sunk Costs: Sunk costs are those that have been incurred in a
project, but have not produced value towards the project’s
objectives. For example, if you are making a cup of tea and spill the
milk that was to be used in the tea, then the value of the milk is
your sunk costs.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Project Budgeting

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Budgeting of Project
A project budget is the total projected costs needed to complete a project
over a defined period of time. It’s used to estimate what the costs of the
project will be for every phase of the project.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Budgeting of Project

Top-down budgeting is a budgeting method in which senior

management develops a high-level budget for the company.
Once the top-level numbers are created, amounts are
allocated to individual functions or departments that must
create a detailed budget with their allocation.

Bottom up budgeting is a type of budgeting that attempts to

determine the underlying costs for each individual department
or segment of an organization and then total up each
department.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Project Financing

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Project Financing

Project financing is a loan structure that relies primarily on

the project's cash flow for repayment, with the project's assets,
rights, and interests held as secondary collateral. Project finance is
especially attractive to the private sector because companies can
fund major projects off-balance sheet.

Sources of finance:
Project finance may come from a variety of sources. The main
sources include equity, debt and government
grants. Financing from these alternative sources have important
implications on project's overall cost, cash flow, ultimate liability and
claims to project incomes and assets.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

 Source of Financing
 Equity Shares
 Preference Shares
 Debentures
 Bonds
 Term Loans
 Unsecured Loans
 Lease Financing
 Deferred Credit (bank offers guarantee for the repayment)
 Capital Investment Subsidy (by The Government)
 Bridge finance / Loan (Temporary Loan for bridging the requirement of
fund and availability of fund)
 Internal Accruals (Non cash expenses of the business like transfer to
retained Earning, General Reserves, Unutilized provision, Depreciations,
Expenses written off)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Social Cost Benefit Analysis

(SCBA)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

COST

BENEFIT

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Social Cost

All the harmful effects of a project on society

as a whole are known as cost to society as:

•Air Pollution
•Water Pollution
•Soil Erosion
•Deforestation
•Production of Harmful Products

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Harmful products

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Social Benefits

All the positive impact of a project on society

as a whole are known as social benefits:

• Increase in employment
• Rise in Per capital income
• Import substitution etc.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Social Cost Benefit Analysis

It provides a scientific and quantitative base for the appraisal of
projects with a view to determine whether the total social benefits of
a project justify the total social costs.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Objective of Social Cost Benefit Analysis

TO choose a net socially beneficial project

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Social Cost Benefit Analysis

Environment Analysis

The success or failure of a project depends upon a number of factors

which may not be always within the control of management. Such as:

• Economic Environment
• Political / Government / Legal Environment
• Social and Cultural Environment
Components
• Natural Environment (Resources)
• Global Environment
• Technological Environment

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

1. Economic Environment

Economic Environment is aggregate of

A. Nature of Economic System

B. Structure of Economy
C. Money & Capital market
D. Economic Policies
E. Economic Conditions

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Economic Environment
A. Nature of Economic System
• Nature of Property Rights
• Ownership of Factors of Production
• Role of Government
• Price Mechanism etc.

B. Structure of Economy
• Structure of National Output ( Agriculture, Industry, Services)
• Pattern of Investment (Region wise, Domestic, FDI)
• Occupational distribution of Labour (skilled, Unskilled etc.)
• Composition of Trade (Domestic, International, Export)

C. Money & Capital market

• Framework of Banking & Non-banking Financial Institutions
• Framework of Capital & Money Market (Financial Market)
• Regulatory Authority ( SEBI, RBI etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Economic Environment
Contd…

D. Economic Policies
• Industrial Policy (Planned development of Industry)
• Monetary Policy (Money supply)
• Fiscal Policy (Taxation and government spending)
• Foreign Exchange Policy ( Foreign Transaction)
• Foreign Investment Policy

E. Economic Conditions
• Per Capita income
• GDP trend
• Inflation trend
• Growth trend (Sector wise)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

2. Political / Government / Legal Environment

Interface between Business & Government

Taxes Law & order

Money & Credit

Government
Information
Business

Business
Infrastructure
Service to Govt. Information
Licences
Political Activities Quotas

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

2. Political / Government / Legal Environment

Political / Legal Environment consist of following:

A. Political Organization
B. Political Stability
C. Legal Rules Governing the businesses
• Monopolistic & Restrictive Trade Practices (MRTP) Act
• Consumer Protection Act
• Foreign Exchange Management Act (FEMA) Act
• Company Law
• Labor Law
• Judicial system

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

3. Social and Cultural Environment

consist of following:

A. View of Society towards:

• Achievement, work, wealth & Income
• Customs and Traditions
• Cooperation and Conflicts
• Class, family, Case system

C. Culture and Education

• Ethics in Business
• Corporate Governance
• Literacy Rate

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

4. Natural Environment
consist of following:

• Availability of Natural Resources

• Weather and Climate
• Topographical conditions effect
• Ecological Factors (floods, earthquakes etc.)
• Natural Misbalance (deplation, Pollution)
• Government Intervention (EURO I, II, III etc)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

5. Global Environment
consist of following:

• WTO and other international bodies (patents/ international

business/ investment/ issues)
• Economic conditions in other country (USA Meltdown)
• International political Factors (War/ Terrorism)
• Development/ Information / Communication ( Spreading
cultures, taste, customs, traditions)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

6. Technological Environment
consist of following:

• Type of Technology in use

• Level of Technological development
• Speed with new technology adopted
• Type of appropriate technology
Impact
• Increased Productivity
• Competitiveness
Need
• Development of society and Nation
• Innovative thinking of company
• customers needs and expectations
• Suppliers’ offering
• Competition in Market
• Social forces
• Research Organizations
• Government

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit III – Project Appraisal

Process of Environmental Analysis

Scanning Monitoring Forecasting Assessment

PEST Analysis
(Political, Economical, Social, Technological Analysis)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

END OF UNIT - III

THANKS

44
PROJECT MANAGEMENT By: Dr. Prateek Gupta
Capital Budgeting
Updated on: Aug 26, 2021 - 07:46:43 PM

10 min read

Capital budgeting is made up of two words ‘capital’ and ‘budgeting.’ In this context, capital
expenditure is the spending of funds for large expenditures like purchasing fixed assets and
equipment, repairs to fixed assets or equipment, research and development, expansion and the
like. Budgeting is setting targets for projects to ensure maximum profitability.

What is Capital Budgeting?

Capital budgeting is a process of evaluating investments and huge expenses in order to obtain
the best returns on investment.

An organization is often faced with the challenges of selecting between two

projects/investments or the buy vs replace decision. Ideally, an organization would like to
invest in all profitable projects but due to the limitation on the availability of capital an
organization has to choose between different projects/investments. Capital budgeting as a
concept affects our daily lives.

Let’s look at an example- Your mobile phone has stopped working! Now, you have two
choices: Either buy a new one or get the same mobile repaired. Here, you may conclude that
the costs of repairing the mobile increases the life of the phone. However, there could be a
possibility that the cost to buy a new cell phone would be lesser than its repair costs. So, you
decide to replace your cell phone and you proceed to look at different phones that fit your
budget!

What are the objectives of Capital budgeting?

Capital expenditures are huge and have a long-term effect. Therefore, while performing a
capital budgeting analysis an organization must keep the following objectives in mind:

Selecting profitable projects

An organization comes across various profitable projects frequently. But due to capital
restrictions, an organization needs to select the right mix of profitable projects that will
increase its shareholders’ wealth.

Capital expenditure control

Selecting the most profitable investment is the main objective of capital budgeting. However,
controlling capital costs is also an important objective. Forecasting capital expenditure
requirements and budgeting for it, and ensuring no investment opportunities are lost is the
crux of budgeting.

Finding the right sources for funds

Determining the quantum of funds and the sources for procuring them is another important
objective of capital budgeting. Finding the balance between the cost of borrowing and returns
on investment is an important goal of Capital Budgeting.

Capital Budgeting Process

The process of capital budgeting is as follows:

Identifying investment opportunities

An organization needs to first identify an investment opportunity. An investment opportunity

can be anything from a new business line to product expansion to purchasing a new
asset. For example, a company finds two new products that they can add to their product
line.
Evaluating investment proposals

Once an investment opportunity has been recognized an organization needs to evaluate its
options for investment. That is to say, once it is decided that new product/products should be
added to the product line, the next step would be deciding on how to acquire these products.
There might be multiple ways of acquiring them. Some of these products could be:

• Manufactured In-house
• Manufactured by Outsourcing manufacturing the process, or
• Purchased from the market

Choosing a profitable investment

Once the investment opportunities are identified and all proposals are evaluated an
organization needs to decide the most profitable investment and select it. While selecting a
particular project an organization may have to use the technique of capital rationing to rank
the projects as per returns and select the best option available. In our example, the company
here has to decide what is more profitable for them. Manufacturing or purchasing one or both
of the products or scrapping the idea of acquiring both.

Capital Budgeting and Apportionment

After the project is selected an organization needs to fund this project. To fund the project it
needs to identify the sources of funds and allocate it accordingly. The sources of these funds
could be reserves, investments, loans or any other available channel.

Performance Review

The last step in the process of capital budgeting is reviewing the investment. Initially, the
organization had selected a particular investment for a predicted return. So now, they will
compare the investments expected performance to the actual performance.

In our example, when the screening for the most profitable investment happened, an expected
return would have been worked out. Once the investment is made, the products are released
in the market, the profits earned from its sales should be compared to the set expected returns.
This will help in the performance review.

Capital Budgeting Techniques

To assist the organization in selecting the best investment there are various techniques
available based on the comparison of cash inflows and outflows. These techniques are:

Payback period method

In this technique, the entity calculates the time period required to earn the initial investment
of the project or investment. The project or investment with the shortest duration is opted for.

Net Present value

The net present value is calculated by taking the difference between the present value of cash
inflows and the present value of cash outflows over a period of time. The investment with a
positive NPV will be considered. In case there are multiple projects, the project with a higher
NPV is more likely to be selected.

Accounting Rate of Return

In this technique, the total net income of the investment is divided by the initial or average
investment to derive at the most profitable investment.

Internal Rate of Return (IRR)

For NPV computation a discount rate is used. IRR is the rate at which the NPV becomes
zero. The project with higher IRR is usually selected.

Profitability Index

Profitability Index is the ratio of the present value of future cash flows of the project to the
initial investment required for the project. Each technique comes with inherent advantages
and disadvantages. An organization needs to use the best-suited technique to assist it in
budgeting. It can also select different techniques and compare the results to derive at the best
profitable projects.

Conclusion
Capital budgeting is a predominant function of management. Right decisions taken can lead
the business to great heights. However, a single wrong decision can inch the business closer
to shut down due to the number of funds involved and the tenure of these projects.

What are Sources of Funding?

Companies always seek sources of funding to grow the business. Funding, also called
financing, represents an act of contributing resources to finance a program, project, or a need.
Funding can be initiated for either short-term or long-term purposes. The different sources of
funding include:

• Retained earnings
• Debt capital
• Equity capital
 PROJECT
MANAGEMENT

UNIT - IV

By
Dr. Prateek Gupta
Unit IV: Project Scheduling and Network Analysis

Estimating Time Accurately

• Time estimates drive the setting of deadlines for delivery of projects, and
hence people's assessments of your reliability.
• They often determine the pricing of contracts and hence their
profitability.

• Other high urgency tasks to be carried out which will have priority
over this one
• Accidents and emergencies
• Internal meetings
• Holidays and sickness in essential staff
• Contact with other customers, perhaps to arrange the next job
• Breakdowns in equipment
• Missed deliveries by suppliers
• Quality control rejections

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Scheduling The Project

Scheduling is an inexact process in that it
tries to predict the future (likelihood of
time to be incurred).

• identifying the tasks that need to be

carried out.
• estimating how long they will take.
• allocating resources.
• scheduling when the tasks will occur.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Process of Project Scheduling

• Milestone Chart
• Gantt Chart
• CPM
• PERT

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Milestone Chart
Milestones mark significant events in the life of a project usually critical
activities which must be achieved on time like:

• installation of equipment
• completion of a project
• file conversion
• cut over to the new system.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Gantt Chart
A Gantt chart is a type of bar chart that illustrates a project
schedule. Gantt charts illustrate the start and finish dates of
the terminal elements and summary elements of a project.
Terminal elements and summary elements comprise the work
breakdown structure of the project. Some Gantt charts also
show the dependency (i.e., precedence network)
relationships between activities. Gantt charts can be used to
show current schedule status using percent-complete
shadings and a vertical "TODAY" line as shown here.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Gantt Chart
Gantt Charts are useful tools for analyzing and planning
complex projects. They:
• Help you to plan out the tasks that need to be completed
• Give you a basis for scheduling when these tasks will be
carried out
• Allow you to plan the allocation of resources needed to
complete the project, and
• Help you to work out the critical path for a project where you
must complete it by a particular date.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Gantt Chart
To draw up a Gantt diagram, follow these steps:
1. List all activities in the plan
2. Head up graph paper with the days or weeks through
to task completion
3. Plot the tasks onto the graph paper
4. Schedule Activities
5. Presenting the Analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Gantt Chart
1. List all activities in the plan

For each task, show the earliest start date,

estimated length of time it will take, and whether it
is parallel or sequential. If tasks are sequential,
show which stages they depend on.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Gantt Chart
2. Head up graph paper with the days or weeks
through to task completion
3. Plot the tasks onto the graph paper
Plot each task on the graph paper, showing it
starting on the earliest possible date. Draw it
as a bar, with the length of the bar being the
length of the task.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Gantt Chart
4. Schedule Activities
Now take the draft Gantt Chart, and use it to
schedule actions. Schedule them in such a way
that sequential actions are carried out in the
required sequence. Ensure that dependent
activities do not start until the activities they
depend on have been completed.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Gantt Chart
5. Presenting the Analysis
The final stage in this process is to prepare a
final version of the Gantt Chart. This should
combine the draft analysis with your
scheduling and analysis of resources. This
chart will show when you anticipate that jobs
should start and finish.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Gantt Chart: Example

There are seven tasks, labeled A through G. Some tasks can be done
concurrently (A and B) while others cannot be done until their predecessor task
is complete (C cannot begin until A is complete). Additionally, each task has
three time estimates:
• the optimistic time estimate (O),
• the most likely or normal time estimate (M), and
• the pessimistic time estimate (P).

The expected time (TE) is computed as: (O + 4M + P) ÷ 6.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Gantt Chart: Example

Time estimates
Expected
Activity Predecessor Normal
Opt. (O) Pess. (P) time
(M)
A — 2 4 6 4.00
B — 3 5 9 5.33
C A 4 5 7 5.17
D A 4 6 10 6.33
E B, C 4 5 7 5.17
F D 3 4 8 4.50
G E 3 5 8 5.17

The expected time (TE) is computed as: (O + 4M + P) ÷ 6.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Gantt Chart: Example

Once this step is complete, one can draw a Gantt chart or a network diagram

Note
(1) the critical path is in red, (2) the slack is the black lines connected to non-critical
activities, (3) since Saturday and Sunday are not work days and are thus excluded from
the schedule, some bars on the Gantt chart are longer if they cut through a weekend.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Work Breakdown Structures

This is a technique to analyze the content of work and cost by breaking it down into its

component parts. It is produced by :-

• Identifying the key elements

• Breaking each element down into component parts

• Continuing to breakdown until manageable work packages have been

identified. These can then be allocated to the appropriate person.

• Below is a work breakdown structure for the recruitment of a new person

to fill a vacant post.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Work Breakdown Structures

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Responsibility Assignment Matrix

A Responsibility Assignment Matrix (RAM) describes the

participation by various organizations, people and roles in
completing tasks or deliverables for a project. It's used by the
Program Manager (PM) in clarifying roles
and responsibilities in cross-functional team, projects and
processes.

A RAM is also called a Responsible, Accountable, Consulted,

and Informed (RACI) matrix. The RACI matrix is a responsibility
assignment chart that maps out every task, milestone or key
decision involved in completing a project and assigns
which roles are Responsible for each action item, which
personnel are Accountable, and, where appropriate, who
needs to be Consulted or Informed.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Responsibility Assignment Matrix

• Responsible: Those who do the work to achieve the task.
There is typically one role with a participation type of
Responsible, although others can be delegated to assist in
the work required.
• Accountable: The one ultimately accountable for the correct
and thorough completion of the deliverable or task, and the
one to whom Responsible is accountable. In other words, an
Accountable must sign off (Approve) on work that
Responsible provides. There must be only one Accountable
specified for each task or deliverable.
• Consulted: Those whose opinions are sought; and with
whom there is two-way communication.
• Informed: Those who are kept up-to-date on progress, often
only on completion of the task or deliverable; and with
whom there is just one-way communication.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Responsibility Assignment Matrix: Example

A RAM can define what a project team is responsible for within each
component of the Work Breakdown Structure (WBS).

