BACHELOR OF BUSINESS ADMINISTRATION (BBA)

BBA [(G)-302 PROJECT MANGEMENT

UNIT I Lectures:-14
Projects, project management, Objective and Importance of project management. Tools and
techniques of Project Management. Project team. Roles and Responsibilities of Project manager.
Determinants of project success . project life cycle, Phases of project life cycle. Classification of
Project, Generation of Idea, Preliminary screening
UNIT-II Lectures:-14
Technical analysis:
Factors considered in technical analysis. Factor affecting selection of location. Needs for
considering alternatives. Sources of technology. Selection of appropriate technology. Technology
selection
Market Analysis:
Conduct of market survey, Characterization of market, market planning
Network analysis:
Critical path method, Programme evaluation and review techniques, identifying critical path
probability of completing the project within given time
UNIT-III Lectures:-14
capital structure, sources of long term finance, Debt financing ,characteristics of debt ,Equity
Financing preference share, equity share, Retained earning ,Short-term sources for working capital
Newer sources of finance Venture capital
Unit IV Lectures:-14

Project Evaluation and Control:

Project Monitoring and controlling, Post project evaluation, project evaluation
Abandonment analysis, Social cost benefit analysis Role of IT in project Management Future of
project Management
 UNIT – I

PROJECT MANAGEMENT
Projects
A project is an activity to meet the creation of a unique product or service and thus activities
that are undertaken to accomplish routine activities cannot be considered projects.
a project is a series of tasks that need to be completed in order to reach a specific outcome.
A project can also be defined as a set of inputs and outputs required to achieve a particular
goal. Projects can range from simple to complex and can be managed by one person or a
hundred. Projects are often described and delegated by a manager or executive. They go
over their expectations and goals and it's up to the team to manage logistics and execute the
project in a timely manner. Sometimes deadlines can be given or a time limitation. For good
project productivity, some teams break the project up into individual tasks so they can
manage accountability and utilize team strengths.
project management,
Management : Management is the technique of understanding the problems, needs and
controlling the use of Resources, Cost, Time, Scope and Quality. Project Management :
Application of knowledge, skills , tools & techniques to project activities in order to meet
stakeholder needs & expectations from a project. Needs : stated part of the project
Expectations : unstated part of the project “Completion of Project on time within Budget
without comprising Quality”
 Objective
In brief, project management objectives are the successful development of the project’s
procedures of initiation, planning, execution, regulation and closure as well as the guidance
of the project team’s operations towards achieving all the agreed upon goals within the set
scope, time, quality and budget standards.

• The successful development and implementation of all project’s procedures. A project,

regardless of its size, generally involves five distinctive phases of equal importance:
Initiation, Planning and Design, Construction and Execution, Monitoring and Control,
Completion. The smooth and uninterrupted development and execution of all the above
phases ensures the success of a project.

• Productive guidance, efficient communication and apt supervision of the project’s

team. Always keep in mind that the success or failure of a project is highly dependent on
teamwork, thus, the key to success is always in collaboration. To this end, the establishment
of good communication is of major importance. On one hand, information needs to be
articulated in a clear, unambiguous and complete way, so everything is comprehended fully
by everyone and on the other hand, is the ability to be able listen and receive constructive
feedback.

• The achievement of the project’s main goal within the given constraints. The most
important constraints are, Scope in that the main goal of the project is completed within the
estimated Time, while being of the expected Quality and within the estimated Budget.
Staying within the agreed limitations always feeds back into the measurement of a project’s
performance and success.

• Optimization of the allocated necessary inputs and their application to meeting the
project’s pre-defined objectives, is a matter where is always space for improvement. All
processes and procedures can be reformed and upgraded to enhance the sustainability of a
project and to lead the team through the strategic change process.
• Production of a complete project which follows the client’s exclusive needs and
objectives. This might mean that you need to shape and reform the client’s vision or to
negotiate with them as regards the project’s objectives, to modify them into feasible goals.
Once the client’s aims are clearly defined they usually impact on all decisions made by the
project’s stakeholders. Meeting the client’s expectations and keeping them happy not only
leads to a successful collaboration which might help to eliminate surprises during project

Importance of project management.

1. Strategic Alignment
Project management is important because it ensures what is being delivered, is right, and
will deliver real value against the business opportunity.Every client has strategic goals and
the projects that we do for them advance those goals. Project management is important
because it ensures there’s rigor in architecting projects properly so that they fit well within
the broader context of our client’s strategic frameworks. Good project management ensures
that the goals of projects closely align with the strategic goals of the business.

2. Leadership
Project management is important because it brings leadership and direction to projects.
Without project management, a team can be like a ship without a rudder; moving but
without direction, control or purpose. Leadership allows and enables a team to do their best
work. Project management provides leadership and vision, motivation, removing
roadblocks, coaching and inspiring the team to do their best work.

3. Clear Focus & Objectives

Project management is important because it ensures there’s a proper plan for executing on
strategic goals.
Where project management is left to the team to work out by themselves, you’ll find teams
work without proper briefs, projects lack focus, can have vague or nebulous objectives, and
leave the team not quite sure what they’re supposed to be doing, or why.
As project managers, we position ourselves to prevent such a situation and drive the timely
accomplishment of tasks, by breaking up a project into tasks for our teams. Oftentimes, the
foresight to take such an approach is what differentiates good project management from bad.
Breaking up into smaller chunks of work enables teams to remain focused on clear
objectives, gear their efforts towards achieving the ultimate goal through the completion of
smaller steps and to quickly identify risks, since risk management is important in project
management.Often a project’s goals have to change in line with a materializing risk. Again,
without dedicated oversight and management, a project could swiftly falter but good project
management (and a good project manager) is what enables the team to focus, and when
necessary refocus, on their objectives.

