Smart task-2

Project Finance –Modeling and Analysis

1Q) While preparing a financial model what are the assumptions we need
to take? Please list down the list of assumptions with the values, assuming
the project will be set up in india?
ANS): Financial model defined:

It is a set of assumptions about future business conditions that drive projections of company’s
earnings, revenue, balance sheet accounts and cash flows.

❖ Assumptions:

➢ Revenue:

It is one of the important assumptions in a financial model. Small variances in topline growth
can mean variances in cash flows and earnings per share. It is important to get feel for what
has affected revenue in the past in order to make a good assumption about the future.
Revenue is also known as sales.

➢ Expenses:

It is also a one of the important assumptions in a financial model. It can be at any cost that a
company bears an attempt to maximize its revenues, and thereby its profits.

There are different types of expenses involved in financial model like an indirect expenses, non-
operating and direct expenses.

▪ Indirect Expenses: These are the operating expenses it involves fixed and variable cost that
are incurred by the business.

▪ Non-operating expenses: Those expenses are which re not related to revenue generation for
the core business activity. These expenses are primarily interest expenses and income tax.

❖ List of assumptions with the values, assuming project will be set up in India:

i. Building maintenance-100000

ii. Utilities (water+ electric+ internet)- 40000

iii. Salary (Accountant+ Maid)-40000

iv. Miscellaneous expenses+ plumber+ electrician-20000

v. Corporate social responsibility, training, HSE-100000

vi. Income tax-15%

2Q) Explain the function of revenue, cost, and debt sheet of financial
model?
ANS) Functions of revenue, cost, and debt sheet of financial model:

▪ Revenue: When forecasting revenue in a modular financial model, revenue is initially

assumed to equal cash, with the cash flow impacts of accounts receivable being modeled as a
next step. This differs from traditional double-entry accounting, which would initially debt
accounts receivable and only debit cash when cash is received. Revenue is the first reported
line item on the income statement, and is reported within the cash receipts section of the
operating cash flows section of the cash flow statement. Ex: It also implies that there are 2 cash
inflows one is rent and another is interest earned on the deposits paid by tenants this is the
revenue earned.

▪ Debt sheet: Financial models are an indispensable part of every company’s finance toolkit.
They are spreadsheets that detail the historical financial data of a given business, forecast its
future financial performance, and assess its risks and returns profile. Financial models are
typically structured around the three financial statements of accounting-namely: income
statement, balance sheet, and cash flow statement. The management of most corporations
rely, at least in part, on the details, assumptions and outputs of financial models, all of which
are critical to said companies strategic and capital decision-making processes.

▪ Cost: A cost function is a formula used to predict the cost that will be experienced at a certain
activity level. This formula tends to be effective only within a range of activity levels, beyond
which it no longer yields accurate results. Cost functions are typically incorporate into
company budgets, so that modeled changes in sales and unit volumes will automatically trigger
changes in breakeven analysis, to determine the sales level at which a business will begin to
generate a profit.

3Q) Explain in detail the various steps involved (with the importance ) in
the fin flows sheet. why and what the bank needs to check before
financing the project?
ANS) It is important to know how to effectively analyze the financial statements of a firm. This
requires an understanding of three key areas:

▪ The structure of the financial statements

▪ The economic characteristics of the industry in which the firm operates and

▪ There are generally six steps to developing an effective analysis of financial statements

i. Identify the industry economic characteristics: First, determine a value chain analysis for the
industry-the chain of activities involved in the creation, manufacture and distribution on the
firm’s products and services. Techniques such as porter’s 5 forces or analysis of economic
attributes are typically used in the step.

ii. Identify company strategies: Next, look at the nature of the product/ services being offered
by the firm, including the uniqueness of product, level of profit margins, creation of brand
loyalty and control of costs. Additionally, factors such as supply chain integration, geographic
diversification and industry diversification should be considered.

iii. Assess the quality of the firm’s financial statements: Review the key financial statements
within the context of the relevant accounting standards. In examining balance sheet accounts,
issues such as recognition, valuation and classification are keys to proper evaluation.

iv. Analyze current profitability and risk: This is the step where financial professionals can
really add value in the evaluation of the firm and its financial statements. The most common
analysis tools are key financial statement ratios relating to liquidity, asset management,
profitability and risk/market valuation.

v. Prepare forecasted financial statements: Although often challenging, financial professionals

must make reasonable assumptions about the future of the firm and determine how these
assumptions will impact both the cash flows and the funding.

vi. Value the firm: While there are many valuation approaches, the most common is a type of
discounted cash flow methodology. These cash flows could be in the form of projected
dividends, or more detailed techniques such as free cash flows to either the equity holders or
on enterprise basis.

Why and what the banks needs to check the finance project:

➢ Project financing has been an integral part of financing options for infrastructure projects
globally, both in developed and emerging markets.
➢ In India, local banks, both public sector and private sector, have been the only players in
infra project financing, with very little participation from international financial institutions. This
situation is not sustainable- with increasing demand for funds, and Indian banks reaching their
prudential exposure limits, there is an urgent need for new instruments and new players in the
financing market. Project financing can play a very important role- we would discuss below
some suggestions to increase the amount of project financing (PF), from the perspective of
international financial institutions (IFIs).

➢ These issues would be applicable whether the IFI is lending funds directly, or providing a
guarantee based on which the borrower could raise fund locally; as long as the borrower credit
risk is being carried by the IFI, these issues would be valid and need to be addressed.

➢ IFIs could include commercial banks, multilateral institutions, credit insurance agencies,
development banks, finance companies, insurance firms, overseas parents of Indian company,
etc.

➢ Mainly the bank check the project where the project will be success or not, it analysis all the
situations and provide loans regarding to that project. They provide loans when they fulfill the
conditions as the project full earn good profits then the persons who take the amount will be
repayable the amount back.

SMART TASK SUBMITED BY:

NAME: G.SANDHAYA RANI

ISTTM BUSINESS SCHOOL(HYD)