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Network Design

Network design is a category of

systems design that deals with data transport
mechanisms. As with other
systems' design disciplines, network
design follows an analysis stage, where
requirements are generated, and precedes
implementation, where the system (or relevant
system component) is constructed.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Project Network Diagrams AOA/AON

A project network illustrates the relationships between activities
/ tasks in the project.
Showing the activities as nodes or on arrows between event
nodes are two main ways to draw those relationships.
Two types of Network Logic:-
• Activity on Arrow (AOA)
• Activity on Node (AON)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Project Network Diagrams AOA

• With activities on arrow (AOA) diagrams, you are limited to showing only the
finish to-start relationships.
• That is the arrow can represent only that the activity spans the time from
the event at the start of the arrow to the event at the end.
• "Dummy" activities have to be added to show some of the more complex
relationships and dependencies between activities.
• Arcs = only indicate activities
• Nodes = events (activity start or end)
• Popularity declining
• Difficult to draw, therefore not much SW support
• Requires dummy activities to model dependency relationships

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Project Network Diagrams AON

• Activity on Node (AON) diagrams place the activity on the node, and the
interconnection arrows illustrate the dependencies between the activities.
• There are more flexible and can show all of the major types of relationships.
• Since the activity is on a node, the emphasis (and more data) usually can be
placed on the activity.
• Arcs = dependencies between activities. (Events not directly represented)
• Nodes = activities
• Popularity increasing
• Easy to draw, universal SW support (is a S/W tool)
• No artificial modelling constructs

The main difference between AOA & AON is AOA diagrams emphasize the
milestones (events); AON networks emphasize the tasks.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Planning the Project:

Project Plans Critical Path Analysis

• Critical Path Analysis and PERT are powerful tools

that help you to schedule and manage complex
projects.
• As with Gantt Charts, Critical Path Analysis (CPA)
helps you to plan all tasks that must be
completed as part of a project. They act as the
basis both for preparation of a schedule, and of
resource planning.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Critical Path Analysis

Drawing a Critical Path Analysis Chart

1. List all activities in the plan
2. Plot the activities as a circle and arrow
diagram

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Critical Path Analysis

1. List all activities in the plan

For each activity, show the earliest start date,
estimated length of time it will take, and
whether it is parallel or sequential. If tasks are
sequential, show which stage they depend on.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Example

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Critical Path Analysis

2. Plot the activities as a circle and arrow
diagram
• Critical Path Analyses are presented using
circle and arrow diagrams.
• In these, circles show events within the
project, such as the start and finish of tasks.
Circles are normally numbered to allow you to
identify them.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Critical Path Analysis

Figure 2: Simple Circle and Arrow Diagram

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Critical Path Analysis

Crash Action
• You may find that you need to complete a
project earlier than your Critical Path Analysis
says is possible. In this case you need to take
action to reduce the length of time spent on
project stages.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

PERT Analysis
Network analysis or PERT is used to analyze the inter-relationships between the
tasks identified by the work breakdown structure and to define the dependencies
of each task. Whilst laying out a PERT chart it is often possible to see that
assumptions for the order of work are not logical or could be achieved more cost
effectively by re-ordering them. This is particularly true whilst allocating
resources; it may become self evident that two tasks cannot be completed at the
same time by the same person due to lack of working hours or, conversely, that
by adding an extra person to the project team several tasks can be done in
parallel thus shortening the length of the project.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

PERT Analysis

PERT (Program Evaluation and Review Technique)

• PERT is a variation on Critical Path Analysis that takes a
slightly more skeptical view of time estimates made
for each project stage.
• Use the formula below to calculate the time to use for
each project stage:

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

PERT Analysis: Example

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Crashing in Projects
Crashing is the technique to use when fast tracking has
not saved enough time on the schedule. It is a technique
in which resources are added to the project for the least
cost possible. Cost and schedule tradeoffs are analyzed
to determine how to obtain the greatest amount of
compression for the least incremental cost.

The main reason for which project crashing is chosen is

precisely to speed up its conclusion. If the end date of
the project needs to be anticipated, the crashing allows
you to get the most compression of the planning with the
least impact and the lowest cost.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

Crashing in Projects

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit IV: Project Scheduling and Network Analysis

END OF UNIT - IV
THANKS

37
PROJECT MANAGEMENT By: Dr. Prateek Gupta
The development of realistic financial planning documents for a business is an important
process. The following pages provides you with tips, that if followed, will result in the
completion of financial forecasts worthy of presentation to lenders, investors, and others. The
development of a good financial plan takes a team effort which involves your internal
accounting / bookkeeping team, your external accountants, your management team, Alberta
Agriculture and Forestry staff, and you as the owner.

By reading through the content below you will receive a high- level understanding of the
following:

1. The purpose of good financial planning

2. The approach to arriving at realistic Start-up or Expansion Costs
3. The up-front homework and planning process in developing Key Assumptions for sales,
cost of production and general and administration expenses
4. The up-front homework and planning process required in developing Key Assumptions
for cash flow planning
5. An overview and an example of a Balance Sheet and Income Statement
6. The importance of accurate Cash Flow Planning
7. Overview of Key Financial Performance Ratios – purpose and formulas
8. Comments on suggestions for monitoring the financial plan developed

Tip: Remember it takes time, good research and a great team effort to achieve a realistic
financial plan on which good decisions can be made.

Introduction
Entrepreneurs, start-up companies and existing companies will utilize and require the
development of numerous financial documents during the planning and operational stages.
Each plays an important role in planning and managing your business. Some may be used in
the earliest stages - simply to determine whether or not your proposed or existing business is
feasible or sustainable. Others will be used to provide information that will enable you to attract
partners, investors or financing capital, while some will monitor and benchmark your business
activities on an ongoing basis.

The structure of your business will determine the variation and format of some of the financial
documents that you will utilize. The typical business structures are: sole proprietorship,
partnerships or corporations. Additional types of business structures may possibly include new
generation co-ops or joint ventures. Your financial and/or legal professional will assist you in
determining the structure best suited to your business needs.

Critical business decisions need to be made before you invest significant time and capital. It is
important to adequately complete market research, hold discussions with possible suppliers
and be able to place estimated costs into models that will enable you to more accurately
complete feasibility assessments.

The development of your financial documents is an important step in bringing your new start-
up business, or new product launch to reality. Once prepared, these financial documents will
assist you in attracting investors, satisfying the needs of your lenders, and monitoring your
business on an ongoing basis.
Building these documents requires utilizing key assumptions. These key assumptions are the
building blocks of information that are collected and used to develop your financial and
business plans - and to help make critical decisions based on solid information. Key
assumptions are critical to all aspects of the financial forecasts – balance sheets, income
statements, cash flow, business plans and so on. They include detailed forecasted sales
volumes; cost of sales, general administration expenses, and others.

• Questions and Answers About Farm Debt

Tip: It is important to understand that all three financial statements are related and connected
indicators of the business' feasibility, risk and profitability. (Balance Sheet, Income Statement,
and Cash Flow).

As you prepare your financial documents and business plans, you will need to document and
sort the information that is used to create these documents. A spreadsheet (or combination of
several spreadsheets) is one of the most effective tools for gathering, compiling and managing
this information.

Tip: Linking your spreadsheets to one another and merging the data together will make it much
simpler and faster to update your documents.

It is highly recommended that you discuss your business start-up or expansion idea in advance
with your financial coach so they can provide you with guidance in the key assumptions they
suggest or recommend. They may help you develop detailed spreadsheets, and provide
supporting comments.

Tip: The greater the accuracy of the key assumptions / information that is used in the initial
planning stages of your business - the greater will be your ability to make good business
decisions moving forward. Utilize your suppliers and other business contacts (as needed) to aid
you in gathering up-to-date information.

Not all assumptions require a detailed breakdown. Your financial professional will aid you in
finding the best spreadsheet tools suited to your needs. Every business is unique and therefore
each may require additional or specific information to be collected.

Start-up costs
What will it cost to get your business off the ground or implement expansion plans? Begin
collecting the data. Talk to potential suppliers for initial pricing of supplies and materials. If
you require capital, make some early inquiries to determine anticipated borrowing expenses
and terms.

As you collect your information, keep a record of the information you gather. Below is a simple
example of a common Start-up/Expansion Capital Worksheet. This example shows some of
the basic information that would commonly be used in a start-up business.

Combine and add your own specific information that is right for your business.
Tip: You should use startup cost planning for a start-up company and also when expanding
your business or launching a new product line. Customize the spreadsheet for your own
purposes.

Tip: The greater the accuracy of the key assumptions/information that is used in the initial
planning stages of your business - the greater will be your ability to make good business
decisions moving forward. Utilize your suppliers and other business contacts (as needed) to aid
you in gathering up-to-date information.

In addition to tracking the total estimated costs of starting up your business, this particular
spreadsheet example also allows you to assign the source(s) of the capital required.

Figure 1. Start-up/Expansion Capital Worksheet

Consider how long it will be before your business will be generating enough revenue to offset
expenses.

In this example, most of the monthly expenses have been multiplied by 3. In this case, this
ensures the expenses are covered until the business generates sufficient revenue to cover costs.

A spreadsheet can easily accommodate additional lines as required. You may wish to link
(merge) them together to quickly make changes and updates.
Missing or underestimating key expenses at this stage could be the difference between success
and failure.

Tip: You may come across items which require more in-depth data to be gathered or updating.
Colour-coding the spreadsheet entries may help you identify those areas. For example (as
shown in the example below) green areas may be used for items that you are very certain of.
Yellow shaded areas require some additional information, while red areas may mean you
require more extensive updating or critical information to be gathered.

Tip: It is important to have sufficient capital funding for the startup of your business. A startup
capital worksheet will help you to calculate how much is needed before you begin to generate
income.

Tip: Developing smaller spreadsheets will assist you in recapping the individual costs
associated with the project.

Remember: It isn't necessary to utilize a spreadsheet in all cases, as long as you are realistic in
your assumptions and you can support them when needed.

Figure 2. Startup Expenses Worksheet

Key assumptions
Key assumptions for planning forecasts
Similar to startup or expansion costs, you need to investigate and give careful consideration to
the development of other key data that would be utilized in the completion of the opening
balance sheet, forecasted profit and loss statements and the development of cash flows.

One of the first key assumptions that needs to be addressed in the startup of a new business
venture, and or expansion, is the source of equity and or debt. This would be the assumption
around the contributions to be made to the business by ownership, whether sole proprietor,
partners, or shareholders. Contributions can take the form of cash contributions through share
purchase, shareholders/partners loans, and contributions of assets in return for equity. You
would be advised to develop a spreadsheet that shows the timing and amount of each
contribution and the terms in which they are being made. The spreadsheet should show both
contributions and the formation of the business and throughout the planning period.

Key assumptions - cost of production and sales

Production costs need to be forecasted. The production cost is determined by your research and
accurate determination of the cost of all inputs that make up all your manufacturing costs.
These costs should include all material costs, labour, service and manufacturing overhead
requirements that are required in the development of your products.

Prior to forecasting your sales projections and revenue, you need to calculate a realistic cost
for your product(s) and break the cost down into a per unit basis. The cost must include all
production inputs: raw materials, utilities (power/water etc), packaging, handling expenses and
any other items involved in production. Labour costs associated with production should be
addressed here as well. Below is an example of a basic worksheet to calculate product cost.

Figure 3. Projected Production Cost Per Unit Worksheet

Tip: Once you calculate the input costs on a per unit basis, you can begin the sales and revenue
forecasts. Each individual product that you produce would require its own individual
calculations for these per unit costs.

Tip: If you manufacture a product, it is advisable that you include not only your material costs
in your cost of sales, but all manufacturing costs such as rent (only equipment rent) utilities
and labour - anything that is variable and related to manufacturing your product.
Key assumptions – pricing your product or service

Placing the right selling price on your product or service can be the difference between financial
success and failure. In order to price your product or service profitably, you need to take into
consideration many factors such as cost of production, your customer, your competitors and
how much value the market places on your product.

The cost of production includes both variable and fixed costs. This is a very important step and
is the foundation to establishing an accurate price for your product. Do not guess, know your
costs and be sure to include all costs.

Price is not the same as value. Value is a perception in your customer's mind. If you have a
unique product that the customer needs or wants, they will place a higher value on it. Your
price should reflect how much value your customer places on your product. If the product you
are producing is commonly available and you have considerable competition customers will
place less value on your product and it may be very difficult to establish a market share.

Critical Questions to ask yourself are:

1. Do you have a unique product with high consumer value?

2. Can you produce your product better or cheaper than all the other suppliers?
3. Do you have much competition?
4. What is the competition doing to maintain or grow their market share?
5. Will people buy your product over the competition and why?
6. How much would your customers be willing to pay?
7. Is there room for your product in the marketplace?

Answers to these and many other critical questions will require thorough market research and
other investigation efforts. Consider consulting a market analyst if you are unsure of your
product/service potential.

Once you have established that you have a product worthwhile to market, and you have
established a realistic price for your product (a cost price to produce, ship and market, plus a
profit margin) you can then determine if the market will support your venture.

Tip: Research into pricing of similar or like products can include the use of your own inquiries
into the marketplace, focus groups, trial markets or enlisting the assistance of professionals.

Key assumptions – general and administration expenses

One of the most significant expenses a business will incur is that of salaries (wages and
benefits). Create an accurate monthly estimate of your labour costs through each of your
planning stages. You will also need to project labour costs in your cash flow summaries, to
ensure your business can manage and meet payroll obligations. Below is an example of a labour
cost spreadsheet that also estimates the company costs of employee benefits. If you intend to
pay bonuses, you would simply add another row or rows as required. It will be critical to outline
your assumptions as to the timing of these bonuses as your financial advisor will require this
information to manage your cash flow. Bonuses should only be paid out if the company is
profitable.
Figure 4. Wages and Labour Worksheet

A larger version of the Wages and Labour Worksheet (PDF, 12 KB) is available for your
review.

Tip: Using a spreadsheet that allows you to easily make quick adjustments throughout the
forecasted year and handle changes (such as wage increases, personnel changes and so on),
will help you manage and prepare for your cash-flow requirements document.

In this particular spreadsheet example, the jobs have been highlighted in different colours. This
is to help assign their associated cost to either overhead costs (fixed) or cost of sales.

Often janitorial and maintenance services will be split between fixed costs and cost of sales.

Tip: You may wish to consider the development of additional spreadsheets to support other
general and administration expenses.

Tip: At times you may have special sales, (seasonal highs or lows) that affect your forecasts.
It is very important that you include in your key assumptions how you managed to arrive at
these various forecasted levels. Maintain a record of your specific assumptions in these areas.

Key assumptions - sales forecast

The preparation of your projected income statement is the planning for the profit of your
financial plan. The example below is for a single product, you would need to complete this for
each additional product and / or source of revenue.

Figure 5. Sales Forecast Worksheet

Tip: As you are developing your sales forecast, it is critical that you document and develop a
narrative in your business plan that can support your projections including the best estimate of
timing of the conversion of sales to cash. The assumption of the timing from invoice to
conversion of cash is required by your financial coach. Are these sales projections reasonable?
Can they be supported though signed orders, contracts or letters of intent from your customers?
Do you have a competitive advantage with your product that fills a consumer need or is at a
price better than anything else currently on the market? Can your operation's infrastructure
support the volume of sales? Lenders or investors will need evidence that these projections are
realistic. Over-estimating your sales forecasts could result in financial disaster.

Key assumptions – cash flow planning

To complete an accurate cash flow forecast it will be critical to make key assumptions
around the following:

1. The amount and timing of cash equity contributions by the owners

2. The amount and timing (advancements) of any loans that will be requested for approval
3. The timing and amount of payment for capital acquisitions (ie. land, building and
development)
4. The terms in which credit will be extended to clients – accounts receivable
5. an understanding of the terms to be provided by suppliers – accounts payable
6. You will need to obtain amortization tables for all loans applied for. This will provide
you with the interest and principal split required for both your income statement and
cash flow planning.
7. Make an assumption on how the general administration expenses are paid (general
administration expenses are paid in the month they are incurred)

Tip: In completing cash flow forecasts for existing businesses, to be accurate, the following
additional steps will be required:

1. The bank reconciliation for the previous month-end

2. Have an aged listing for all outstanding accounts receivable as at previous month-end
(you need to be prepared to make an assumption on how/if these accounts will be
collected otherwise if uncollectable, they are a bad debt expense)
3. Have an aged listing of accounts payable (and the timing of when they will be paid)
4. If any loan payments are in arrears, a plan to catch up and make them current
One of the first steps in the cash flow planning for the next year of an existing operation will
be to determine when opening accounts receivables will be collected in the next period and
when outstanding accounts payable will be paid in the next forecasted period.

Tip: Quite often the development of an initial cash flow statement will initiate a revised cash
flow statement that will include the additional financing required to fund the cash flow deficit.

