Financial analysis

1
Financial analysis
• Financial analysis is largely an effort to assess financial
performance, i.e., how well or how poorly a firm performed
with money entrusted to it.
• Financial analysis is considered a part of firm’s accountability.
Exactly how financial reporting is done depends in part on the
model selected.
• In addition, many types of financial reports can be generated
but a considerable amount of attention is given to the
quantitative financial statements, which are one type of
report, but usually the major consists of financial, sources,
budgeted estimates and expenditures.
2
Introduction
• Financing is one of the major hurdles for an entrepreneur.
• How much money does the entrepreneur need?
• Undercapitalized
• Overcapitalized
Working Capital and Cash Flow
Management
• Permanent working capital is the amount needed to produce
goods and services at the lowest point of demand.
• Temporary working capital is the amount needed to meet
seasonal or cyclical demand.
The Cash Flow Cycle
• The production cycle from material ordering to finished goods
inventory. It also shows the cash cycle from payment for raw
materials through the collection of receivables.
Managing and Controlling the
Cycle.
• Accounts payable:
• Raw materials inventory:
• Work-in-process inventory:
• Finished goods inventory:
Financial Projections
• A forecast of future revenues and expenses for a business,
organization, or country.
• A financial projection will typically take into account both
internal information such as historical income and cost data,
and estimates of the development of external market factors,
providing estimated figures in addition to projections of the
general financial condition of the company in the future.

8
COST OF PROJECTS
The cost of project represents the total of all items of outlay
associated with a project which are supported by long-term funds. It is
the sum of the outlays on the following:
1. Land and site development
2. Buildings and civil works
3. Plant and machinery
4. Technical know how and engineering fees
5. Expenses on foreign technicians and training of Indian technicians
abroad
6. Miscellaneous fixed assets
7. Preliminary and capital issue expenses
8. Pre-operative expenses
9. Margin money for working capital
10. Initial cash losses 9
Land and Site Development
The cost of land and site development is the sum of the
following:
1. Basic cost of land including conveyance and other allied
charges
2. Premium payable on leasehold and conveyance charges
3. Cost of levelling and development
4. Cost of laying approach roads and internal roads
5. Cost of gates
6. Cost of tube wells
The cost of land varies considerably from one location to
another. While it is very high in urban and even semi-urban
locations, it is relatively low in rural locations. The expenditure
on site development, too, varies widely depending on the 10
location and topography of the land.
 Buildings and Civil Works
1. Buildings for the main plant and equipment.
2. Buildings for auxiliary services like steam supply, workshops, laboratory, water
supply, etc.
3. Godowns, warehouses, and open yard facilities.
4. Non-factory buildings like canteen, guest houses, time office, excise house, etc.
5. Quarters for essential staff.
6. Silos, tanks, wells, chests, basins, cisterns, hoppers, bins, and other structures
necessary for
installation of the plant and equipment.
7. Garages Sewers, drainage, etc.
8. Other civil engineering works.

The cost of the buildings and civil works depends on the kinds of structures required
which, in turn, are dictated largely by the requirements of the manufacturing process. 11
Once the kinds of structures required are specified, cost estimates are based on the
plinth area and the rates for various types of structures. These rates, of course, vary
with the location to some extent.
Plant and Machinery
Cost of Imported Machinery
This is the sum of (i) FOB (free on board) value, (ii) shipping,
freight, and insurance cost,
(iii) import duty, and (iv) clearing, loading, unloading and
transportation charges.
Cost of Indigenous Machinery
This consists of (i) FOR (free on rail) cost, (ii) sales tax, octroi,
and other taxes, if any, and
(iii) railway freight and transport charges to the site.

12
Cost of Stores and Spares
• Foundation and Installation Charges
• The cost of the plant and machinery is based on the latest
available quotation adjusted for possible escalation. Generally,
the provision for escalation is equal to the following product:
(latest rate of annual inflation applicable to the plant and
machinery) × (length of the delivery period).