4. Realistic Project Planning

Project management is important because it ensures proper expectations are set around what
can be delivered, by when, and for how much.Without proper project management, budget
estimates and project delivery timelines can be set that are over-ambitious or lacking in
analogous estimating insight from similar projects. Ultimately this means without good
project management, projects get delivered late, and over budget.
Effective project managers should be able to negotiate reasonable and achievable deadlines
and milestones across stakeholders, teams, and management. Too often, the urgency placed
on delivery compromises the necessary steps, and ultimately, the quality of the project’s
outcome. We all know that most tasks will take longer than initially anticipated; a good
project manager is able to analyze and balance the available resources, with the required
timeline, and develop a realistic schedule. Project management really matters when
scheduling because it brings objectivity to the planning.
A good project manager creates a clear process, with achievable deadlines, that enables
everyone within the project team to work within reasonable bounds, and not unreasonable
expectations.

5. Quality Control
Projects management is important because it ensures the quality of whatever is being
delivered, consistently hits the mark.
Projects are also usually under enormous pressure to be completed. Without a dedicated
project manager, who has the support and buy-in of executive management, tasks are
underestimated, schedules tightened and processes rushed. The result is bad quality output.
Dedicated project management ensures that not only does a project have the time and
resources to deliver, but also that the output is quality tested at every stage.
Good project management demands gated phases where teams can assess the output for
quality, applicability, and ROI. Project management is of key importance to Quality
Assurance because it allows for a staggered and phased process, creating time for teams to
examine and test their outputs at every step along the way.

6. Risk Management
Project management is important because it ensures risks are properly managed and
mitigated against to avoid becoming issues.
Risk management is critical to project success. The temptation is just to sweep them under
the carpet, never talk about them to the client and hope for the best. But having a robust
process around the identification, management and mitigation of risk is what helps prevent
risks from becoming issues.
Good project management practice requires project managers to carefully analyze all
potential risks to the project, quantify them, develop a mitigation plan against them, and a
contingency plan should any of them materialize. Naturally, risks should be prioritized
according to the likelihood of them occurring, and appropriate responses are allocated per
risk. Good project management matters in this regard, because projects never go to plan, and
how we deal with change and adapt our plans is a key to delivering projects successfully.

7. Orderly Process
Project management is important because it ensures the right people do the right things, at
the right time – it ensures proper project process is followed throughout the project lifecycle.
Surprisingly, many large and well-known companies have reactive planning processes. But
reactivity – as opposed to proactively – can often cause projects to go into survival mode.
This is a when teams fracture, tasks duplicate, and planning becomes reactive creating
inefficiency and frustration in the team.
Proper planning and process can make a massive difference as the team knows who’s doing
what, when, and how. Proper process helps to clarify roles, streamline processes and inputs,
anticipate risks, and creates the checks and balances to ensure the project is continually
aligned with the overall strategy. Project management matters here because without an
orderly, easily understood process, companies risk project failure, attrition of employee trust
and resource wastage.

8. Continuous Oversight
Project management is important because it ensures a project’s progress is tracked and
reported properly. Status reporting might sound boring and unnecessary – and if
everything’s going to plan, it can just feel like documentation for documentation’s sake. But
continuous project oversight, ensuring that a project is tracking properly against the original
plan, is critical to ensuring that a project stays on track.
When proper oversight and project reporting is in place it makes it easy to see when a
project is beginning to deviate from its intended course. The earlier you’re able to spot
project deviation, the easier it is to course correct.
Good project managers will regularly generate easily digestible progress or status reports
that enable stakeholders to track the project. Typically these status reports will provide
insights into the work that was completed and planned, the hours utilized and how they track
against those planned, how the project is tracking against milestones, risks, assumptions,
issues and dependencies and any outputs of the project as it proceeds.
This data is invaluable not only for tracking progress but helps clients gain the trust of other
stakeholders in their organization, giving them easy oversight of a project’s progress.

9. Subject Matter Expertise

Project management is important because someone needs to be able to understand if
everyone’s doing what they should.
With a few years experience under their belt, project managers will know a little about a lot
of aspects of delivering the projects they manage. They’ll know everything about the work
that their teams execute; the platforms and systems they use, and the possibilities and
limitations, and the kinds of issues that typically occur.
Having this kind of subject matter expertise means they can have intelligent and informed
conversations with clients, team, stakeholders, and suppliers. They’re well equipped to be
the hub of communication on a project, ensuring that as the project flows between different
teams and phases of work, nothing gets forgotten about or overlooked.
Without subject matter expertise through project management, you can find a project
becomes unbalanced – the creative’s ignore the limitations of technology or the developers
forget the creative vision of the project. Project management keeps the team focused on the
overarching vision and brings everyone together forcing the right compromises to make the
project a success.

10. Managing and Learning from Success and Failure

Project management is important because it learns from the successes and failures of the
past. Project management can break bad habits and when you’re delivering projects, it’s
important to not make the same mistakes twice. Project managers use retrospectives or post
project reviews to consider what went well, what didn’t go so well and what should be done
differently for the next project.