The Balance Sheet

The Balance Sheet is a summary of the assets and liabilities and equity of a business at a
specific point of time. In addition it provides a picture of the financial solvency and risk bearing
ability of the business.

The Balance Sheet will vary slightly depending on the legal structure of your company whether
it is a sole proprietorship, partnership or corporation. This is an example of what a typical
balance sheet may look like for a corporate entity (Limited Company). If your business is a
sole proprietorship, the equity section of the balance sheet will simply be the difference
between the assets and liabilities - there will be no indication of original share capital reflected.
If you choose to operate the business as a partnership or corporation, the owners' equity section
will reflect the equity breakdown amongst partners depending on their percentage of
ownership.

Figure 6. Project Balance Sheet

A larger version of the Balance Sheet (PDF, 12 KB) is available for your review.

Tip: As mentioned, balance sheets will look different depending on corporate structures.

A Sole Proprietorship will not be showing any share capital. Equity will simply be the
difference between assets and liabilities. For Partnerships the equity portion will be shown as
per the breakdown amongst the partners. In a corporation, (as per the example on the left)
equity will be shown as share capital and retained earnings of the corporation. Shareholders
loans can be considered equity, only if they have been postponed in favour of the banks or
investors. Postponement means that shareholders cannot withdraw these loans without prior
approval.

If you operate as a Sole Proprietorship it is suggested that you keep your assets and liabilities
of your business separate from your personal assets and liabilities. Consult with your financial
advisor so they may advise you in the best way on how to manage your assets and liabilities.

Income Statement
The Income (Profit and Loss) Statement, commonly referred to as the P&L statement,
summarizes the revenue and expenses for a specific time period (one month, one quarter, one
year, etc.) The Projected Income Statement is a snapshot of your forecasted sales, cost of sales,
and expenses. For existing companies the projected income statement should be for the 12
month period from the end of the latest business yearend and compared to your previous results.
Any large differences in line items should be explained in detail.

Figure 7. Income Statement

A larger version of the Income Statement (PDF, 13 KB) is available for your review.

Tip: There will be no forecast in the income statement for the payment of taxes (for a sole
proprietorship) The main difference between a company, partnership and the sole
proprietorship is the area of taxes payable and remuneration. Your financial advisor will assist
you in how you will reflect this in your forecast(s). For example there may be no salary expense
in a sole proprietorship or partnership (they may be shown as withdrawals after profit
calculations whereas active shareholders' remuneration for wages and bonuses may be shown
as a management expense in the general administration section of the income statement.
Depreciation expenses could also be handled differently in a sole proprietorship if these assets
are utilized in the generation of revenues not associated to this venture. You are encouraged to
engage professional assistance in the creation of these documents. Your advisor will help you
complete these forms in accordance with general accepted accounting principles (GAPP).

Tip: If the whole area of financial documents is new to you, you may wonder the difference
between the income and cash flow statements. The income statement is your revenue and
expenses for a point in time. The revenue is recorded at the point it is earned, not when payment
is received and the expense is recorded at the time it is incurred, not paid. The cash flow
statement forecasts the assumptions as to when revenues from sales, and other incoming funds
are going to be received, and the assumptions on the timing of paying of expenses, capital
purchases, and any loan repayments.

Cash flow projections

Once you have made your sales projections based on volume, calculate the cash flow
projections by converting your sales volumes into income. In the example below accounts
receivable are shown based on cash sales with 30- 60- and 90-day receivables. Deduct outflows
from all cash inflows and you will be able to predict your cash flow requirements for each
month. If you find yourself in a negative position, it becomes a critical decision whether or not
to move forward, with your business unless you can make valid adjustments to either your
inflows or outflows through the extension of accounts payable or approved operating lines of
credit. These options should only be considered if in future months there will be cash excess to
pay down operating loans and or accounts payable.

For a new business, the cash flow forecast can be more important than the forecast of the
Income Statement because it details the amount and timing of expected cash inflow and
outflows. Usually the levels of profits, particularly during the startup years of a business, will
not be sufficient to finance operating cash needs. Moreover, cash inflows do not match the
outflows on a short-term basis. The cash flow forecasts will indicate these conditions and if
necessary the aforementioned cash flow management strategies may have to be implemented.

Given a level of projected sales, associated expenses and capital expenditure plans over a
specific period, the cash flow statement will highlight the need for and the timing of additional
financing and show your peak requirements for working capital. You must decide how this
additional financing is to be obtained, on what terms and how it is to be repaid.

Figure 8. Monthly Cash Flow Projection

A larger version of the Monthly Cash Flow Projection (PDF, 18 KB) is available for your
review.

Tip: A good cash flow projection should forecast monthly amounts for month end receivables,
payables and inventory. This information is often required so that management can calculate
their operating loan margin requirements as stipulated by their lender. Forecasting these month
end numbers and testing them against margin conditions, in advance, eliminates challenges you
may experience with your lender if your unable to meet your conditions at a later date. Being
able to test these numbers, allows you to alter your financial projections and take alternative
measures.

Tip: The advantage of good upfront homework to arrive at realistic key assumptions will
greatly assist your professional advisor, who may utilize existing financial automated
spreadsheet planning and analyst tools. You should also be prepared to provide identified
"what-if" scenarios (changes to revenues, cost of sales expenses and assumptions impacting
cash flow) so that alternative projections could be quickly produced to provide for risk analysis.

Financial ratios
Ratios are useful when comparing your company with the competition on financial
performance and also when benchmarking the performance of your company. Ratios can
measure your company's performance against the performance of other companies. Most ratios
will be calculated from information provided by the financial statements. Financial ratios can
analyze trends and compare your financial status to other similar companies. They can also be
used to monitor your company’s overall financial status. In the table below, many of the
common ratios are shown along with the formulas that are used to calculate them.
Figure 9. Ratio Analysis

A larger version of the Ratio Analysis (PDF, 24 KB) is available for your review.

Liquidity ratios provide information about your company's ability to meet its short term debt.
The Current Ratio and Quick Ratio (also known as the acid test) represent assets that can
quickly be converted to cash to cover creditor demands.

Asset Turnover Ratios indicate how well you are utilizing your company's assets. Receivable
Turnover, Average Collection Period and Inventory Turnover are the main tools to monitor
your assets.

Financial Leverage Ratios indicate your financial state and the solvency of your company.
They measure your company's ability to manage and use long term debt. The Debt Ratio and
Debt-to-Equity (Leverage Ratio) Ratio are used in these calculations.

Profitability Ratios include Gross Profit Margin, Return on Assets and Return on Equity ratios.
These ratios primarily are used to indicate your company's ability to generate profits, and return
to the shareholders' investments.
Your financial advisor will assist you in these ratio calculations and utilize the ones that best
measure your company's financial well-being.

Monitoring your financial plan

If you are new or uncomfortable in working with your financial business plan, work with a
financial advisor who can guide you through the processes involved in continually monitoring
the financial affairs of your business or business venture.

Keep your information current and review the documents on a regular basis (monthly or more
often if needed). Review them with key individuals within your company.

Utilize monthly financial statements as part of your business management process. By

reviewing these documents monthly, you will be prepared to make changes if and when
necessary, always compare changes between your actual performance and your previously
forecasted projection.

Use these documents to make adjustments to your business' financial plan or strategies. Use
them to plan new initiatives or new product launches.

A simple checklist such as the one below may help you in your ongoing management practices.

Figure 10. Monthly Financial Plan Checklist

A larger version of the Monthly Financial Plan Checklist (PDF, 10 KB) is available for your
review.

Tip: Create and customize your own monthly checklist that helps you to be in control of the
day to day operations. Take immediate action if you find areas that need attention on anything
appears to be questionable.

Review these suggested tasks with your financial advisor to see if he or she has other
recommendations to add.

Tip: If Key Performance Indicators (KPI) are not being met, an action plan needs to be
implemented.

Conclusion
The information provided here provides guidelines and examples from which to begin the
development of your own financial documents or business plan. Every company has a unique
set of circumstances and due diligence is required on your part to seek out professional
guidance in preparation of these important documents. The more you are able to accurately
forecast and estimate your expenses, sales volumes and revenues – the more you will be able
to make sound business decisions to proceed, stop or alter your business plans moving forward.

As you complete your documents, time will pass and some of the key assumptions in the
information will change. Keep this information current; update the most critical assumptions
regularly. Maintaining accurate up-to-date financial documents will enable you to have
accurate information to present to a lender or potential investor. These documents will provide
you with the management tools you need to make sound business decisions at any time.

Tip: Before a business and financial justification can be made to proceed with a start-up
business or expansion, the target market must be sharply defined and the product concept and
positioning strategy must be confirmed. The benefits to be delivered and the value proposition
must also be defined and validated, as well as the physical attributes of the product features,
specifications, and performance requirements. All costs of the proposed plans need to be well
investigated and key assumptions documented.

It will be important to review the core competencies and determine additional resources and
capabilities needed to achieve the financial plan. You need to clearly have a plan for sourcing
additional resources, partnering, or outsourcing. Your financial plan is a way to clearly
demonstrate the financial costs of that execution strategy. Ensure you have considered
everything required to achieve your goals, and planned for their costs in your plans.

A good financial plan developed with the assistance of financial professionals will be
invaluable to ensuring good decisions are made.
The projected income statement shows a company’s profitability. It reports on the making
and selling activities of a business over a predetermined period of time: typically a month,
quarter, or year.

Sales – (Costs + Expenses) = Income

Let’s start with sales. You record sales on the income statement when product is shipped or a
service is performed. It is important to note that sales do not occur when the product is
ordered or the service is scheduled. The sales figure used is the net sales figure; in other
words, the true price paid when discounts are applied.

You may be asking yourself why orders aren’t included in the sales figure: Orders create a
backlog, but they don’t generate income until they become a sale. Receiving an order does
not guarantee a sale.

Only once you ship the product or perform the service is there a sale. Until that time, it’s
simply an order — a product order or a service order. Accountants often refer to sales as
revenue.

Costs, in comparison, are expenditures. They can include materials, wages, contractor fees,
and general overhead.

Basically, costs are what you spend either to buy or make an item or to perform a service.
With physical products, this figure is taken out of inventory and entered into the income
statement as an expense and is termed cost of goods sold.

This can be a bit confusing. The basic rule is that costs lower cash values while increasing
inventory on the balance sheet. The total value remains the same, but the distribution of
goods is altered.

When inventory is sold, its value moves from the balance sheet to the income statement. In
other words, a potential sale has become a true sale. Product in inventory was shipped to the
customer.

At this point, let’s clarify two terms that can sometimes be confusing and unknowingly
interchanged: cost and expense. Both differ from expenditure.

Costs are manufacturing expenditures. What is needed to build up your inventory falls under
this category.

Expenses are everything else. They can include the general and administrative areas of your
business: everything from the copy machine to the salesperson’s mileage, and his or her
salary or commission. Consultations with your accountant are expenses, for example.

Expenses impact the income statement because they lower the income tally. Both costs and
expenses are expenditures.

Not to confuse matters more, there is a special category of expenses known as operating
expenses. These are the expenses that a company experiences while trying to generate an
income and can include sales and marketing, research and development, and general and
administrative expenses. You may find them listed on the sample financial sheets as SG&A
expenses, representing sales, general, and administrative expenses.

And now we get to the bottom line of the equation — income.

Income occurs when the sales total exceeds costs and expenses. Now, you’ve made a profit!
This is every business’s goal.

Up until the point where you make a profit, you’ll experience a loss.

Income can also be referred to as profit or earnings. And for that reason, the income
statement itself can be called the profit and loss statement or P&L or earnings statement.

There are two ways to handle a company’s books or records — cash basis or accrual basis.

In a cash-based system, income is measured when cash is actually received and expenses are
measured when cash is actually spent. It’s a real-time scenario.

In comparison, an accrual-based system occurs when an accounting system is based on when

the transaction itself takes place and not on when the cash physically exchanges hands.

Most companies use a cash system. In a cash-based system, the income statement and the
cash flow statement are the same.

Carol Parenzan Smalley is an educator, innovator, and entrepreneur. She is the creator of
and instructor for Creating a Successful Business Plan, an online course offered by colleges
and universities around the world.

Projecting Income Statement Line Items

When building a three statement model, it becomes necessary to get into the habit of
projecting income statement line items. Being able to project the main line items of the
income statement should become second nature. Each specific line item will have drivers that
impact their future values. In fact, if a specific financial model you are using is similar to
another company that you need to model, you may even be able to copy the model directly,
and simply replace the historical values.

Main Line Items to Forecast

The following are the main accounts that need to be covered when projecting income
statement line items:

• Sales Revenue
• Cost of Goods Sold (or Gross Revenue)
• Total or Specific General Expenses (SG&A)
• Depreciation Expense
• Interest Expense
 • Tax Expense

By including all of the above (and more, if necessary), you can arrive at net income, or the
bottom line of the income statement.

Below is a screenshot from one of CFI’s financial modeling courses of the main drivers of an
income statement forecast.

Source: CFI’s financial modeling courses.

Sales Revenue

Projecting income statement line items naturally begins with the top of the income statement.
This is the sales revenue. All subsequent line items will usually be based on the sales revenue
value.

Sales revenue can be forecasted in several different ways. First, you can model sales revenue
as a simple growth rate from previous years. This means that any subsequent year is the past
year’s sales revenue multiplied by one plus the growth rate.
Second, you can model sales revenue as a factor of GDP or some other macroeconomic
peg/metric. This means that revenue for each year will depend on a regression formula based
on historic sales revenue and the input of that year’s GDP (or other metric).

Finally, you can model sales revenue as a simple dollar value. This method of forecasting is
the least dynamic and, usually, the least accurate. However, it is available when quick and
dirty sales revenue forecasts are needed.

Cost of Goods Sold (or Gross Profit)

The next step is to forecast Cost of Goods Sold. By doing so, we can subtract COGS from
revenue to find Gross Profit. Alternatively, Gross Profit can be forecast, and then we can
mathematically find Cost of Goods Sold.

Regardless of which line item we choose to forecast, the method is simple. Most of the time,
the simple percentage of sales revenue method will suffice. We take past figures of Cost of
Goods Sold (or gross profit) over sales revenue and use these percentages to predict future
percentages.

Alternatively, a more robust model may model out specific cost of goods items. These may
be split into raw material, work in progress, finished goods, labor costs, direct material costs,
or some other line items, depending on business operations. These can be forecast as
percentages of sales revenue as well, or by using whole dollar values.

Selling, General, and Administrative Expenses

A simple and clean model will elect to forecast the total Selling, General, and Administrative
(SG&A) expense as one line item. This is easily done with the percentage of sales method.
However, a more robust model may want to break out SG&A into individual components,
which is a more involved method. This is because each individual line item will have
different drivers.

For example, rent expense will generally be fixed every month, so a fixed dollar value will be
more appropriate than a percentage of sales revenue. However, advertising expenses may be
correlated with sales revenue, so, in this case, the percentage of sales may be more accurate.
There may also be “one-off” line expenses that do not appear every month. We discuss this
more in our article on financial statement normalization.

There are also two line expenses that sometimes appear under SG&A that need specific
forecasting work. These are depreciation expense and interest expense.

Depreciation Expense
Depreciation expense ties the gradual usage of machinery and PP&E to their benefit of
generating revenue. Because the economic benefit (revenue) of using PP&E lasts more than
one accounting period, the matching principle dictates that their expense must also be accrued
over more than one accounting period.

We forecast depreciation expense through the use of a depreciation schedule. This shows us
the opening balances of PP&E, any new capital expenditures, and the closing balance of
PP&E. Through historic balances and CapEx, we can find historic depreciation expense.
These values can then be used to predict future depreciation expense and capital
expenditures.

Depreciation expense can be forecasted in the schedule using a percentage of the opening
balance or any of the depreciation accounting methods. If we know the company’s
depreciation policy, then we can directly apply straight-line, units-of-production, or
accelerated depreciation to find the proper expense values.

Learn more about the various types of depreciation.

Interest Expense

Interest expense is found through using the debt schedule. This schedule outlines each
individual piece of debt on their own schedule, and sometimes makes a summary schedule
that totals all balances and interest expense.

Interest expense is found by multiplying the opening balance in each period with the interest
rate. This interest expense is then added back to the opening balance, and is then reduced by
any principal repayments, to find the closing balance.

Tax Expense

Finally, we arrive at the last line item to find tax expense. Tax expense is found as a
percentage of earnings before tax (EBT). This percentage is known as the effective tax rate or
cash tax rate. EBT must be found by subtracting all the previous expense line items from
sales revenue. After multiplying EBT with the historical effective tax rate, we are able to
forecast future tax expense.

Putting it all together

After projecting income statement line items, the income statement is found as follows:

• Sales revenue
• Less cost of goods sold
• Gross profit
 • Less SG&A
• EBITDA
• Less Depreciation Expense
• EBIT or Operating Income
• Less Interest Expense
• EBT
• Less Tax Expense
• Net Income

What are projected balance sheets?