13
COSTING AND PRINCING OF
PROJECTS
• Order-of-Magnitude Cost Estimates
• This type of cost estimate is made without any detailed
engineering data.
• This cost estimate may be accurate± 25% within the scope of
the project.
• It may be based on past experience in India or abroad with
foreign principals or it he based on capacity estimates.
• These order-of-magnitude cost estimates are useful for
preliminary discussions and project formulation.

14
Approximate Cost estimate
(PFR Estimates)
• Also called top-down estimate, it is done without detailed
engineering data and may be accurate +15%.
• This type of estimate is undertaken at the time of Preliminary
Feasibility Report (PER) stage.
• Here we use various techniques of costing like pro-rata estimate
from experience of doing similar projects in the past and updating
for inflation. It may also be described as estimating by analogy or
rule of thumb estimates.
• We extensively use indexing costs of similar activities. These are
adjusted for capacity and technology. Since detailed engineering
data is not available, estimator is likely to conclude that since this
component is 20% more difficult than a similar one completed in
another project, it is likely to cost 20% more overall or in terns of
materials or labour or overhead, as appropriate. 15
Economic Feasibility Cost
Estimate (TEFR Estimates)
• This is used for working out the product cost and pricing and
consequently the profitability analysis of the project depends
on this cost estimate. This is based on a reasonable degree of
detailed engineering data and should be accurate + 10% for
Techno Economic Feasibility Report (TEFR) stage.

16
Detailed Project Cost Estimate
(DPR Estimates)
• Some preliminary drawings like layouts, process flow
diagrams, piping and instruments (also called engineering line)
diagrams are prepared and company firms up its action plan
by preparing a detailed project cost estimate -corresponding
to Detailed Project Report (DPR) stage and is expected to be
accurate to + 5%.
• At this state, costing exercise is very detailed and costs of all
major plant items are supported by proper price quotations
from the intended suppliers. Even at this stage. Cost of
construction and erection labour and cost of overheads are
estimated factorial.

17
Control Cost Estimates
• After making some progress on the basic design viz. drawing
up of detailed scheme, flow diagrams and layouts, a very
detailed exercise on cost-estimates is undertaken.
• When basic documents as above are sufficiently frozen, we
have, more or less, defined the scope of the project in hand.
Consequently the aim is to arrive at an accuracy of + 2.5%
although it may be more precise to say that is lower than + 5%
as achieving an accuracy lower than + 5% is very much
dependent upon economic stability, inflationary trends on
prices, balance of payment, fluctuations in currency exchange
rate etc.

18
Means of Finance
1. Share capital
2. Term loans
3. Debenture capital
4. Deferred credit
5. Incentive sources
6. Miscellaneous sources

19
Planning the Means of Finance
• Key business considerations
• Cost
• Risk
• Control
• Flexibility

20
Capacity and resources requirement in a
Project
While starting a new project a project manager may need to
plan for the following:
• Attaining New skills: Specific training programmes for
human resource.
• Manpower hiring: New staff may need to be hired.
• Process Implementation: New processes need to be
implemented.
• Capacity requirement planning: Assessing the capacity
requirements, generate replenishment schedules,
production schedules.
Increasing Plant Capacity
The following factors may affect the capacity of a Plant

• Input constraints

• Investment cost

• Market situation

• Government policies
Selecting project location
The following factors may affect a manufacturing plant
project location:
• Proximity to market
• Proximity to raw material
• Infrastructure
• Labour and wages
• Government policies
• Climatic conditions
• Safety needs
Selecting project location
• Policies of Central Government
for Plant Location
• Regional factors
• Community factors
• Safety factors
• Legal Aspects in Selecting Plant
Location
• Disposal of waste material
• Labour issues
• Protection from flood and fire
• Power and water supply
• Technological requirements
• Specifications of a product/service
• Uncertainties and interdependence
on other technologies
• Ease of technology availability
• Organization's capacity to adopt the
technology
• Cost of acquiring, installing, and
maintaining the technology
• Obsolescence of technology
• Safety parameters