Tools and techniques of Project Management.

Project Management Techniques
Techniques in project management range from traditional to innovative ones. Which one to
choose for running a project, depends on project specifics, its complexity, teams involved,
and other factors. Most of them can be used in various fields, however, there are techniques
that are traditionally used in certain areas of activity, or are developed specifically for
certain fields. Below, we’ve listed the most popular techniques that are used in project
management.
Classic technique
The simplest, traditional technique is sometimes the most appropriate for running projects. It
includes preparing a plan of upcoming work, estimating tasks to perform, allocating
resources, providing and getting feedback from the team, and monitoring quality and
deadlines.

Where to use: this technique is ideal for running projects performed by small teams, when
it’s not really necessary to implement a complex process.

Waterfall technique
This technique is also considered traditional, but it takes the simple classic approach to the
new level. As its name suggests, the technique is based on the sequential performance of
tasks. The next step starts when the previous one is accomplished. To monitor progress and
performed steps, Gantt charts are often used, as they provide a clear visual representation of
phases and dependencies.

Where to use: this technique is traditionally used for complex projects where detailed
phasing is required and successful delivery depends on rigid work structuring.
Agile Project Management
Agile project management method is a set of principles based on the value-centered
approach. It prescribes dividing project work into short sprints, using adaptive planning and
continual improvement, and fostering teams’ self-organization and collaboration targeted to
produce maximum value. Agile frameworks include such techniques as Scrum, Kanban,
DSDM, FDD, etc.

Where to use: Agile is used in software development projects that involve frequent
iterations and are performed by small and highly collaborative teams.

The agile technique

Today, many project & work management software tools like actiTIME offer convenient
ways to introduce Scrum and Agile in work process. With them, you can configure multiple
levels of your work structure, track long-term and short-term deadlines, use estimates in
planning process, and create Kanban boards to monitor work progress. Basically, software
tools allow to structure your work according to the Agile method, and visualize the
structure.
Where to use: Agile is used in software development projects that involve frequent
iterations and are performed by small and highly collaborative teams.
Rational Unified Process
Rational Unified Process (RUP) is a framework designed for software development teams
and projects. It prescribes implementing an iterative development process, where feedback
from product users is taken into account for planning future development phases.

Where to use: RUP technique is applied in software development projects, where end-user
satisfaction is the key requirement.

Program Evaluation and Review Technique

Program Evaluation and Review Technique (PERT) is one of the widely used approaches in
various areas. It involves complex and detailed planning and visual tracking of work results
on PERT charts. Its core part is the analysis of tasks performed within the project.
Originally, this technique was developed by the US Navy during the Cold War to increase
the efficiency of work on new technologies.

Where to use: this technique suits best for large and long-term projects with non-routine
tasks and challenging requirements.

Critical Path Technique

Actually, this technique is an algorithm for scheduling and planning project works that is
often used in conjunction with the PERT method discussed above. This technique involves
detecting the longest path (sequence of tasks) from the beginning to the end of a project and
defining the critical tasks. Critical are tasks that influence the deadlines of the entire project
and require closer attention and thorough control.

Where to use: Critical Path technique is used for complex projects where delivery terms
and deadlines are critical, in such areas as construction, defense, software development, and
others.
Critical Chain Technique
Critical Chain is a more innovative technique that derives from PERT and Critical Path
methods. It is less focused on rigid task order and scheduling and prescribes more flexibility
in resource allocation and more attention to how time is used. This technique emphasizes
prioritization, dependencies analysis, and optimization of time expenses.

Where to use: like the previous two techniques, it is used in complex projects. As it is
focused on time optimization and wise resource allocation, it suits best for projects where
resources are limited.

Extreme Project Management

Extreme project management technique (XPM) emphasizes elasticity in planning, open
approach, and reduction of formalism and deterministic management. Deriving from
extreme programming methods, it is focused on the human factor in project management
rather than on formal methods and rigid phases.

Where to use: XPM is used for large, complex and uncertain projects where managing
uncertain and unpredictable factors is required.
Project Management Tools
When applying any of the techniques to the project you need to accomplish, you also need to
use specific tools for successfully implementing the technique. Here’s a list of software tools
that are used in project management on different work steps.

Organizing Workflow & Planning

This step is the core part of starting a project: it defines how the project will be performed,
and how the quality of its outcome will be ensured. Large companies often use such
comprehensive solutions as MS Project. For smaller teams, various alternatives are
available. They don’t provide all the rich functionality typical to complex and expensive
tools, but they have planning and roadmap features that are sufficient for visualizing future
project progress. There are also free project management solutions that suit best for startups
and small businesses.

Communication
Being the key point in many techniques and methodologies, communication within a project
team needs to be properly organized. While using email for formal communication and
important messages, it’s also essential to have a corporate messenger – Slack and Skype are
the most popular ones. And, if your team members use different tools to communicate,
eliminate the pain of having multiple messengers by integrating them.

Scheduling
When allocating resources and planning for the future, it’s crucial to know who on the team
is available for specific dates. Use scheduling software for that! Such tools as actiPLANS
provide a clear visual chart of absences for upcoming dates and allow to see all necessary
details to team members’ leaves and time off.