Projected balance sheets, or pro forma balance sheets, are the statements that show estimated
changes to a company's financial status, including investments, other assets, liabilities and
financing for equity. Company owners or accounting professionals perform projections to
understand more about the business and anticipate income and expenses for a future period of
time. Here are the descriptions of the main line items you'll likely find on a projected balance
sheet:

• Assets: A business asset is anything that a company owes. Assets usually affect the
perceived and calculated value of a business and can fall into different categories, like
fixed, tangible, intangible, operating and non-operating. Some examples of assets
include items like machinery, computer software, office equipment, intellectual
property and any cash.
• Liabilities: A company's liabilities are those line items that the organization owes.
Some common liabilities include mortgage debt, employee wages the company owes,
owed taxes and any items that appear on the accounts payable sheet that indicates
what the company need to pay to vendors and suppliers.
• Equity: Equity is the amount that company shareholders would receive if all
liabilities are paid. You can calculate equity by subtracting a company's total
liabilities from its total assets. For example, if the total liabilities for a business equals
 $100,000 and the total assets equal $120,000, then the equity in the business is
$20,000.

Related: FAQ: Balance Sheets and Their Purpose

Why is having a projected balance sheet important?

Projected balance sheets are important because they can facilitate strategic and effective
planning for the business. Before company executives and owners can properly the form
long-term plans they may have for the business, it's crucial that they understand more about
the growth of the company, including how assets should grow, which debts the organization
must acquire and the equity it holds for shareholders.

Through building a projected balance sheet, you're able to see the relevant financial details
you need to plan accordingly, which can include hiring more employees, securing more
investors, expanding operations or buying equipment that will improve productivity and lead
to increased sales. Without a projected balance sheet, you may not be aware of what steps
your business can take to reach its goal or be able to communicate why an individual or
business should supply capital to the company.

Related: Definitive Guide To Creating a Sales Forecast

How to create a projected balance sheet

If you need to create a projected balance sheet for your company, here are some steps to
follow to do so:

1. Create a format for the projected balance sheet

A projected balance sheet is something you can create many times over, especially since they
are usually used to project balances for a specified time period. You may want to make a
balance sheet before a merger, prior to a sales presentation or periodically to make sure
you're keenly aware of what the next few months of the business should look like to
determine if you can make a large purchase or expand operations in some way.

With a formatted projected balance sheet, you can easily adjust the assets, liabilities and
equity for the time period you're working within and not have to spend the time and effort in
recreating one each time. Consider using an accounting program or spreadsheet software to
make this easier and so that you have a consistent format that anybody adjusting or reviewing
can understand.

Related: Software for Accounting: What It Is and How To Choose It

2. Gather past financial statements

Unless you're a startup without previous financial statements, gather any statements you may
have. Accountants and other financial experts use the past financial statements of an
organization to make accurate projections about the financial future of the company through
analyzing trends and reviewing ongoing assets and liabilities that they already include on
current balance sheets. Try to gather at least two years of financial data so your projections
are as accurate as possible.

3. Review your past and ongoing assets and liabilities

Examining these items can further prepare you for completing a projected balance sheet
because you'll be reminded of and more aware of the assets you have had, the assets you
currently have and the prior and present liabilities. With these line items displayed, you'll be
in a better position to determine if those same assets and liabilities should appear on the
projected balance sheet you're creating. For example, a mortgage debt liability that the
company has paid will not need to appear on a projected balance sheet, but an ongoing debt
that has recurring payments will.

Keep in mind that assets can change depending on sales, amount of inventory and any capital
the business receives. While certain assets and liabilities may continue to appeal on balance
sheets, it's important to take each line item individually to determine if it's a consequential
part of creating a projected balance sheet.

4. Project your fixed assets

Fixed assets are tangible and more long term for the business because it's an asset that the
organization regularly uses, like production machinery or company vehicles. Fixed assets are
an easy addition to any projected balance sheet, but remember to account for depreciation.
Depreciation is the reduction in value that an asset experiences the more it's used, especially
if there is normal wear and tear present. Each year, the line items you include under assets
may remain the same, but have less worth as time goes on, which is important to consider
when building a projected balance sheet.

5. Estimate the company's debt

If you've been overseeing the company's debts, it should be a quick process to estimate how
much debt the business will have during the time period you're covering in the projected
balance sheet. Review the current debts you have, including the amounts, the payments you'll
owe and pay over the next months and when the debt should be completely paid off. With
this information you'll be better able to know which debts to include on the projected balance
sheet and in what amounts.

6. Forecast your equity

To forecast your equity, review last year's equity, calculate the company's net income,
account for your dividends and add in any changes to equity. When you're able to accurately
forecast equity, you're estimating the earnings for the business that can pass along to the
stakeholders. This is also important information for investors who want to feel assured that
their investment will give them a healthy return.

Projected balance sheet example

Review this example of a projected balance sheet for inspiration when creating your own:
Antonio's Granite

Total Assets
Cash$15,000Inventory$12,000Machinery$67,000

Total Liabilities
Taxes payable$11,000Wages owed$24,000Accounts payable$13,000

Equity
Invested capital$30,000Retained earnings$22,000
 The Projected Cash Flow Statement

Freddie L. Barnard, Assistant Professor of Agricultural Economics

A projected cash flow statement is used to evaluate cash inflows and outflows to deter. mine
when, how much, and for how long cash deficits or surpluses will exist for a farm business
during an upcoming time period. That information can then be used to justify loan requests,
determine repayment schedules, and plan for short-term investments. This publication
focuses on preparing and using a projected cash flow statement in managing the farm
business.

A projected cash flow statement is best defined as a listing of expected cash inflows and
outflows for an upcoming period (usually a year). Anticipated cash transactions are entered
for the subperiod they are expected to occur. The length of the subperiod depends upon
whether a monthly or quarterly cash flow statement is used. The word cash is crucial in this
definition, because only cash items are included in a cash flow statement.

Cash inflows include cash operating and capital receipts and can include nonfarm as well as
farm revenues. Cash outflows usually include such things as farm operating and capital
outlays, family living expenses, and loan payments. However, if the farming operation is
completely separate from the family, living expenses would not be included in the cash flow
statement for the farming operation. An example of such an arrangement would be a farm
that is incorporated and pays salaries to family members. Also included in the list of cash
outlays are debt repayment commitments, both principal and interest.

What Information Is Provided?

Operating expenses are usually not paid evenly over the course of a year for many farm
enterprises. Also, marketing patterns for many farm products are not evenly distributed
throughout the year. Therefore, revenues usually do not flow into the business, and expenses
do not flow out of the business on an equal and regular basis during the year. This results in
periods of cash deficits and surpluses.

Knowledge of the amounts of cash deficits and surpluses and the timing and duration of each
aids tremendously in setting up a line of credit with a lender. The projected cash flow
statement clearly identifies when loan funds will be needed and when the lender can expect to
be repaid. This information is extremely useful in justifying loan requests, especially during
financially stressful times.
In addition, a projected cash flow statement enables the user to identify the amount and
duration of cash surpluses, which is useful when deciding among the various short-term
deposit instruments currently available to the investor (i.e., 3-month certificates, 6-month
money market certificates, money market funds, etc.).

Of course, the accuracy of the information provided by a projected cash flow statement
depends upon the accuracy of revenue and expense projections, the detail included in the cash
flow statement, and whether the statement is prepared for quarters, months, or even weeks.
Even though it may lack accuracy be cause of being an estimate, a projected cash flow
statement does provide a projection of expected cash deficits and surpluses, which can be
updated as the year progresses.

How Is The Statement Organized?

Perhaps the best way to understand how a projected cash flow statement is organized is to
think in terms of a calendar, with the columns representing the subperiods for the planning
period used in the projection. Usually the planning period is one year, but the subperiods can
be as detailed as you desire. The subperiods can represent quarters, months, and even weeks.

The rows represent various categories for the beginning cash balance, cash receipts, cash
expenses, borrowing, saving, and the ending cash balance. Of course, the beginning cash
balance for each subperiod is the ending cash balance for the previous subperiod.

A very simplified cash flow statement has been adapted from a statement developed by
Thomas L. Frey and Danny A. Klinefelter (Coordinated Financial Statements for
Agriculture) and is used to explain how a projected cash flow statement is organized (handout
1). The statement used here is a quarterly state ment for one year and consists of 5 columns; a
column for each of the 4 quarters plus one for projected annual totals. The number of lines
necessary to list revenues and expenses depends upon the number needed to account for all
revenue and expense items for the farming operation. The simple organization of this
statement would make it inadequate in many farming operations. It is used here to teach the
mechanics of cash flow budgeting.

HANDOUT 1. Projected Cash Flow Statement

Projected
Entry Quarter Quarter Quarter Quarter
totals
---------------------------------------------------------------------------
----------------
1. Beginning cash balance
(all readily available
funds)_____________________________________________________
Operating receipts: xx xx xx xx
xx

2. Grain and feed

_____________________________________________________
3. Livestock and poultry
_____________________________________________________

4. Custom work
_____________________________________________________

5. _________________________
_____________________________________________________
Capital receipts: xx xx xx xx
xx

6. Breeding stock
_____________________________________________________

7. Machinery and equipment

_____________________________________________________

8. __________________________
_______________________________________________________
Nonfarm income: xx xx xx xx
xx

9. Off-farm wages

10. Total cash available

(add lines 1 thru 9)
_____________________________________________________
Operating expenses: xx xx xx xx
xx

11. Fertilizer and lime

_____________________________________________________

12. Seed and chemicals

_____________________________________________________

13. Machine operation and

drying
_____________________________________________________

14.__________________________
_____________________________________________________

15.Total cash operating

expenses (add lines
11 thru 14)
Livestock and feed
_____________________________________________________
purchases: xx xx xx xx
xx

16. Feeder livestock

_____________________________________________________

17. ______________________
_____________________________________________________
Capital expenditures: xx xx xx xx
xx

18.Machinery and equipment

_____________________________________________________
19.__________________________
_____________________________________________________
Other expenses: xx xx xx xx
xx

20. Family living

_____________________________________________________

21. Intermediate and long-term

loan payments (principal)
_____________________________________________________

22. (interest)
_____________________________________________________

23. Total cash required (add

lines 15 thru 22)
_____________________________________________________

24. Cash available less cash

required (line 10 minus
line 23)
_____________________________________________________

25. Inflows from savings

(principal)
_____________________________________________________

26. (interest)
_____________________________________________________

27. Cash position before

borrowing and after
savings_____________________________________________________

28. Money to be borrowed:

(Operating loans)
_____________________________________________________
(Intermediate and long-
term loans)
_____________________________________________________

29. Oper. loan payments

(principal)
_____________________________________________________
(interest)
_____________________________________________________

30. Outflows to savings

_____________________________________________________

31. Ending cash balance

_____________________________________________________
Loan balances (at end of
period): xx xx xx xx
xx

32. Current year's oper. loans

_____________________________________________________
33. Previous year's oper.
loans_____________________________________________________

34. Intermediate and long-term

loans
_____________________________________________________

35. Total loans

_____________________________________________________
---------------------------------------------------------------------------
--------------

Cash Available

The first line of any cash flow statement is usually the beginning cash balance for the period.
That balance includes all readily available funds (i.e., checking accounts, cash, mutual funds
with checkwriting privileges, or arrangements for transferring funds to a checking account,
etc.).

The next section is the receipt section, which is divided into three subsections: operating
receipts, capital receipts, and nonfarm income. Operating receipts (lines 2-5) include receipts
from crops, livestock, custom work, government payments, hedging account withdrawals,
and any other cash receipts to the farm business. Each projected cash receipt is entered in the
quarter that the cash is expected. It is usually a good idea to include several blank lines
throughout the form (line 5 for example), so that the statement can be tailored to meet your
needs.

Capital receipts (lines 6-8) are cash inflows from the sale of capital items, such as breeding
livestock, machinery, and equipment. Also, only the amount of cash expected to flow into the
operation is entered. If farmer A expects to trade a boar to farmer B and receive $50 in cash
plus his new boar, only the $50 is entered in farmer A's projected cash flow statement. That
amount is entered in the quarter that the cash is expected.

Nonfarm income includes off-farm wages (line 9) and cash received from interest payments,
dividends, and other nonfarm sources. The total cash available for the quarter (line 10) is then
calculated by adding the beginning cash balance, operating receipts, capital receipts, and
nonfarm income.

Cash Required

The expense section is divided into four subsections: operating expenses, livestock and feed
purchases, capital expenditures, and other expenses. Operating expenses (lines 11-14) include
such things as seed, fertilizer, breeding expenses, real estate and property taxes, insurance,
utilities, and veterinary. The amount for each item is entered in the quarter when it is
expected to be paid, which may be different from when you actually take possession of the
item.

The next subsection is labeled livestock and feed purchases (lines 16 and 17) and includes
cash expenses for feeder livestock as well as for purchasing breeding livestock. Also included
are cash outlays for feed.
The third subsection is labeled capital expenditures (lines 18 and 19) and includes cash
outlays to purchase machinery, equip ment, buildings, and improvements. If the dealer is to
be paid in full and you borrow the money from another lender (i.e., commercial bank, PCA,
etc.), the entire amount to be paid is entered in the appropriate quarter. The cash flowing into
the operation from the loan will be discussed later.

Other expenses (lines 20-22) can include hedging account deposits, gross family living
withdrawals, nonfarm business expenditures, and income tax and social security payments.
Also included in this section are principal and interest payments due for intermediate and
long-term loans. The total cash required for the quarter (line 23) is calculated by adding all
expenses projected for the quarter.

The Cash Position

Subtracting total cash required (line 23) from total cash available (line 10) yields the cash
position before borrowing and inflows from savings. If the cash position is negative or below
a specified amount, you can transfer any money available in savings to the checking account
(lines 25 and 26).

If the cash position before borrowing and after savings (line 27), is still negative or below
some specified amount, you must borrow those funds needed to satisfy the deficit and/or
maintain the minimum amount desired in the checking account. Line 28 provides a place to
enter operating, intermediate, and long-term borrowing.

A line is also needed to schedule principal and interest payments for operating loans (line 29),
which lenders usually require to be repaid during the upcoming 12 months from the proceeds
of the enterprises financed. For example, if operating funds are borrowed in the spring to
plant the corn crop, those funds are usually scheduled to be repaid when the corn is expected
to be sold. Of course, if the corn is stored and expected to be sold the next year, then the
payment should be scheduled the next year.

Two additional lines are needed to account for any cash remaining at the end of the period
(lines 30 and 31). First, when the amount of cash is greater than the minimum balance
desired, the excess will likely be invested in a short-term security, money market fund, etc.
Therefore, a line is needed to account for funds flowing out of the farm business and into
some type of savings or short-term investment (line 30). This line is necessary since that
amount of cash will not be available for use by the farm business until either the security
matures or until the funds are withdrawn by the operator. Line 31 is the ending cash balance
for the quarter. This is also the beginning cash balance for the next quarter.

The cash position for each quarter is then calculated sequentially as described above, until the
ending cash balance for the last quarter is calculated. That amount then becomes the
beginning cash balance for the first quarter of the next year's projected cash flow state ment.

The last four lines (32-35) enable the borrower to keep a running total of the various loan
balances. The lines are labeled to distinguish between current year operating loans (line 32)
and operating loans remaining from a previous period (line 33). This information is extremely
useful when applying for a line of credit from a lender, because the lender needs to know the
maximum amount expected to be outstanding as well as amounts expected to be outstanding
throughout the year, The balances for each period are increased or decreased as funds are
disbursed and payments are made.

Intermediate and long-term loan balances are on a separate line (line 34) and can be increased
or decreased as additional funds are borrowed or payments made. The total loan balance
outstanding each period can then be calculated by summing the loan balances outstanding for
each type of loan and recording the total on line 35.

An Example--Fred Farmer

To illustrate how a projected cash flow statement is prepared, an example is used to describe
the anticipated cash transactions for a hypothetical farm operator, Fred Farmer. The
information describing this farming operation is presented in handout 2. To understand the
mechanics of completing a projected cash flow statement, the example will be used first to
complete an annual projected cash flow statement. Therefore, the information from handout 2
will be entered in the column labeled Projected Totals.

An Annual Projected Cash Flow Statement

In this simple example, transfer the information contained in handout 2 to the projected total
column for your projected cash flow state ment (handout 1). To check yourself refer to Figure
1, as the transactions are discussed in the following paragraphs.

HANDOUT 2. Projected Cash Flow Statement Exercise

Cash transactions expected during the upcoming 12-month period:

1. The cash balance on January 1 is $2,500. (Line 1).

2. Corn to be sold during the upcoming year should generate $26,250. (Line 2).

3. Off-farm wages for the upcoming year are expected to equal $20,000. (Line 9).

4. Operating expenses of $12,500 are expected for the upcoming year. (Line 15).

5. A new piece of machinery costing $6,000 will likely be purchased; $5,000 will be
borrowed from the local bank. (Line 18).

6. Family living expenses of $16,000 are expected during the upcoming year. (Line 20).

7. Intermediate and long-term principal payments on loans are expected to equal $11,000,
with another $12,250 due in interest. (Lines 21 and 22).

8. The farmer has a money market fund for emergencies that currently has a balance of
$5,000. This money will be used before additional money is borrowed.
On January 1, there is $2,500 in cash, or in the checking or negotiable order withdrawal
account, or perhaps in a money market fund with checkwriting provisions. Remember, this
balance is the amount at the end of the previous year. It is entered on line 1.

Next, expect $46,250 to flow into the operation during the upcoming period. This is found by
adding the $26,250 from the sale of crops (line 2) to the amount of money flowing into the
operation from an off-farm job, $20,000 (line 9). Thus, the total cash available is $48,750
(line 10).

Also, expect $57,750 to flow out of the operation during the upcoming year. This is found by
adding operating expenses of $12,500 (line 15), capital expenditures of $6,000 (line 18),
family living of $16,000 (line 20), and intermediate and long-term loan payments of $23,250;
$11,000 in principal (line 21) and $12,250 in interest (line 22).

The cash position at the end of the year would be minus $9,000 (line 24), which is not a
desirable way to end the year. At this time Fred must think about ways to obtain some
additional cash. This can be accomplished by increasing cash available, reducing cash
required, bringing in savings, or borrowing.

FIGURE 1. Projected Cash Flow Statement

Line Projected
no. Item totals
---------------------------------------------------------------------------
------
1. Beginning cash balance $ 2,500
2. Grain and feed 26,250
9. Off-farm wages 20,000
10. Total cash available -----------
$48,750
15. Total cash operating expenses $12,500
18. Machinery and equipment 6,000
20. Family living 16,000
21. Inter. and long-term loan payment (principal) 11,000
22. Inter. and long-term loan payment (interest) 12,250
23. Total cash required -----------
$57,750
24. Cash available less cash required -
$9,000
25. Inflows from savings (principal)
5,000
27. Cash position before borrowing and after savings -
$4,000
28. Money to be borrowed (intermediate and long-term)
5,000
--------
---
31. Ending cash balance
$1,000
---------------------------------------------------------------------------
------
As you can see from the information in handout 2, on January 1 Fred had $5,000 in a money
market fund. That amount can be transferred to his checking account to help alleviate part of
his cash flow shortage (line 25). However, even after that transfer he is still short $4,000 (line
27).

The next source of cash is borrowing, either in the form of operating funds or intermediate
and long-term loans. As you probably remember, Fred plans to borrow $5,000 when
purchasing that piece of machinery. After entering that amount on line 28, Fred has an ending
cash balance of $1,000 (line 31), which is the beginning cash balance for the next year.

A Quarterly Projected Cash Flow Statement

However, the year can be divided into quarters, months, weeks, or even days. Each division
provides a more detailed projection, but normally projected cash flow statements are done
either quarterly or monthly. A quarterly statement is often sufficient for operations with fewer
transactions during a year, such as a cash grain farm. A monthly cash flow statement may be
useful for operations that have a greater number of transactions during a year, such as a dairy
or a farrow-to-finish swine operation.

Now, let's look at the items in handout 3, which provide additional information on the timing
of those cash transactions listed in handout 2. We will use that information to complete lines
1 through 35 of the projected cash flow statement. The transactions for the first and second
quarters will be discussed in the following paragraphs. Then you should try to complete the
last two quarters of the year on your own. An answer sheet is provided for you to check your
answers.

It is easier to transfer all of the information in handout 3 to the appropriate quarters of the
projected cash flow statement before totaling any of the subsections. The following steps list
the sequence of events, and Figure 2 provides the answers for the first quarter.

HANDOUT 3. Projected Cash Flow

Statement Exercise
Cash transactions expected during the upcoming 12-month period:

1. Cash balance on January 1 is $2,500.

2. Fred Farmer expects to sell all the corn in inventory, 4,230 bushels, in July for $3.25 per
bushel or approximately $13,750.

3. Continue to work full-time and receive wages of $5,000 each quarter.

4. Produce 100 bushels of corn per acre during the upcoming year on 100 acres or 10,000
bushels of total production. 5,000 bushels are expected to be sold at harvest (October) for
$2.50 per bushel or $12,500. The remaining 5,000 bushels will be stored.
5. Acreage production costs for the corn are expected to be $53.00 for fertilizer, $31.00 for
seed and chemicals, and $41.00 for machine operation and drying. All production expenses
will probably be paid in April, except $2,000 for machine operation and drying, which will be
paid in October.

6. Fred expects to purchase a piece of machinery on January 2 of the upcoming year that will
cost $6,000; $5,000 will be borrowed and paid off in five annual payments of $1,000 each.
The first payment is due in December of the upcoming year. The interest rate is 15 percent.

7. Family living expenses will be about $16,000 during the upcoming year and will be spread
evenly over the 4 quarters.

8. Fred has a machinery loan of $10,000 at 15 percent interest. The next annual payment of
$5,000 plus interest is due in December of the upcoming year.

9. Fred also has a $100,000 real estate loan at 10 percent. The next annual payment of $5,000
plus interest is due in December of the upcoming year.

10. Operating loans can be obtained at an interest rate of 15 percent. None is currently
outstanding.

11. Fred has $5,000 in a money market fund, earning 10 percent.

12. Mr. Farmer wants to always keep at least $1,000 in his checking account or cash balance,
but no more than $5,000. Any excess funds will be placed in the money market fund in
$1,000 increments.

13. All loan payments and savings transactions are conducted as of the end of the quarter.

14. Fred will pay the operating loan off, before adding cash to his money market fund.

FIGURE 2. Projected Cash Flow Statement

Projected
Entry Q1 Q2 Q3 Q4
totals
---------------------------------------------------------------------------
------------
1. Beginning cash balance 2,500
2,500
Operating receipts: xx xx xx xx
xx

2. Grain and feed

26,250

______________________________________________
3. Livestock and poultry
______________________________________________

4. Custom work
______________________________________________

5.______________________
______________________________________________
Capital receipts: xx xx xx xx
xx

6. Breeding stock
______________________________________________

7. Machinery and equipment

______________________________________________

8. ____________________________
______________________________________________
Nonfarm income: xx xx xx xx
xx

9. Off-farm wages 5,000 5,000 5,000 5,000

20,000

10. Total cash available 7,500

48,750
(add lines 1 thru 9)
______________________________________________

Operating expenses: xx xx xx xx
xx

11. Fertilizer and lime

5,300

12. Seed and chemicals

3,100

13. Machine operation and

4,100
drying
______________________________________________

14. ___________________________
______________________________________________

15. Total cash operating 0

12,500
expenses (add lines
11 thru 14)

Livestock and feed

purchases: xx xx xx xx
xx

16. Feeder livestock

______________________________________________

17. _____________________________
______________________________________________
 Capital expenditures: xx xx xx xx
xx

18. Machinery and equipment 6,000

6,000

19. ___________________________
______________________________________________
Other expenses: xx xx xx xx
xx

20. Family living 4,000 4,000 4,000 4,000

16,000

21. Intermediate and long-term

loan payments (principal)
11,000

22. (interest)
______________________________________________

23. Total cash required 10,000

57,750
lines 15 thru 22)
______________________________________________

24. Cash available less cash -2,500

-9,000
required (line 10 minus
line 23)

25. Inflows from savings

(principal)
5,000

______________________________________________

26. (interest)

27. Cash position before

borrowing and after savings -2,500
-4,000

28.Money to be borrowed:
______________________________________________
(Operating loans)
(Intermediate and long-
term loans) 5,000
5,000

29. Oper. loan payments

(principal)
______________________________________________
(interest)
______________________________________________

30. Outflows to savings

0

31. Ending cash balance 2,500

1,000
 Loan balances (at end of
______________________________________________
period): xx xx xx xx
xx

32. Current year's oper. loans 0

0

______________________________________________

33. Previous year's oper. loans 0

34. Intermediate and long-term

______________________________________________
loans 115,000
104,000

35. Total loans 115,000

104,000
---------------------------------------------------------------------------
------------

1. We know the beginning cash balance for the year and the first quarter is $2,500 (line 1).

2. There were no cash receipts from the sale of corn in the first quarter.

3. Off-farm wages during each quarter are expected to equal $5,000. Now, this is the amount
that is expected to be taken home, and not the gross amount. Since we know that amount will
occur in each quarter, we can record $5,000 on line 9 for each quarter.

4. There were no operating expenses during the first quarter.

5. However, Fred expects to spend $6,000 for a piece of equipment during the first quarter
(line 18).

6. Family living expenses of $4,000 are expected in every quarter (line 20).

Now let's calculate our total cash available for the first quarter:

Line
1 Beginning cash balance $ 2,500
9 Off-farm wages + 5,000
---------
10 Total cash available $ 7,500

Now let's calculate our total cash required for the first quarter:

Line
18 Machinery and equipment $ 6,000
20 Family living + 4,000
---------
23 Total cash required $10,000
 Cash available less cash required is:
Line
10 $ 7,500
23 -10,000
--------
24 -$2,500

However, remember $5,000 was to be borrowed for the piece of machinery, which has not
yet been taken into account. It should be entered on line 28. Now our ending cash balance is
$2,500 (line 31), which is also the beginning cash balance for the second quarter.

Also, Fred still has his $5,000 in the money market fund. He also has a $100,000 real estate
loan and a $15,000 machinery loan ($10,000 original loan plus $5,000 new loan) for total
intermediate and long-term loans of $115,000 (line 34). Total loans equal $115,000 (line 35).

Next, we will complete the second quarter. To check your answers, refer to Figure 3. The
following steps list the sequence of events.

1. During the second quarter we again notice that no grain or livestock is expected to be sold.

2. Again, $5,000 is expected from off-farm wages.

3. Operating expenses during the second quarter include: $5,300 for fertilizer, $3,100 for seed
and chemicals, and $2,100 for machinery operations.

4. Family living expenses again equal $4,000 for the quarter.

Now it is time to total.

Line

1 Beginning cash balance $ 2,500

9 Off-farm wages 5,000
10 Total cash available $ 7,500
15 Total cash operating expenses $10,500
20 Family living 4,000
--------
23 Total cash required $14,500

Cash available less cash required is:

Line

10 $ 7,500
23 $-14,500
---------
24 $-7,000

At this time Fred brings his savings into the cash flow. The inflow from savings is $5,000 in
principal (line 25) and the interest (line 26) is $250, since $5,000 was kept in the money
market fund for 6 months at a 10 percent interest rate.

FIGURE 3. Projected Cash Flow Statement

Projected
Entry Q1 Q2 Q3 Q4
totals
---------------------------------------------------------------------------
-----------

1. Beginning cash balance 2,500 2,500

2,500
Operating receipts: xx xx xx xx
xx

2. Grain and feed

26,250

3. Livestock and poultry

______________________________________________

4. Custom work
______________________________________________

5. ____________________________
______________________________________________
Capital receipts: xx xx xx xx
xx

6. Breeding stock
______________________________________________

7. Machinery and equipment

______________________________________________

8. ____________________________
______________________________________________
Nonfarm income: xx xx xx xx
xx

9. Off-farm wages 5,000 5,000 5,000 5,000

20,000

10. Total cash available 7,500 7,500

48,750
(add lines 1 thru 9)
Operating expenses: xx xx xx xx
xx

11. Fertilizer and lime 5,300

5,300

12. Seed and chemicals 3,100

3,100

13. Machine operation and 2,100

4,100
drying

14. ____________________________
______________________________________________
15. Total cash operating 10,500
12,500
expenses (add lines
______________________________________________
11 thru 14)
Livestock and feed
purchases: xx xx xx xx
xx

16. Feeder livestock

______________________________________________

17. ____________________________
______________________________________________
Capital expenditures: xx xx xx xx
xx

18. Machinery and equipment 6,000

6,000

______________________________________________

19. ___________________________
______________________________________________
Other expenses: xx xx xx xx
xx

20. Family living 4,000 4,000 4,000 4,000

16,000

21. Intermediate and long-term

______________________________________________
loan payments (principal)
11,000

22. (interest)
12,250

23. Total cash required 10,000 14,500

57,750
lines 15 thru 22)

______________________________________________

24. Cash available less cash -2,500 -7,000 -

9,000
required (line 10 minus
line 23)

25. Inflows from savings

(principal) 5,000
5,000

26. (interest) 250

27. Cash position before

______________________________________________
borrowing and after savings -2,500 -1,750 -
4,000
28. Money to be borrowed:
______________________________________________
(Operating loans) 5,000
(Intermediate and long-
______________________________________________
term loans) 5,000
5,000

29. Oper. loan payments

(principal)
______________________________________________
(interest)
______________________________________________

30. Outflows to savings

0

31. Ending cash balance 2,500 3,250

1,000
Loan balances (at end of
period): xx xx xx xx
xx

32. Current year's oper. loans 0 5,000

0

33. Previous year's oper. loans 0 0

______________________________________________

34. Intermediate and long-term

loans 115,000 115,000
104,000

35. Total loans 115,000 120,000

104,000

---------------------------------------------------------------------------
--------------

The cash position before borrowing and after savings (line 27) is now minus $1,750. At this
time Mr. Farmer decides to borrow $5,000 in the form of an operating loan. This is used to
cover the cash deficit and to cover any unexpected expenses that may have been omitted. The
operating loan is entered on line 28. So, the ending cash balance is $3,250, which is also the
beginning cash balance for the third quarter.

Total loans include the $115,000 in intermediate and long-term loans (line 34), plus the
$5,000 operating loan (line 32). The total is then $120,000 (line 35).

At this time, you should complete quarters 3 and 4. The answer sheet for Fred Farmer's
projected cash flow statement is presented in Figure 4. Check your answers with the answer
sheet. If there is a difference and you do not understand the reason for that difference, please
contact your county Extension agent.
There is one additional point that should be made. When we prepared the annual projected
cash flow statement, did it show that Fred would need an operating loan? The answer is no.
That was found only when the quarterly cash flow statement was prepared. This only
illustrates one of the benefits of preparing a projected cash flow statement on a more frequent
basis; it provides more detailed information. Many people prepare a monthly projected cash
flow statement, because they can get actual cash transactions from their monthly bank
statement.

FIGURE 4. Projected Cash Flow Statement

Projected
Entry Q1 Q2 Q3 Q4
totals
---------------------------------------------------------------------------
-------------------
1. Beginning cash balance
2,500 2,500 3,250 4,815
2,500**
Operating receipts: xx xx xx xx
xx

2. Grain and feed 13,750* 12,500

26,250

3. Livestock and poultry ----------------------------------------

------------

4. Custom work -----------------------------------------

-----------

5. ____________________________ ----------------------------------------
------------
Capital receipts: xx xx xx xx
xx

6. Breeding stock -----------------------------------------

-----------

7. Machinery and equipment ----------------------------------------

------------

8. _____________________________ ----------------------------------------
------------
Nonfarm income: xx xx xx xx
xx

9. Off-farm wages 5,000 5,000 5,000 5,000

20,000

10. Total cash available 7,500 7,500 22,000 22,315

48,750**
(add lines 1 thru 9) ----------------------------------------
------------
 Operating expenses: xx xx xx xx
xx

11. Fertilizer and lime 5,300

5,300

12. Seed and chemicals 3,100

3,100

13. Machinery operation and 2,100 2,000

4,100
drying -----------------------------------------
-----------

14. ____________________________ ----------------------------------------

------------

15. Total cash operating 10,500 2,000

12,500
expenses (add lines ----------------------------------
------------------
11 thru 14)
Livestock and feed
purchases: xx xx xx xx
xx

16. Feeder livestock ----------------------------------------

------------

17. ____________________________
Capital expenditures: xx xx xx xx
xx

18. Machinery and equipment 6,000

6,000

19. ____________________________ ----------------------------------------

------------
Other expenses: xx xx xx xx
xx

20. Family living 4,000 4,000 4,000 4,000

16,000

21. Intermediate and long-term

loan payments
(principal) 11,000
11,000

22. (interest) 12,250

12,500

23. Total cash required 10,000 14,500 4,000 29,250

57,750
lines 15 thru 22)

24. Cash available less cash -2,500 -7,000 18,000 -6,935

9,000**
required (line 10 minus
line 23) ------------------------------------------
----------
25. Inflows from savings
(principal) 5,000 8,000
5,000**

26. (interest) 250 200

27. Cash position before -------------------------------------------

---------
borrowing and after savings -2,500 -1,750 18,000 1,265
-4,000**

28. Money to be borrowed:

(Operating loans) 5,000
(Operating loans)
___________________________________________________
(Intermediate and long-
term loans) 5,000
5,000

29. Oper. loan payments

(principal) 5,000
(interest) 185*

30. Outflows to savings 8,000

0

31. Ending cash balance 2,500 3,250 4,815 1,265

1,000**
Loan balances (at end of ------------------------------------------
----------
period): xx xx xx xx
xx

32. Current year's oper. loans 0 5,000 0 0

0

33. Previous year's oper. loans 0 0 0 0

0
-------------------------------------------
---------

34. Intermediate and long-term 115,000 115,000 115,000 104,000

104,000
loans -------------------------------------------
---------

35. Total loans 115,000 120,000 115,000 104,000

104,000

*Rounded to the nearest $5.