Time management
Knowing where your team’s time goes not just helps to manage current project risks. It also
provides valuable information for future planning and estimating. Time management tools
help managers understand both individual time expenses and team’s results for any period.
Informative reports with time & cost summaries and notes to the logged time provide
insights into how time is used and what can be optimized.

Finance & Accounting

For any project manager and business owner, understanding the financial outcome of the
projects is crucial for analysis and future planning. Most used accounting tools –
QuickBooks, Zoho, Freshbooks – help collect this information. For smaller project teams,
other accounting solutions can be reasonable. They require less investment, but also provide
insights on project profitability, teams’ performance, and estimation accuracy.

Summary
Before starting work on any project, select the technique to be used and the tools that will
help your team speed up and automate work. This defines the entire workflow, management
process, and control procedures. By following the principles of the selected technique and
using the functionality of the project management tools, you’ll ensure successful project
delivery in compliance with requirements and deadlines.
project team.

Project Team
Successful projects are usually the result of careful planning and the talent and collaboration
of a project’s team members. Projects can’t move forward without each of its key team
members, but it’s not always clear who those members are, or what roles they play. Here,
we’ll describe five roles – project manager, project team member, project sponsor, executive
sponsor and business analyst – and describe their associated duties.

Project Manager

The project manager plays a primary role in the project, and is responsible for its successful
completion. The manager’s job is to ensure that the project proceeds within the specified
time frame and under the established budget, while achieving its objectives. Project
 managers make sure that projects are given sufficient resources, while managing
relationships with contributors and stakeholders.

Project manager duties:

• Develop a project plan

• Manage deliverables according to the plan
• Recruit project staff
• Lead and manage the project team
• Determine the methodology used on the project
• Establish a project schedule and determine each phase
• Assign tasks to project team members

Project Team Member

Project team members are the individuals who actively work on one or more phases of the
project. They may be in-house staff or external consultants, working on the project on a full-
time or part-time basis. Team member roles can vary according to each project.

Project team member duties may include:

• Contributing to overall project objectives

• Completing individual deliverables
• Providing expertise
• Working with users to establish and meet business needs
• Documenting the process

Project Sponsor

The project sponsor is the driver and in-house champion of the project. They are typically
members of senior management – those with a stake in the project’s outcome. Project
 sponsors work closely with the project manager. They legitimize the project’s objectives and
participate in high-level project planning. In addition, they often help resolve conflicts and
remove obstacles that occur throughout the project, and they sign off on approvals needed to
advance each phase.

Project sponsor duties:

• Make key business decisions for the project

• Approve the project budget
• Ensure availability of resources
• Communicate the project’s goals througout the organization
Executive Sponsor

The executive sponsor is ideally a high-ranking member of management. He or she is the

visible champion of the project with the management team and is the ultimate decision-
maker, with final approval on all phases, deliverables and scope changes.

Executive sponsor duties typically include:

• Carry ultimate responsibility for the project

• Approve all changes to the project scope
• Provide additional funds for scope changes
• Approve project deliverables
Business Analyst

The business analyst defines needs and recommends solutions to make an organization
better. When part of a project team, they ensure that the project’s objectives solve existing
problems or enhance performance, and add value to the organization. They can also help
maximize the value of the project deliverables.

Business analyst duties:

• Assist in defining the project

• Gather requirements from business units or users
• Document technical and business requirements
• Verify that project deliverables meet the requirements
• Test solutions to validate objectives
Roles and Responsibilities of Project manager

Defining scope & specifications of the Project

Every project shall have a different set of scope & specifications.
2. Strategize & Prepare site logistics
With respect to available space, the whole area is divided into different parts as per
execution strategy.
3. Prioritize the activities in sequence / Preparation of WBS (Work Breakdown
Structure)
Here comes the major part where the whole project is listed out in the form of activities i.e. a
work breakdown structure is prepared for the project.Activities that are to be completed in
priority are considered in the primary set of WBS.
4. Planning & Scheduling (Timelines)
After finalizing WBS, now all the activities are allocated with prescribed timelines (ensuring
project completion within stipulated timelines).
All the activities and their respective interdependencies are work out and are linked
accordingly using some project management software like MSP, Primavera, etc.
5. Quantity Estimate
Quantum of different materials required for the project are estimated or calculated based on
design/drawings provided by the Architect & Structural team.Based on the above estimate &
planning, a material requirement schedule is prepared by the project manager and submitted
to the procurement team for further process.
6. Resource Estimation
Based on the quantum of work & timelines, the project manager shall work out the resource
requirement i.e. Estimation of the number of labors (or) machinery required.
7. Budgeting
Budgeting is one of the major portfolios of a project manager. All the quantities of materials
& resources (Staff, labor, machinery, etc.) requirements which are worked out earlier are
converted into cost and project manager shall prepare the budget in accordance with the cost
allotted by the management and subsequent expectations of the customer.
After a rigorous exercise on different options, the best budget shall be proposed to the
management by the project manager and necessary assumptions and benefits are clearly
stated to management for further approval.
Once the budget is approved by the management, then the project manager shall start with
the resource deployment and execution.
8. Deployment of resources (3 M’s – Man, Material & Machinery)
As per budgetary provisions, the project manager shall negotiate with vendors in
coordination with procurement & contracts team and deploy the required Manpower,
Material & Machinery at the site for execution.
9. Execution
Based on strategy & planning project manager shall start execution with site team consisting
of Engineers, Supervisors with specialized trade i.e. Engineer – Shell & core (Structural
part) & Engineer – Finishing (Interior flat finishes).
In this stage project manager shall coordinate & lead the team of Planning, billing, execution
& quality and ensures that the project is well within the schedule, budget, quality, etc.

10. Risk Identification & Mitigation

One of the most important roles of a project manager is to identify the potential risks of
projects which are about to occur or already occurred in the project and finding a way out or
mitigation measures for the same.

11. Monitoring & Controlling

The project manager shall monitor the project on a daily, weekly & monthly basis and
project progress is evaluated based on Time, cost & quality parameters & any overheads or
deviation in these parameters are identified and necessary compensatory measures are
worked out.
Necessary Material & labor reconciliations are carried out at regular intervals to ensure that
the project is always in prescribed budgetary provisions.
12. Management Information Systems
Project Manager is accountable for each and every aspect of the project and management
shall evaluate his/her performance on their commitments & value additions to the project.
All the progress & financial aspects of the project are captured & documented in required
formats and presented to management on a weekly/monthly basis.
For example, WPR (weekly progress report), MPR (Monthly progress report), CPD (Critical
Path Delay Report), CCR (Cost center report), etc.

13. Quality Control

Any project can be evaluated on one single parameter i.e. Customer Satisfaction. The
welfare of any company in the construction industry is purely dependent on customer
satisfaction. Every valued customer shall always expect a difference in conventional product
& a good quality product.
One of the most important responsibilities of the project manager is to always maintain a
top-notch quality in the product and ensure 100% customer satisfaction.

14. Safety
According to the BOCW (Building & Other Construction Workers) Act, all the labors must
work in a safe & healthy environment. So maintaining & following efficient safety measures
at the site is also an integral responsibility of a project manager.
Determinants of project success .
project life cycle,
A project life cycle is the sequence of phases that a project goes through from its initiation to
its closure. The number and sequence of the cycle are determined by the management and
various other factors like needs of the organization involved in the project, the nature of the
project, and its area of application. The phases have a definite start, end, and control point
and are constrained by time. The project lifecycle can be defined and modified as per the
needs and aspects of the organization. Even though every project has a definite start and end,
the particular objectives, deliverables, and activities vary widely. The lifecycle provides the
basic foundation of the actions that has to be performed in the project, irrespective of the
specific work involved. A project life cycle is the sequence of phases that a project goes
through from its initiation to its closure. The number and sequence of the cycle are
determined by the management and various other factors like needs of the organization
involved in the project, the nature of the project, and its area of application. The phases have
a definite start, end, and control point and are constrained by time. The project lifecycle can
be defined and modified as per the needs and aspects of the organization. Even though every
project has a definite start and end, the particular objectives, deliverables, and activities vary
widely. The lifecycle provides the basic foundation of the actions that has to be performed in
the project, irrespective of the specific work involved.
Phases of project life cycle.
A generic project management lifecycle is illustrated below. It consists of four main phases,
each comprising certain processes, with each process producing certain Project Management
deliverables.

Initiation
Project Charter is the first meaningful deliverable that can be identified as a reporting
milestone. While it is not necessarily voluminous and does not generally take a significant
effort to develop, it nevertheless represents agreement on the project's overall direction and
approach among all project constituencies, and as such serves as a more or less formal
“contract” for the project. Also, it can be used as a “quick hit” to generate positive
momentum for the project.

As we have noted before, the project's initial Scope and associated Schedule and Budget
documents cannot be developed until the System Requirements deliverables have been
produced. Depending on the size of the system (and the associated effort it takes to discern
functional requirements) the Business Requirements deliverable may be regarded as the next
reportable milestone. Getting a sign-off on Functional Specifications, however, should be
reported as a major accomplishment on any project.

While these System deliverables are developed, the Project Manager is busy identifying
risks and quality standards, developing a Communications Plan, and defining main project
parameters. While each of them is important to the project, once they are finalized following
the completion of Functional Specifications, it may be advantageous to package them all
together, and present them as a grand final deliverable for this phase – the Initial Project
Plan.

Planning
The Project Management deliverables defined in Initiation are refined in Planning, and most
of them cannot be finalized until the System Design deliverables are produced. The first
tangible deliverable on the technical side (that can be understood by non-technical people) is
the System Prototype. A successful Prototype is indeed an event worthy of highlighting on
your manager's monthly report – it is the first time the business units – the Customer – got
their hands on something that substantiates the great effort they expended detailing their
requirements.

The Technical Specifications document is undeniably a technician's deliverable. Even when

fully annotated in business English, in its full expanse it is impenetrable to the uninitiated.
However, it represents a great deal of effort consumed, and is the blueprint for the remaining
system development effort; it should definitely be regarded as a milestone.

It should in due course be followed by the Project Plan which includes not only the finalized
versions of the Scope, Schedule and Budget but also all the other documents the Project
Manager has been working on in this phase, such as Risk Management Plan, Quality
Management Plan, Project Implementation and Transition Plan, Organizational Change
Management Plan, etc. Acceptance of the Project Plan indicates the organization's
commitment to complete the project.
Execution
As noted above, the Project Management processes in this phase are produced throughout
the duration of the phase, change week to week, and are transient in nature. None of them
can be counted as a milestone in its own right. It is on the System Development side where
the rubber meets the road. The deliverables come fast and furious (well, we hope they do!).
The individual modules accrete into sub-systems that are integration-tested and submitted
for acceptance. Individual judgments should be made at that point as to how to choose the
proper milestones. It is obvious that you can't report each module's construction as a
milestone; it is equally obvious that you can't wait for the whole system to be deployed
before coming out of the “black box”. A successful Integration Test of a sizable portion of
the system (a logical sub-system) may meet the need; or perhaps you may decide to wait for
that subsystem's formal Acceptance. In any case, it should be spaced well enough apart that
you can report significant, understandable achievements in every corporate reporting cycle.