**These lines cannot be totaled across the four quarters to arrive

at the projected total. This is because of the carryover effect of
taking the ending cash balance for a previous quarter and transferring
that balance to the beginning balance for the next quarter.

Where Do You Get The Numbers?

The most precise approach for arriving at the numbers to use in a projected cash flow
statement is to calculate the amount of each input item needed for the various crop or
livestock enterprises, and the projected production levels for those enterprises. Then an
estimate is needed for prices and the timing of expenses and revenues. Those amounts would
then be entered in the appropriate quarter. This approach assumes the farm business is
operating with a marketing plan to arrive at projected sale dates and prices. A review of last
year's actual cash flow statement would help tremendously in estimating receipts and
expenses and in projecting the timing of those receipts and expenses for the upcoming year.

However, some farming operations do not keep detailed records, so a less precise approach
would be needed. In that case, the best place to get the estimates is from last year's totals.
Those numbers can then be prorated to the appropriate quarter and adjusted to reflect
expected changes in production, prices, buying dates, and selling dates. Check stubs from last
year can aid in deciding when expenses were paid and receipts received.

How Do I Monitor a Projected Cash Flow Statement?

The most precise method for monitoring a projected quarterly cash flow statement is to add
12 columns to the 5 that are already included in the statement. One additional column each
quarter allows you to record actual cash flow entries each quarter. A year-to-date column for
projected and actual totals allows the user to monitor year-to-date totals for receipts and
expenses. An example of these additions is presented in Figure 5.

The additions allow comparison of actual cash flow entries with projected amounts, which
enable calculation of differences between them. This enables you to monitor the cash position
of the operation throughout the upcoming year.

However, a projected cash flow statement can be used without any of the three columns. The
key point to remember is a projected cash flow statement can be tailored to fit the needs of
each individual operation. It can be as simple or as complex as is needed to be workable and
useful.

FIGURE 5. Projected Cash Flow Comparison Statement

Quarter___________________
Year-to-date
Year-to-date
Entry Projection Actual projection
actual
---------------------------------------------------------------------------
-------------
1. Beginning cash balance
(all readily available funds)
_____________________________________________________
Operating receipts: xx xx xx
xx

2. Grain and feed

_____________________________________________________
3. Livestock and poultry
_____________________________________________________

4. Custom work
_____________________________________________________

5. ____________________________
_____________________________________________________
Capital receipts: xx xx xx
xx

6. Breeding stock
_____________________________________________________

7. Machinery and equipment

_____________________________________________________

8. ____________________________
_____________________________________________________
Nonfarm income: xx xx xx
xx

9. Off-farm wages
_____________________________________________________

10. Total cash available

(add lines 1 thru 9)
_____________________________________________________
Operating expenses: xx xx xx
xx

11. Fertilizer and lime

_____________________________________________________

12. Seed and chemicals

_____________________________________________________

13. Machine operation and

drying
_____________________________________________________

14. ____________________________
_____________________________________________________

15. Total cash operating

expenses (add lines
11 thru 14)
_____________________________________________________
Livestock and feed
purchases: xx xx xx
xx

16. Feeder livestock

_____________________________________________________

17. ____________________________
_____________________________________________________
Capital expenditures: xx xx xx
xx
18. Machinery and equipment
_____________________________________________________

19. ____________________________
_____________________________________________________
Other expenses: xx xx xx
xx

20. Family living

_____________________________________________________

21. Intermediate and long-term

loan payments
_____________________________________________________
(principal)
_____________________________________________________

22. (interest)
_____________________________________________________

23. Total cash required

add lines 15 thru 22)
_____________________________________________________

24. Cash available less cash

required (line 10 minus
line 23)
_____________________________________________________

25. Inflows from savings

(principal)
_____________________________________________________

26. (interest)
_____________________________________________________

27. Cash position before

borrowing and after savings
_____________________________________________________

28. Money to be borrowed:

(Operating loans)
_____________________________________________________
(Intermediate and long-
term loans)
_____________________________________________________

29. Oper. loan payments

(principal)
_____________________________________________________
(interest)
_____________________________________________________

30. Outflows to savings

31. Ending cash balance

_____________________________________________________
Loan balances (at end of
period): xx xx xx
xx
32. Current year's oper. loans
_____________________________________________________

33. Previous year's oper. loans

_____________________________________________________

34. Intermediate and long-term

_____________________________________________________

loans
_____________________________________________________

35. Total loans

_____________________________________________________
---------------------------------------------------------------------------
-------------------

Summary

The focus of this publication is on preparing and using a projected cash flow statement to
determine when, how much, and for how long cash deficits and surpluses are likely to exist
for a farm business during some future period. A projected cash flow statement is described
as a listing of all expected cash inflows and outflows for the coming year. The statement can
be prepared for whatever time period is most useful to you; quarterly, monthly, and even
weekly if desired. This information enables you to communicate borrowing needs to your
lender and to establish a repayment schedule. In addition, the information can be used to
identify possible investment opportunities during the planning period.

An additional column each quarter enables you to record actual cash receipts and expenses in
the quarter those transactions occur. That information can then be compared to projected
amounts to determine differences that may exist. Projected and actual year-to-date columns
can also be added to determine how year-to-date totals for receipts and expenses compare to
projections.

Finally, cash flow planning through the remainder of the 1980's will be a major concern for
lenders and borrowers. A projected cash flow statement will greatly aid attempts to plan cash
inflows and outflows for a farm business. Often the statement provides only a rough estimate
of the cash position for the business, since marketing plans, prices, production levels, and
even expenses often differ from what is projected. However, even though a projected cash
flow is but a rough estimate--if compared to no estimate--it is a great help in planning ahead.

Reference

Frey, Thomas L. and Danny A. Klinefelter, 1980. Coordinated Financial Statements for
Agriculture, Second Edition. Skokie, Illinois: Agri Finance.

Acknowledgment Appreciation is extended to Agri Finance, Skokie, Illinois, the publisher of

Coordinated Financial Statements for Agriculture from which handout 1 and Figures 2
through 5 were adapted.
What is cash flow projection?
First things first, if you want to learn about cash flow projections, you need to know what
cash flow is.

Cash flow is the amount of money going in and out of your business. Healthy cash flow can
help lead your business on a path to success. But poor or negative cash flow can spell doom
for the future of your business.

If you want to predict your business’s cash flow, create a cash flow projection. A cash flow
projection estimates the money you expect to flow in and out of your business, including all
of your income and expenses.

Typically, most businesses’ cash flow projections cover a 12-month period. However, your
business can create a weekly, monthly, or semi-annual cash flow projection.

Advantages of projecting cash flow

Estimating anticipated cash flow projections can help boost your business’s success.

Projecting cash flows has many advantages. Some pros of creating a cash flow projection
include being able to:

• Predict cash shortages and surpluses

• See and compare business expenses and income for periods
• Estimate effects of business change (e.g., hiring an employee)
• Prove to lenders your ability to repay on time
• Determine if you need to make adjustments (e.g., cutting expenses)

Cash flow projection isn’t for every business. Your projected cash flow analysis can be time-
consuming and costly if done wrong.

Keep in mind that cash flow predictions will likely never be perfect. However, you can use
your projected cash flow as a tool to help manage cash flow.

The bottom line is, your cash projections give you a clearer picture of where your business is
headed. And, it can show you where you need to make improvements and cut costs.

How to calculate projected cash flow

If you’re ready to start calculating projected cash flow for your business, start gathering some
historical accounting data.

You need to get reports detailing your business’s income and expenses from your accountant,
books, or accounting software. Depending on the timeframe you want to predict, you might
need to gather additional information.
Want to learn how to calculate cash flow projections? Use the projected cash flows steps
below.
1. Find your business’s cash for the beginning of the period

To calculate your cash from the beginning of the period, you need to subtract the previous
period’s expenses from income.

Cash at Beginning of Period = Previous Period’s Income – Previous Period’s Expenses

2. Estimate incoming cash for next period

Next, you need to predict how much cash will come into your business during the next
period.

Incoming cash includes things like revenue, sales made on credit, loans, and more.

You can forecast future cash by looking at trends from previous periods. Be sure to account
for any changes or factors that differ from previous periods (e.g., new products).

3. Estimate expenses for next period

Think about all the expenses you will pay next period. Consider things like raw materials,
rent, utilities, insurance, and other bills.

4. Subtract estimated expenses from income

To calculate your business’s cash flow, subtract your estimated expenses from your estimated
income.

Cash Flow = Estimated Income – Estimated Expenses

5. Add cash flow to opening balance

After you calculate cash flow, you need to add it to your opening balance. This will also give
you your closing balance. Your closing balance will carry over to act as your starting balance
for the next period.

To complete the next period’s projected cash flow, repeat the steps from above.

Confused? No worries! Take a look at an example of a project cash flow statement below:
Creating a projection of cash flow
If you want to create your own cash flow projection, start drafting out columns for your
future periods. Or, you can take advantage of a spreadsheet to organize your cash flow
statement projections.

You should include the following categories in your cash flow projection:

• Opening balance
• Cash in (e.g., sales)
• Cash out (e.g., expenses)
• Totals for cash in and cash out
• Uses of cash (e.g., materials)
 • Total cash flow for the period
• Closing balance
• Periods (e.g., month of January)

After you lay out the sections on your cash flow projection report, plug in your projected cash
flow calculations.

Revisiting your cash flow projection

Cash flow projections are not set in stone. Revisit your projection from time to time to see
where you stand.

If you see major differences or flaws in your cash flow forecast, it may be time to crunch
more numbers and do some digging. Pinpointing issues with your projection early on can
prevent major inaccuracies in the future.

To ensure your projection stays as accurate as possible, consider variable expenses such as:

• Months with three paychecks

• Sales during peak seasons
• Months when premiums are due (e.g., insurance)
• Hiring additional workers

A good rule of thumb is to not project too far into the future. Too many variables can come
into play with your business (e.g., dip in the economy) and affect your future cash flow.

As mentioned, a standard time period for cash flow projection is 12 months. Try to limit your
cash flow projection time period to only a year in advance. That way, you can help prevent
unforeseen expenses and errors impacting your projection.

If you don’t have time to track financial forecasts, consider delegating projection updates to a
bookkeeper. Or, you can streamline the way you track cash flow with basic accounting
software.

.
 Detailed Project Report: Preparation Toolkit

DETAILED PROJECT REPORT:

Preparation Toolkit
(SUB-MISSION FOR URBAN INFRASTRUCTURE AND
GOVERNANCE)

Ministry Of Urban Development

GOVERNMENT OF INDIA

1
 Detailed Project Report: Preparation Toolkit

Contents
Contents............................................................................................................................... 2

Introduction ......................................................................................................................... 3
General notes for use of this toolkit ........................................................................................................... 3

1. Sector Background Context & Broad Project Rationale................................................. 4

2. Project Definition, Concept and Scope .......................................................................... 5

3. Project Cost ..................................................................................................................... 6

4. Project Institution Framework (for construction)........................................................... 7

5. Project Financial Structuring........................................................................................... 9

6. Project Phasing............................................................................................................ 12

7. Project O&M planning ................................................................................................. 14

8. Project Financial Viability & Sustainability ................................................................ 16

9. Project Benefits Assessment (Social Cost-Benefit Assessment) .................................. 18

Annexures.......................................................................................................................... 20
Annexure 1: Sector specific infrastructure components........................................................................... 21
(water supply, sewerage,solid waste management,waterbody preservation,drainages,roads,urban
transportation,urban renewal and heritage conservation)

Annexure 2: Project implementation planning: package wise contracting relationship ......................... 25

Annexure 3: Schedule for financial contribution and sources ................................................................. 25
Annexure 4 Project cashflow template .................................................................................................. 26
Annexure 5 : ULB Cashflow Template..................................................................................................... 29
Annexure 6 : Loan Schedules and Loan Ageing....................................................................................... 30

2
 Detailed Project Report: Preparation Toolkit

Introduction
The Detailed Project Report (DPR) is an essential building block for the Jawaharlal
Nehru National Urban Renewal Mission (JNNURM) in creating infrastructure and
enabling sustainable quality service delivery. The DPR is to be prepared carefully
and with sufficient details to ensure appraisal, approval, and subsequent project
implementation in a timely and efficient manner.

This document provides a reference format for preparing DPRs/Project Reports across
sectors. The major sections covered are as follows:

1. Sector background context & broad project rationale

2. Project definition, concept and scope
3. Project cost
4. Project institution framework
5. Project financial structuring
6. Project phasing
7. Project O&M framework and planning
8. Project financial viability/sustainability
9. Project benefits assessments

The key issues needing to be addressed and other relevant details are outlined
separately for each section

General notes for use of this toolkit

i. This document provides a general reference framework for DPR preparation;

additional relevant details are to be incorporated as per the requirements of the
ULB city planners/ entity preparing the project report.

ii. The headings (the numbered section headings and sub-headings) for the DPR are
to be as per this document. Any additional headings may be incorporated as per
requirement.

iii. The Detailed Project Report is to be accompanied by a separate Executive

Summary

iv. Within 30 days of clearance by the CSMC, the ULB/parastatal may arrange to
digitize (create a soft copy of) the entire project report including drawings and
forward the same to the Ministry of Urban Development (MoUD)

v. Further feedback and suggestions for improving the “DPR Preparation Toolkit”
are welcome and may be suggested to the MoUD

3
 Detailed Project Report: Preparation Toolkit

1. Sector Background Context & Broad Project Rationale

Key issue for the section:

Have the relevant aspects of the sector (eg. Water supply sector, transportation sector etc) been
adequately profiled and the context of the proposed project adequately explained?

The DPR needs to provide information covering the following areas:

1.1 Existing status of the physical infrastructure (brief description)

1.2 Base line information in terms of user coverage & access (by different user
categories/segments including urban poor)

1.3 List of various projects proposed for the sector in the City Development Plan
(CDP) and confirmation /explanation of how this project is aligned with stated
CDP priorities

1.4 List of other capital expenditure projects supported by other schemes for the
sector (sanctioned projects that have yet to commence as well as ongoing
projects)

1.5 Existing tariff and cost recovery methods and extent of cost recovery
• Past five year trends
• Existing per unit cost; existing per unit service delivery price ( in
absolute terms and also on per capita basis)
(The basis, assumptions and method of calculations in regard to the above
are also to be provided)

1.6 Existing areas of private sector/community participation in the sector for

design, construction, project management, and/or O&M services (including
billing & collection)

1.7 Any other qualitative information (eg list of key issues that are of importance
to this sector and project; importance of the project to the sector, extent to
which the project would address key issues/problems of the sector etc.)

4
 Detailed Project Report: Preparation Toolkit

2. Project Definition, Concept and Scope

Key issue:
Has the project concept been defined in a complete manner and its components/modules clearly
delineated?

The proposed project needs to be clearly demarcated in terms of all its constituent
sub-components. 1 (Several project DPRs specify only the “to-be-constructed”
infrastructure component which does not represent the complete project) The project
concept comprises several sub-components /elements including:

2.1 Land2
• Total quantum of land required and being provided for the project
• Confirmation that the required land is owned /already purchased by the
ULB/parastatal; land title is to be clear and unencumbered.

2.2 Physical infrastructure components

( Please refer Annexure-1 for sector specific reference components)

The physical infrastructure of each project/DPR can be considered in terms of

specific components. (component 1, component 2, component 3, …etc) These
would be unique for each project and would also vary across sectors. For
reference purposes, a wide range of sector specific project components have
been provided in Annexure.1. The design, detailed engineering and drawings
as applicable for the components are to be included in this section
These project components can also serve as a reference for “packaging of
contracts” either individually, in parts, or through combinations.

2.3 Environmental compliance/protection measures/improvement measures

• Environment impact assessment
• Environment management plan

2.4 Rehabilitation and Resettlement3

2.5 Specialised procured services for design, independent supervision, and

quality assurance

2.6 Other information

• Details of surveys and investigations required to be carried out ( site,
customer, etc)
• Assessment of requirements related to utilities shifting
• List of clearances and agencies from which these are to be obtained

1
Such demarcation additionally serves to facilitate planning of (a) phasing and (b) costing
2
Land cost is not funded by JNNURM ACA Grants ( except for North-Eastern states & designated
hilly states: Uttaranchal, J&K, HP)
3
Rehabilitation and resettlement are not funded by JNNURM Additional Central Assistance (ACA) grants;
ULB/state governments have to make their own arrangements.