Completion of User Manuals and associated Training Materials should be identified as a

milestone; it is a visible reminder of the system's impending arrival, and a great indication of
your concern for your customer.

In Implementation, the moment everyone's waiting for is naturally System Deployment,

which will again probably not come all at once, but be phased in over a period of time. Prior
to that, however, for system development efforts that involve significant data conversion or
acquisition, Data Validation may serve as an appropriate milestone. Finally, formal System
Transition may be useful to mark the point where Execution formally ends, and the Closeout
activities begin.

Closeout
Project Closeout allows the organization an opportunity to capture and apply lessons learned
on this project to all future projects; from the Project Management perspective, the
importance of this phase is only eclipsed by the success of the system itself. It starts with an
honest assessment of the project's performance, followed by identification of best practices
and lessons learned. The Project Assessment report is the repository of the knowledge
acquired the hard way, and is the vehicle for communicating that knowledge to the rest of
the organization. Above all else, it highlights the value of the formal Project Management
approach and its benefits to the organization.

By the time the final activities of project closeout come around, nobody cares about the
project anymore, and boasting about successful archiving of project materials may be a bit
anticlimactic.

Conclusion
So there you have it. By aligning the Project Management and the System Development
lifecycles and deciding which deliverables can be used to periodically report project success
to Project and Executive Sponsor management layers, we came up with a sequence of
milestones that should generally coincide with the corporate reporting schedule, and provide
meaningful updates of the project's progress.

“Your mileage may vary” – the specific circumstances of your project may dictate
modifications of the milestone sequence we've discussed; but by applying the same criteria,
and by understanding the interdependencies of Project Management and System
Development deliverables, you should be able to come up with a list of milestones that
accurately and positively portrays the progress of your project while highlighting the value
of your project management contributions.

Classification of Project
Every Project is different. Projects can be classified on several different points. The
classification of projects in project management varies according to a number of different
factors such as complexity, source of capital, its content, those involved and its purpose.
Projects can be classified on the following factors.
According to complexity:
Easy: A project is classified as easy when the relationships between tasks are basic and
detailed planning or organisation are not required. A small work team and few external
stakeholders and collaborators are common in this case.
Complicated: The project network is broad and complicated. There are many task
interdependencies. With these projects, simplification where possible is everything. Cloud-
based apps such as Sinnaps will immensely help to simplify complicated projects by
automatically calculating the project’s best work path and updating any changes introduced
through its use of different types of project management tools. Here, the importance of
project management and how an effective tool could help you!
According to source of capital:

Public: Financing comes from Governmental institutions.

Private: Financing comes from businesses or private incentives.
Mixed: Financing comes from a mixed source of both public and private funding.
According to project content:
Construction: These are projects that have anything to do with the construction of a civil or
architectural work. Predictive methods are used along with agile techniques which will be
explained later on.
IT: Any project to do with software development, IT system etc. The types of project
management information systems vary across the board, but in today’s world are very
common.
Business: These projects are involved with the development of a business, management of a
work team, cost management, etc., and usually follow a commercial strategy.
Service or product production: Projects that involve themselves with the development of an
innovative product or service, design of a new product, etc. They are often used in the R &
D department.
According to those involved:

Departmental: When a certain department or area of an organisation is involved.

Internal: When a whole company itself is involved in the project’s development.
Matriarchal: When there is a combination of departments involved.
External: When a company outsources external project manager or teams to execute the
project. This is common in digital transformations, process improvements and strategy
changes, for example.
According to its objective:

Production: Oriented at the production of a product or service taking into consideration a

certain determined objective.
Social: Oriented at the improvement of the quality of life of people.
Educational: Oriented at the education of others.
Community: Oriented at people too, however with their involvement.
Research: Oriented at innovation and the gaining of knowledge.
Generation of Idea,
Generation and Screening of a project idea involves the following tasks :-

(1) Generation of ideas –

A panel is formed for the purpose of identifying investment opportunities. It involves the
following tasks which must be carried out in order to come up with a creative idea –
(a) SWOT analysis – Identifying opportunities that can be profitably exploited

(b) Determination of objectives – Setting up operational objectives like cost reduction,

productivity improvement, increase in capacity utilization, improvement in contribution
margin

(c) Creating Good environment – A good organizational atmosphere motivates employees

to be more creative and encourages techniques like brainstorming, group discussion etc.
which results in development of creative and innovative ideas.

(2) Monitoring the Environment –

An Organization should systematically monitor the environment and assess its competitive
abilities in order to profitably exploit opportunities present in the environment. The key
sectors of the environment that are to be studied are :-

(a) Economic Sector –

State of economy
Overall rate of Growth
Growth of primary, secondary and tertiary sectors
Inflation rate
Linkage with world economy
BOP situation
Trade Surplus/Deficit
(b) Government Sector –
Industrial policy
Government programmes and projects
Tax framework
Subsidies, incentives, concessions
Import and export policies
Financing norms
(c) Technological Sector –

State of technology
Emergence of new technology
Receptiveness of the industry
Access to technical know how
(d) Socio-demographic sector –

Population trends
Income distribution
Educational profile
Employment of women
Attitude towards consumption and investment
(e) Competition Sector –

No. of firms and their market share

Degree of homogeneity and production differentiation
Entry barriers
Marketing policies and prices
Comparison with substitutes in terms of quality/price/appeal etc.
(f) Supplier Sector – Availability and cost of raw material, energy and money

(3) Corporate Appraisal –

It involves identification of corporate strengths and weaknesses. The important aspects that
are to be considered are:-

(a) Market and Distribution –

Market Image
Market share
Marketing and Distribution cost
Product line
Distribution Network
Customer loyalty
(b) Production and Operations –

Condition and capacity of plant and machinery

Availability of raw materials and power
Degree of vertical integration
Location advantage
Cost structure – Fixed and Variable costs
(c) Research and Development –

Research capabilities of a firm

Track record of new product developments
Laboratories and testing facilities
Coordination between research and other departments of the organization
(d) Corporate Resources and Personnel –

Corporate Image
Clout with government and regulatory agencies
Dynamism of top management
Competence and commitment of employees
State of industrial relations
(e) Finance and Accounting –

Financial leverage and borrowing capacity

Cost of capital
Tax situation
Relations with shareholders and creditors
Accounting and control system
Cash flows and liquidity
Tools for identifying investment opportunities →

(4) Looking for Project Ideas –

Various sources to look for good project ideas include:-

Trade fairs and exhibitions

Studying Government plans and guidelines
Suggestion of financial institutions and development agencies
Investigating local materials and resources
Analyzing performance of existing industries
Analyzing social and economic trends
Analyzing new technological developments
Studying the consumption pattern of people abroad
Stimulating creativity to produce new ideas
Reducing exports and imports
(5) Preliminary Screening –

It refers to elimination of project ideas which are not promising. The factors to be
considered while screening for ideas are:-

♦ Compatibility with the promoter – The idea must be consistent with the interest,
personality and resources of entrepreneur.
♦ Consistency with Government priorities – The idea must be feasible with national goals
and government regulations.
♦ Availability of inputs – Availability of power, raw material, capital requirements,
technology.
♦ Adequacy of Market – Growth in market, prospect of adequate sale, reasonable Return on
Investment.
♦ Reasonableness of cost – The project must be able to make reasonable profits with respect
to the costs involved.
♦ Acceptability of risk level – The desirability of the project also depends upon risks
involved in executing it. In order to access risk the following factors must be considered:-

-Project`s vulnerability to business cycles

-Change technology

-Competition from substitutes

-Government`s control over price and distribution

-Competition from imports

(6) Project Rating Index →

It is a tool used for evaluating large number of project ideas. It helps in streamlining the
process of preliminary screening. Hence a preliminary evaluation may be converted in
project rating index.
Steps to calculate project rating index→
I. Identifying the factors relevant for project rating
II. Assigning weights to these factors according to their relative importance(FW)
III. Rate the project proposal on various factors using suitable rating scale (FR)
(5 point scale or 7 point scale)
IV. For each factor multiply the factor rating with factor weight to get factor scores
(FR X FW = FS)
V. All the factor scores are added to get the overall project rating index.
Organization determines a cut off value and the project below this cut off value are rejected.
(7) Sources of the Net Present Value

In order to select a profitable and feasible project, a project manager must carry out a
fundamental analysis of the product and factor market to know about entry barriers which
lead to positive net present value. There are six entry barriers which result in a positive NPV
project. They are –

• Economies of scale
• Product differentiation
• Cost advantage
• Marketing reach
• Technological edge
• Government policy

(8)Entrepreneurial skills →
An individual must possess the following traits and qualities in order to be a successful
entrepreneur –

• He must be Willing to make sacrifices

• He must be a good Leader
• He must be able to make quick and rational decisions
• He must have confidence in the project
• He must able to exploit market opportunities
• He must have strong ego in order to survive ups and downs of a business
 UNIT – II

TECHNICAL ANALYSIS

Factors considered in technical analysis,

Technical aspects relate to the production or generation of the project output in the form of
goods and services from the projects inputs. Technical analysis represents study of the
project to evaluate technical and engineering aspects when a project is being examined and
formulated. It is a continuous process in the project appraisal system which determines the
prerequisites for meaningful commissioning of the project.

Aspects of Technical Analysis

Technical analysis broadly involves a critical study of the following aspects, viz.,

1) Selection of Process/ Technology: For manufacturing a product, more than one

process/technology may be available. For example, steel can be manufactured either by the
Bessemer process or by the open-health process. Cement can be manufactured either by the
wet process or by the dry process.

The choice of technology also depends upon the quantity of the product proposed to be
manufactured. It the quantity to be produced is large, mass production techniques should be
followed and the relevant technology is to be adopted. The quality of the product depends
upon the use to which it is relevant technology is to be adopted. The quality of the product
depends upon the use to which it is meant for. A product of pharmaceutical grade or
laboratory grade should have high quality and hence sophisticated production technology is
required to achieve the desired quality. Products of commercial grad do not need such high
quality and the technology can been chosen accordingly.