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 Detailed Project Report: Preparation Toolkit

• Disaster related risk assessment and broad countermeasures (including

earthquake/other natural disaster resistant design of structures)

3. Project Cost

Key issue
Have all the relevant project costs been accounted for in addition to costs of physical infrastructure
construction works?

The project (construction) cost should cover distinct elements, including but not
limited to the specific components listed below:

3.1 Land acquisition/site development (Land acquisition is not covered by

JNNURM ACA Grant-- except for North-Eastern and designated hilly states.
In all other cases, land acquisition is to be completed prior to application for
JNNURM support).

3.2 Physical infrastructure component-wise cost (should correspond to section

2.2)

3.3 Environmental compliance cost

3.4 Rehabilitation & resettlement cost (to be borne by ULB/ parastatal/ state
government)

3.5 Cost of surveys & investigations

3.6 Cost of shifting utilities

3.7 Cost of consultancy services: (a) Design (b) Supervision (c) Quality
Assurance
3.8 Other statutory compliance costs if applicable

3.9 Finance/interest cost during construction

3.10 Contingency

3.11 Any other

For all cost elements, assumptions (rates, methods of calculations etc) are to be
clearly given either in the main text or as an attached appendix of the DPR.

Note:
(1) All cost heads are to be provided for in the DPR; if an element is not applicable, “0” may be put
against it when entering actual figures. O&M costs are covered in a separate section; this section
covers only capital cost.
(2) if survey cost are included in design cost ( ie 3.7), this may be clearly specified to avoid double
counting
(3) The project, for implementation purposes, can be broken into contract packages for tendering. This
perspective of cost is being covered separately in the section on Project Institutional framework

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4. Project Institution Framework (for construction)

Key issue
Have the institutional arrangements for project construction implementation been clearly specified?

The DPR needs to clearly specify the institutional arrangement details, including the
information requested below:

4.1 Roles of different institutions involved in the construction phase of the

project
(i) A Roles/responsibility matrix could be a convenient option to present this
information.
(ii) The relationship between ULB on the one hand and parastatal or state
government agencies on the other are to be made explicit. Innovative
approaches to provide for improved coordination and/or working
arrangements can be highlighted.

4.2 Manner of undertaking construction works

…ie whether construction works are envisaged to be undertaken:
(i) in-house through one of the Govt. agencies/parastatals’ own staff OR
(ii) by being tendered out under the supervision/management of the ULB/
parastatal OR
(iii) through a separately established legal entity/project implementation company
such as an SPV (Special Purpose Vehicle)

4.3 Involvement of the construction entity in the subsequent O&M activities

….ie whether the contracted entity undertaking construction works are also to
be retained and involved in (any aspect of the subsequent) O&M phase

4.4 Areas of involvement of the private sector in the construction phase4

(tick mark as appropriate):

i Project Feasibility Study

ii Project Engineering Design
iii Specialized Surveys
iv Construction Works
v Supervision Consultants
vi Quality Assurance Consultants
vii Any Other Please Specify ( Eg:
Equipment Lease)

Additional information regarding the above can be provided. ( in brief) if

required.

4
In case any of these activities are provided by govt. agencies ( including autonomous agencies) specify their names and
include the results as a part of section 4.1.

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4.5 Construction “Packages” for works construction

Brief description of strategy for the overall works programme including

information on indicative packages for tendering as per the following format:

Project implementation planning: Package-wise contracting relationships

List: tender packages Cost
Package No, Package Description Estimate
1
2
3
4
…n
Total:

Within 30 days of DPR approval by CSMC, a more detailed format is required to be

submitted covering break down by tender packages, contract type, and corresponding
estimates for cost, tendering time frame, and package-wise completion schedules
(Please refer Annexure-2 for the project implementation planning format)

If possible, the complete information as per Annexure-2. may be presented in the

DPR itself prior CSMC approval; this approach would expedite time towards project
implementation.

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5. Project Financial Structuring

Key issue
Have the sources of financial contribution of the ULB and state’s share been clearly identified?
To what extent is there a comfort level that these sources have been tied up and would be available for
the project?

The project financial structuring examines the sources and composition of funding for
the project. For this section, the DPR needs to provide:

5.1 Overall Financial Structuring of the project

In this regard, the DPR should include information as per the table given below:

Note:
(1) in case of SPV /separate project legal entity, equity share of each contributing entity including govt
entities need to be specified
(3) Term loans and other private funding commitments: are required to be supported by sanction
letter/agreement/in- principle letter of support containing the terms ( for example: loan/debt should
include details such as moratorium grace, interest rate, payment schedule of principal and interest etc).
(4) Column no. 6 refers to percentage distribution as per JNNURM guidelines as applicable for the city
(5) State Government’s contribution commitment: are required to be supported by approval for
sanction in the annual plan/state cabinet approval/ in principle letter of support from the state finance
ministry
(6) Within 30 days of CSMC approval, a quarterly forecast of when state and ULB contributions will
be received in the project bank account is to be specified and forwarded to MoUD in the format as
provided in Annexure-3.

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Project financial structuring can involve a combination of equity, grant, debt and
finance from private participation (and in some cases, contribution from user
communities)

5.2 Review of options for

• Institutional debt and/or

• Private sector participation.

The ULB, should ideally review the scope and options for possible debt and/or private
sector financing while preparing the DPR. To provide a perspective in this regard, a
brief overview of debt and private sector finance is given below:

The Debt Component

Supporting the capital cost of the project entirely by Grant and ULB internal sources
(surplus) might not necessarily reflect the best manner of financing urban
infrastructure projects. A debt component would-
(a) provide gearing and hence support a larger number/scale of infrastructure
projects by the ULB and
(b) provide (an additional) project appraisal by the funding agency and hence
contributes to risk reduction and improved project structuring
(c) contribute to project management discipline for the ULB, specially in the
context of O&M management, user charge levy etc.

The Debt Component5 can be from:

(a) general bank finance: however banks are unlikely to accord long tenure
finance (these could typically be around eight years at a stretch)
(b) specially issued municipal bonds
(c) term loan from financial intermediary such as HUDCO, LIC, IL&FS, IDFC,
SBI Caps ICICI bank; state level financial institutions (including those
specific to development of urban infrastructure ) etc

The ideal debt component is dependent upon a number of factors including the nature
and sector of the project, project cash-flows as well as the financial condition of the
municipality and financial management practices of the municipality. However,
several projects might be able to support at least a small debt component (such as 5-
10% of the total project cost) and take advantage of the stated benefits.

Private Participation in financing construction of infrastructure project

Private sector can be involved in financing (as well as managing the) construction of
the infrastructure project and it can contribute towards the ULB or state share of
finance This could be through -

(a) a separate legal entity created specifically for this purpose ( SPV)
(b) a direct BOT/BOOT arrangement and its variant models with or without an
SPV arrangement.

5
institutional debt—ie loans other than from the central or state government

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(c) a simple management contract or lease based contract

All variants involve payment to the private entity to enable them cost recovery of
construction (and also for O&M). This could be in the form of:
(a) Private party being allowed direct recovery of user charges for a specified long
term duration ( say, for illustrative purposes only, 15-25 years)
(b) Private party being paid a fixed annuity (or on a fixed rate per unit quantity for
service delivery undertaken) for its services over the specified term duration.
The ULB can directly recover user charges or retain the option of contracting
out billing and collection to a different private entity.

Linking construction with a long term O&M performance contract could provide the
advantage of operational cost efficiency as well as accountability (including quality)
for creating the original infrastructure asset.

All the models of private entity involvement envisages ULB/parastatal

monitoring/supervision of outcomes. Hence the ULB/parastatal continues to be
actively involved in these activities though its role is modified.

Private sector financing and /or debt financing helps the ULB to leverage the grant
support funds provided by JNNURM. The true spirit of JNNURM (in the project
perspective) is to use funds to catalyse additional funds and ensure their efficient
management. The ULB will need to examine various options for project
structuring in this regard on a case to case basis .Project proposals are hence no
longer a simplistic case of detailing technical parameters supplemented by cost
estimations based on an administratively defined schedule of rates.

In summary, for the section concerning project financial structuring, the DPR needs
to provide:
5.1 Information as per the given tabular format
5.2 Confirmation that project planners have examined the scope and options for
institutional debt (financing at the very least a small component of the total project
cost) and/or private sector participation. Brief analysis and conclusions in this
regard may be presented.

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6. Project Phasing

Key issue
Has the project been adequately planned in terms of scheduling and phasing (including pre-
construction commencement activities) and covering all relevant modules and components? Have
all these activities been adequately thought through?

Planned schedules (as a part of the DPR) need to be prepared for the following types
of activities (other activity heads can be included as per requirement of the city
planners/project preparation team)

6.1 Schedule for tendering/selection for procurement of services:

(i) Construction contractors

Can be given in indicative terms in the DPR. This has to be firmed up and
given in more specific detail within 30 days of CSMC approval--as per the
package-wise contract implementation template6 ( Refer Annexure 2)

(ii) Consultants / firms for supervision and quality assurance

(iii)Consultants/firms for any other specialized activities that has to be carried out
to fine-tune DPR/ undertake CSMC directed inclusions based on in-principle
project approvals ( eg: additional surveys, design activities etc. as applicable)

6.2 Schedule for bringing in State level and ULB level contributions to the
project
Can be given in indicative terms in the DPR. This has to be firmed up and
given in more specific detail within 30 days of CSMC approval as per
template provided in Annexure 3

6.3. Schedule for obtaining all clearances (along with list of major clearances)

6.4. Schedule for shifting utilities

6.5 Project infrastructure component-wise implementation

For each of the component given in section 2.2 (Component1, Component2,
Component 3……Component n)

The implementation schedules/work plan can be presented in a simple bar chart7 on a

quarterly basis, as shown below:
Bar Chart for Key Activities
S. No Item Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10*
…
1
2
*Additional Quarters to be introduced as per requirement

6
Already referred to in section 4.5
7
Also referred to GANTT chart

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Note:
(1) In case the project is to be commissioned (in parts) even before the complete project is constructed,
then this can be made explicit in the phasing plan along with clarifying explanations.
(2) Contractor phasing as per Annexure-2: As already stated, this is to be provided within 30 days of
CSMC approval of DPR. If possible, the complete information as per Annexure-3 may be presented in
the DPR itself prior CSMC approval; this approach would expedite time towards project
implementation.
(3) State and ULB fund contribution(reference Annexure- 3): same as the above ; The” in-principle”
and other such documentary support provided at DPR stage would have to be converted into
confirmed arrangements within 30 days.

6.6 For projects having a capital cost value of Rs. 25 crores plus, presentation
of a PERT and CPM diagrams are required in addition to the Gantt
charts.

The PERT chart provides a further detailed break down of activity tasks and
milestones and the inter-relationship between tasks 8 . The PERT and CPM
would be useful for the ULBs/parastatal both for project planning and
subsequently for project management.

8
These interlinkages could be defined in several ways such as:
SS: Start to Start; SF: Start to Finish; FS: Finish to Start: & FF: Finish to Finish

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7. Project O&M planning

Key issue
Has the Project Report assessed the requirements and planned for long term O&M sustainability?

Long term project sustainability requires that long term O& M is planned in terms of
(a) Institution framework including billing & collection (organization & operations)
strategy and
(b) Tariff and user-cost recovery (financial) strategy

7.1 Institution framework (organization & operations) strategy

The DPR is to incorporate/include information relating to the following five areas:

(i) The institution to be engaged in the O&M of the created infrastructure

asset/enhanced infrastructure assets9.

(ii) Brief outline of the existing method of billing & collection (including
user/customer-segment wise differentiated strategy, if any)

(iii) Select performance metrics in regard to billing & collections (for the most recent
completed financial year, and if possible, for the current quarter of the ongoing
financial year)

• the billing/billable ratio (in terms of physical and financial units

separately)
• cost of billing & collection (in absolute terms; as percent of total cost;
and details of the cost break up)
• any other, if possible
(The basis, assumptions and method of calculations in regard to the above
are also to be provided)

(iv) Brief description/analysis of the key issues and obstacles in regard to O&M
(including billing/collection issues) and proposed countermeasures to
overcome them for the sector in general and for the project in particular

(v) The scope for private entity/community /NGO to be involved in defined

aspects of O&M for any specific/all components of the infrastructure asset.

• Private entity/ community entity/NGO can participate through a variety of

models for performance based O&M (even without participating in the
infrastructure construction; in this context, contract periods can be of shorter
duration10 since capital cost has not been borne by the private entities and to
prevent service delivery complacency on the part of the contracted entities)

9
In case project is of augmenting/partial revamping nature.
10
Smaller period than the case when the private entity also finances capital asset construction

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• The ULB can aim to promote competitiveness among an empanelled group of

such entities and distribute geographical regions (eg identified ward areas)
among a limited number of selected private/community based/NGO entities.
This would enable comparisons of performance11.

(vi) The DPR should explicitly define the requirements of manpower, energy,
spares and consumables etc. for O&M on an annual basis giving details of existing
usage, norms and proposed additional requirements..12

7.2 Tariff and user cost recovery

In regard to tariff and user cost recovery, the DPR is to provide:

(i) The tariff (revenue) model for each customer/user group for the sector
(including underlying assumptions) and forecast growth of customer/ user
groups over the next 20 years.

(ii) Unit cost of service and unit price (existing year and forecast for next 20 years)

(iii) Outline plan to restructure tariff system to any or all categories of user groups to
comply with MoA requirement (institution of full cost recovery user charges)
In this regard, cross-subsidization requirements/ strategy if applicable are to be
explicitly specified and addressed.
(The basis, assumptions and method of calculations in regard to the above are
also to be provided)

11
Citizens’/user segment feedback could be an important source of feedback for O&M activity specially service
delivery.

12
Codes, guidelines of respective nodal technical appraising agencies shall be referred for the respective sectors

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8. Project Financial Viability & Sustainability

Key issue
Has the financial viability assessment taken into consideration both capital cost & O&M sustainability?
Has it additionally taken into consideration the ULB financial situation?

The project viability assessment will be based on a combination of multiple

perspectives as given below:

8.1 Overall project perspectives:

The DPR is to provide financial analysis for (Net Present Value) NPV and
(Internal Rate of Return) IRR defined in the following two ways:

(i) NPV & IRR (overall): examines overall project viability, including finance
cost and asset replacement cost
(ii) NPV & IRR (O&M): examines only O&M viability

The complete supporting project cash flow projections along with underlying
assumptions have to be presented. (A reference project cash flow template is
provided in Annexure-4 ).

The Project financial assessment should explicitly state the cost of capital
considered and calculation method to arrive at the same

8.2 ULB level perspectives and financial situation assessment

The DPR is to provide the following information:

(i ) ULB cash flow:

This includes a complete cash flow covering the last 5 years on an actual basis
and projections for the next 20 years. The underlying assumptions for the
projections also need to be mentioned (a reference format for ULB Cashflow
is given in Annexure 5)13.

An assessment of the annual impact of the project on the ULB’s finances (i.e.
revenue receipts, revenue expenditure, capital receipts and capital expenditure)
for the Mission Period is to be provided showing the impact being
high/medium/low (more than 20 %; between 20% and 5%; less than 5%
respectively). The base year to be considered for this exercise is the last
completed financial year. A format for providing the impact is given below:

13
The ULB cash flow format has also been separately circulated to all cities as a part of updating/ standardizing
their Financial Operating Plans (FoP). The FoP can be taken as the reference document and duly updated, if
required

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Sl. Head Impact Low/ Medium/ High (more than 20 %; between 20% and 5%; less than
No. 5% respectively)
2005-06 2006-07 2007-08 2008-09 2009-20 2010-11 2011-12
1 2 3 4 5 6 7 8 9
1 Revenue Receipt
2 Revenue
Expenditure
3 Capital Receipt
4 Capital
Expenditure
Base Year: _________ (last completed financial year)

(ii) Debt situation assessment

This includes
• Debt schedules and terms for all debt taken (to be provided in
Appendices to the DPR. (Refer Annexure 6 of this document)
• Debt service coverage ratio (DSCR)
• Debt-equity ratio for the project and the ULB

(iii) Other financial information:

• Has the ULB been credit rated? If yes: provide the name of the rating
agency, type of rating and existing rating details.
• In case of Special Purpose Vehicle (SPV) or Joint Venture (JV) as a
separate legal project implementation entity, the Profit & Loss (P&L)
Statement and Balance Sheet forecasts for the next 20 years shall be
provided. In this context, the given project cash-flow template (as per
Annexure 4) may be used as the initial reference format on which
appropriate modifications can be made.

Note:
(1) The requirements for financial information under section 8.2 and elsewhere are
applicable to parastatals (as well as to ULBs). The given formats may be appropriately
modified for the organization entity context.

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9. Project Benefits Assessment (Social Cost-Benefit Assessment)

The DPR is to provide the following:

9.1 A list of benefits from societal perspective (both social and economic)
supported by:
(i) Explanation or description in qualitative terms
(ii) Quantification of these benefits to the extent possible (or wherever possible)
along with underlying assumptions

Benefits are to be focused on project outcomes (in the context of the project outlays
made) and specially on their impact on citizens/user segments covering elements such
as:

- access - supply continuity -time savings

- coverage - safety -environment improvement
- service quality - cost savings -employment
- improved efficiency - improved efficiency - improved quality of life, etc.

The above are illustrative only with type of benefits being specific to a
project/sector/region.etc.

9.2 A list of “negative externalities” (ie adverse impacts) from a societal

perspective ( both social and economic) supported by:

(i) Explanation or description in qualitative terms

(ii) Quantification of these negative/adverse impacts to the extent possible (or
wherever possible) along with underlying assumptions
Examples of negative/adverse impacts include:

- pollution; environmental distortions

- reduced green cover
- reduced access to any specific user segments
- supply interruptions (especially during project construction phases) etc
- displacement of inhabitants
- disruption in livelihood /reduced employment/ labour redundancy
- possible haphazard development around/adjacent project site areas ( eg resulting
In slums)

The listing or identification of adverse impacts facilitates planning for possible

countermeasures and also recognizes possible trade-offs in taking up the project

Note for (9.1) and (9.2)

(1) The Project Benefit/”dis-benefit” assessments should be carried out for the project life or at least
consider a 20 year time frame
(2) For convenience, the following format may be considered (this is optional and is given for
reference)

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S.No Benefits Description Comments Quantitative Impacts &

Underlying Assumptions
Societal Benefits
1
2
3..etc

Societal adverse impacts

1
2
3..etc
The societal benefits and “disbenifits”(adverse impacts) streams should be projected for the time
period specified ( entire project life cycle or for a minimum of 20 years; it should not be restricted to
the construction period or for the Mission period only).
(3) Benefits and adverse impacts identified must be specific and not generic/general statements.
Examples:
• if certain specific wards are benefiting from increased access, they should be identified
• if some specific sections of slum area or some specific slums are benefiting, these should be
specifically identified.
(4) Both direct and indirect societal impacts and assessments are to be considered ( for benefits/
adverse impacts). This constitutes the “with project scenario” which has to be compared to the prior
status or “without project scenario”.
(4) Impact on the poor (including poor households & settlements) may be specifically
highlighted/documented

9.3 Economic Internal Rate of Return (EIRR) (for projects above Rs. 100 crores or
otherwise designated as considerably complex by the State Level Nodal Agency)

For projects above Rs 100 crores (or otherwise designated as considerably

complex by the State Level Nodal Agency), structured estimation of the
Economic Internal Rate of Return (EIRR) would be prescribed as a part of the
Social Cost-Benefit Assessment. The EIRR would incorporate monetization of
the identified (quantifiable) social benefits and adverse impacts and
additionally provide for social perspective corrections to the costs and benefits
considered for financial viability assessments. For projects where the EIRR is
found to be less attractive or is a borderline case, and at the same time the project
planners deem that there are substantial benefits which are intangible, then the project
EIRR analysis is to be supported by detailed descriptive statements and assessments
on such benefits.

For projects of less than Rs. 100 crore cost, the Benefits Assessment are to be
as per 9.1 and 9.2 given above; with EIRR being optional.

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Annexures

1. Sector specific infrastructure components (illustrative)

1.1 Water supply
1.2 Sewerage
1.3 Solid waste management
1.4 Preservation of water bodies
1.5 Drainage
1.6 Roads and Transport
1.7 Urban public transport
1.8 Urban renewal and heritage conservation

Scheduling related information to be provided either within DPR or at latest

within 30days of DPR approval by CSMC

2. Project implementation planning: package-wise contracting

3. Project financial contribution planning

4. Project cashflow template

ULB/Parastatal Financial information

5. ULB cashflow template
6. Debt and Loan schedules

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Annexure 1: Sector specific infrastructure components

Indicative components and subcomponents for infrastructure sectors are mentioned

below, which will serve as guidelines for preparation of detailed project report and for
tendering/packaging of projects as an individual component or in combination. Each
component shall include all associated works for completion of the Component works.

1.1 Water Supply

S.No. Major components Sub-components
1 Source Development
(i) Type of source
(ii) Diversion Structure
(iii) Intake Structure
(iv) Plant and Machinery (raw water pumps, motors, electrical,
instrumentation, piping)
(v) Other Structures (offices, housing, roads, etc)
2 Raw Water Transmission System
(i) Raw Water Transmission main (Pumping/Gravity)
3 Water Treatment (Civil works, Plant and Machinery)
(i) Inlet Works
(ii) Primary Treatment (Aeration, Clarification)
(iii) Chemical House and Dosing systems
(iv) Rapid Mixing
(v) Filter House, and associated plant and equipments
(vi) Clear Water Reservoir and Pumping Station
(vii) Chlorine House and chlorination systems
(viii) Control Room and Laboratory
4 Clear Water Transmission System
(i) Transmission Main (Pumping/Gravity)
(ii) Booster stations and Control rooms
5 Service Reservoirs
(i) Master balancing reservoir
(ii) Ground Level Service Reservoirs
(iii) Overhead Service Reservoirs
(iv) Booster Stations / Control Rooms (Civil, Plant, Equipment)
6 Distribution System
Distribution pipeline
Note: The following details are also required in DPR
1. Raw Water Analysis Report
2. Source reliability study and report
3. DPRs for water supply projects are to be prepared as per guidelines given in
the Manual on Water Supply and Treatment 1999, Ministry of Urban
Development

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1.2 Sewerage
S.No. Major components Sub-components
1 Collection and Conveyance system
(i) Sewer Network
(ii) Manholes
2 Sewage Pumping Stations
(i) Civil Works-wet well and dry well
(ii) Plant and Machinery
3 Sewage Pumping Mains
(i) Trunk Mains
4 Sewage Treatment and Disposal (Civil works, Plant and machinery)
(i) Primary Treatment
(ii) Secondary Treatment
(iii) Tertiary Treatment
(iv) Sludge Treatment
(v) Chlorination
(vi) Gas collection system
(vii) Recycle and reuse
(viii) Disposal System
(ix) Control room and laboratory
Note:
1. The following details are also to be included in the in DPR : Sewage
Analysis Report

2. The DPRs for sewerage systems shall be prepared as per the guidelines given
in the Manual of Sewerage and Sewage Treatment – 1993., Ministry of Urban
Development

1.3 Solid Waste Management

S.No. Major components Sub-components
1 Primary Collection
(i) System of Collection (door-to-door collection, segregation
of waste)
(ii) Waste storage and collection bins (Household bins,
Community bins)
(iii) Primary collection vehicles (for collection and transfer to
transfer stations)
2 Transfer Stations
(i) Development of Transfer Stations
(ii) Equipment
3 Transportation
(i) Vehicles (for transfer from transfer stations to disposal site)
(i) Vehicle Depot
4 Disposal of Waste
(i) Development of disposal site (land-fill site, compost plant,
vehicle depot)
(ii) Equipment at disposal site
(iii) Recycling plant (briquette, waste-to-energy, etc)

1.4 Preservation of Water Bodies

S.No. Components
1 Embankment works and other civil works
2 Desilting/cleaning of water bodies
3 Desilting/cleaning of primary channels
4 Provision of facilities (public facilities/refreshments/entertainments)

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1.5 Drainage
S.No. Components
1 Roadside Drains (cleaning, rehabilitation, new works)
2 Major Drainage Channels (desilting, cleaning, rehabilitation works, new works)
3 Disposal (desilting, cleaning, rehabilitation works at receiving water body)

Note: The DPR for drainage systems shall be prepared as per the guidelines given
in the Manual of Sewerage and Sewage Treatment – 1993., Ministry of Urban
Development

1.6 Roads and Transport

S.No. Components Sub-components
1 Road works with drainage
(i) ROW availability and utility shifting
(ii) Road work
(iii) Drainage work
(iv) Street lights/signals
(v) Street furniture
(vi) Painting/Markings/Signages
2 Bridges
(i) Bridge work
(ii) Lighting
(iii) Painting/markings/signages
3 Flyovers/ROBs/RUBs
(i) Flyover/ROBs/RUBs work
(ii) Lighting
(iii) Painting/markings/signages
4 Terminals
(i) Area demarcation
(ii) Civil work
(iii) Access
(iv) Provision of basic urban services (Water
Supply, Drainage Network, Sewerage
Network, Solid Waste Collection, other
Service lines and Ducts)
5 Other Infrastructure development
(i) Street lighting
(ii) Signalization
(iii) Junction improvement
(iv) TSM
(v) Parking
Note:
1. The DPR for Roads and Transport project shall in general be in line with the
National Urban Transport Policy and shall refer to the MORTH guidelines and
IRC codes as applicable.
2. Detailed engineering design of project component shall include but not be
limited to:
• General drainage conditions, HFL, water level
• Traffic analysis, traffic growth, desire line based on O-D survey, traffic
flow diagrams.
• Evaluation of alternative proposals/structural solutions

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 Detailed Project Report: Preparation Toolkit

• Characteristics of existing facility and integration with new facility

supported with maps
• Design life
• Planning and design criteria considering overall scenario
• Layout plan, GAD and detail drawings.
• Cost estimate-assumptions, basis of adoption of rates supported with rate
analysis
• Source of construction material

1.7 Urban Public Transport

S.No. Components
1 Corridor development (BRTS, MRTS, multi-modal etc.)
2 Ridership estimate
3 System requirement
4 Fleet Requirement
5 Stations/Terminals/depots (Civil works, Tools and Plant for maintenance)
6 Other associated infrastructure for operation and maintenance

1.8 Urban renewal and heritage conservation

S.No. Major components Sub-components
1 Public space/Area improvement and conservation scheme
(i) Provision of basic urban services (Water Supply, Drainage
Network, Sewerage Network, Solid Waste Collection, other
Service lines and Ducts)
(ii) Provision of Amenities
(iii) Street Furniture and Lighting
(iv) Landscaping
(v) Access Pathways, Pavements, and Roads
(vi) Parking Areas
(vii) Information System
2 Restoration Works
(i) Public Space
(ii) Street façade
(iii) Building, Monument, and Structure
(iv) Street Furniture
(v) Pavements and Landscape Elements
(vi) Water Bodies
(vii) Waterfront or Ghats
(viii) Hillocks, Forests, Sacred Groves, and other natural features.

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 Detailed Project Report: A Reference Framework

Annexure 2: Project implementation planning: package wise contracting relationship

Project implementation planning: Package-wise contracting relationships

list: tender packages contract Cost tendering Completion
type
package no, package unit rate/ estimate release award date scheduled
description turnkey/ date (month & date (date &
percentage/ (month & year) month)
others year)
1

2
3
4
5
6
7
…n
Total:

Annexure 3: Schedule for financial contribution and sources

Proposed project schedule – to be provided wither within DPR or at latest within 30 days of DPR approval by CSMC

Financial contribution and sources table (in Rs. Lakhs)

S. FY 06-07 FY 07-08 FY 08-09 FY 09-10 FY 10-11 FY 11-12 Total
Sources
No Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total
scheduled scheduled scheduled scheduled scheduled
Scheduled month and amount scheduled month and amount
amount amount amount amount amount
1 GoI
2 State
3 ULB
4 Others
Total
Note (for filling table):
(1)For year of sanction of project and following year, provide quarterly schedule (month- year and amount),. For subsequent years provide annual schedule
month-year and amount

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 Detailed Project Report: A Reference Framework

Annexure 4 Project cashflow template (including optional templates)

Annexure 4A
PROJECT CASH FLOW FOR JNNURM
Particulars Block 1 - JNNURM Duration Block 2 - Beyond JNNURM Duration
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 ……...2024-25
1 2 3 4 5 6 7 8 9 10 11 12-21
Cash Flow during Construction phase
Inflows
Central Government Grant – JNNURM
State Government Grant
ULB's own contribution
Loans from banks/ FIs
Debentures/ Bonds
Beneficiary contribution
Others (Please specify)
Sub Total (A)
Outflows
Capital expenditure (Note 1)
Interest during construction
Project related Establishment charges
Others (Please specify)
Sub Total (B)
Net cash flow during Construction phase (A-B)(C)
Cash Flow during O & M phase
Inflows
User charges
Revenue grant from State Government
Other income (Please specify)
Income earmarked for the project (Note 2)
Others (Please specify)
Sub Total (D)
Outflows
Establishment charges
O & M charges (Note 3)
Loan repayments (Principal)
Interest
Others (Please specify)
Sub Total (E)
Net cash flow during O & M phase (D-E) (F) (Note 4)
NPV and IRR (O&M)
Net cash flow during Construction and O & M phase (C+F) (G)
NPV and Project IRR (overall)
Note:
1. Provide details in Annexure 4B (optional)
2. Income earmarked for the project includes those own sources of income for the organisation which is earmarked for O&M or loan repayment of the project
3. Provide details in Annexure 4C (optional)
4. NPV and IRR (O&M) should be calculated after adding back the amount of Loan repayments (Principal)

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 Detailed Project Report: A Reference Framework

Annexure 4B
Details of Capital Expenditure
2005-06 2006-07
…… (entire construction phase)
Particulars Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
1 2 3 4 5 6 7 8 9 ………
Land acquisition
Rehabilitation and Resettlement
Civil works
Administrative buildings
Plant and Machinery
Technical/ Supervision/ Other consultancies
……..
……..
Total

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 Detailed Project Report: A Reference Framework

Annexure 4C
Details of Operation & Maintenance Charges
Particulars 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 ……...2024-25
1 2 3 4 5 6 7 8 9 10 11 12-21
Electricity charges
Petrol, Oil and Lubricants
Rent, Rates and Taxes
Consultancy/ Professional charges
Office-Maintenance
Communication Expenses
Billing and Collection
Printing and Stationery
Insurance
Consumption of Stores
Repairs and Maintenance
Annual maintenance charges
Patents and Royalties
Bank charges
……..
……..
Total

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 Detailed Project Report: A Reference Framework

Annexure 5 : ULB Cash-flow Template

" Name" of the Urban Local Body

S.No Particulars Actual Projected
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 to 2019-20 2020-21 to 2024-25
Rs in Lakhs Rs in lakhs Rs in lakhs Rs in lakhs
Indicate status of accounts (A- Audited and U-Unaudited)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
O Opening Balance (O)*

A Revenue Income
A-1 Tax Revenue
A-2 Non-Tax Revenue
A-3 Assigned Revenue and Compensations
A-4 Grants, Contributions and Subsidies
A-5 Other Income
TA Total

B Revenue Expenditure
B-1 Establishment Expenditure
B-2 Administrative expenditure
B-3 O & M Expenditure
B-4 Interest and Finance charges/Debt servicing (only interest)
B-5 Grants/contributions to allied institutions
B-6 Other Expenses
TB Total

X Revenue Surplus/(Deficit) (A-B)(X)

C Capital Income and Borrowings

C-1 Grants/Contributions for capital works
C-2 Loans/Borrowings (deduct principal repayments)
C-3 Deposit works (grants received)
C-4 Others
TC Total

D Capital Expenditure
D-1 Capital Works
D-2 Deposit works (expenditure incurred)
D-3 Transfer to Reserves
D-4 Investments (deduct sale)
D-5 Stores/Inventory
D-6 Others
TD Total

Y Capital Surplus/(Deficit) (C-D)(Y)

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C Closing Balance** (O+X+Y)
(X+Y)
Note: *Opening Balance of cash-in-hand and cash at bank , **Closing Balance of of cash-in-hand and cash at bank
 Detailed Project Report: A Reference Framework

Annexure 6 : Loan Schedules and Loan Ageing

Annexure 6 A
Rs. Lakhs
Long Term Debt Situation of ULB/Parastatal
Details of loans & borrowings Overall Status Repayment Schedule
Loan Source Year Original Terms Total Loan Total Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10
taken loan in outstanding arrears
amount brief
loan1
loan2
loan3
loan4
loan5
….n
Notes
1 Loan refers to long term loans ie having tenure of greater than 1 year
2 Repayment schedule of the 10 year time frame is being requested
3 Terms cover: tenure, interest rate, moratorium period, total repayment period
4 Original loan amount to cover only principal
5 Total loan outstanding includes principal and interest

Annexure 6 B
Long Debt Situation of ULB/Parastatal: Aging Analysis of Total Arrears
Details of loans & borrowings Aging Analysis ( in years)
sLoan Source Year taken Total Loan Total < 3 Years 3-5 Years 5-10 Years >10 Years
outstanding arrears
loan1
loan2
loan3
loan4
loan5
….n

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