A new technology that is protected by patent rights, etc., can be obtained either by licensing
arrangement or the technology can be purchased outright. Appropriate technology: A
technology appropriate for one country may not be the ideal one for another country. Even
within a country, depending upon the location of the project and other features, two different
technology may be ideal for two similar projects set up by two different firms at two
different locations. The choice of a suitable technology for a project calls for identifying
what is called the ‘appropriate technology’.

The term ‘appropriate technology’ refers that technology that is suitable for the local
economic, social and cultural conditions.

2) Scale of operations: Scale of operations is signified by the size of the plant. The plant
size mainly depends on the market for the output of the project. Economic size of the plant
varies from project to project. Economic size of the plant for a given project can be arrived
at by an analysis of capital and operating costs as a function of the plant size. Though the
economic size of the plant for a given for a given project can be theoretically arrived at by
above process, the final decision on the plant size is circumscribed by a number of factors,
the main factor being the promoter’s ability to raise the funds required to implement the
project. If the funds required implementing the project as its economic size is beyond the
promoter’s capacity to arrange for and if the economic size is too big a size for the promoter
to manage, the promoter is bound to limit the size of the project that will suit his finance and
managerial capabilities. Whenever a project is proposed to be to be set up at a size blow its
economic size, it must be analyzed carefully as to whether the project will survive at the
proposed size (which is below the economic size). Performance of existing units operating at
blow economic size will throw some light on this aspect.

3) Raw Material: A product can be manufactured using alternative raw materials and with
alternative process. The process of manufacture may sometimes vary with the raw material
chosen. If a product can be manufactured by using alternative raw materials, the raw
material that is locally available may be chosen. Since the manufacturing process and the
machinery/requirement to be used also to a larger extent depend upon the raw material, the
type of raw material to be used should be chosen carefully after analyzing various factors
like the cost of different raw materials available, the transportation cost involved, the
continuous availability of raw material , etc. Since the process of manufacture and the
machinery/ equipments required depend upon the raw material used, the investment on plant
and machinery will also to some extent depend upon the raw material used, the investment
on plant and machinery will also to some extent depend upon the raw material chosen.
Hence the cost of capital investments required on plant and machinery should also be
studied before arriving at a decision on the choice of raw material.

4) Technical Know-How: When technical know-how for the project is provided by expert
consultants, it must be ascertained whether thee consultant has the requisite knowledge and
experience and whether he has already executed similar projects successfully. Care should
be exercised to avoid self-styled, inexperienced consultants. Necessary agreement should be
executed between the project promoter and the know-how supplier incorporating all
essential features of the know-how transfer. The agreement should be specific as to the part
played by the know-how supplier (like taking out successful trial run, acceptable quality of
final product, imparting necessary training to employees in the production process, taking
out successful commercial production, performance guarantee for a specified number of
years after the start of commercial production, etc). The agreement should also include
penalty clauses for non-performance of any of the conditions stipulated in the agreement.

5) Collaboration Agreements: If the project promoters have entered into agreement with
foreign collaborators, the terms and conditions of the agreement may be studied as explained
above for know-how supply agreement.
Apart from this, the following additional points the deserve consideration:
(i) The competence and reputation of the collaborators needs to be ascertained through
possible sources including thee Indian embassies and the collaborator’s bankers.
(ii) The technology proposed to be imported should suit to the local conditions. A highly
sophisticated technology, which does not suit local conditions, will be detrimental to the
project.
(iii) The collaboration agreement should have necessary approval of the Government of
India.
(iv) There should not be any restrictive clause in the agreement that import of
equipment/machinery required for the project should be channelized through the
collaborators.
(v) The design of the machinery should be made available to the project promoter to
facilitate future procurement and/or fabrication for machinery in India at a later stage.
(vi) The agreement should provide a clause that any dispute arising out of interpretation of
the agreement, failure to, comply with the clauses contained in the agreement, etc., shall be
decided only by courts within India.
(vii) It must be ensured that the collaboration agreement does not infringe upon any patent
rights.
(viii) It is better to have a buy–back arrangement with the technical collaborator. This is to
ensure that the collaborator would be serious about the transfer of correct know-how and
would ensure quality of the output.

6) Product Mix: Customers differ in their needs and preferences. Hence, variations in size
and quality of products are necessary to satisfy the varying needs and preferences of
customers, the production facilities should be planned with an element of flexibility. Such
flexibility in the production facilities will help the organization to change the product mix as
per customer requirements, which is very essential for the survival and growth of any
organization.

For example, a plastic container manufacturing industry can be produced according to the
market requirement. This will give the unit a competitive edge.

7) Selection and Procurement of Plant and machinery

Selection of machinery: The machinery and equipment required for a project depends upon
the production technology proposed to be adopted and the size of the proposed. Capacity of
each machinery is to be decided by making a rough estimate, as under; thumb rules should
be avoided.

i) Take into consideration the output planned.

ii) Arrive at the machine hours required for each type of operation.
iii) Arrive at the machine capacity after giving necessary allowances for machinery
maintenance/breakdown, rest time for workers, set up time for machines, time lost during
change of shifts, etc.
iv) After having arrived at the capacity of the machinery as above, make a survey of the
machinery available in the market with regard to capacity and choose that capacity which is
either equal to or just above the capacity theoretically arrived at.

In case of process industries, the capacity of the machines used in various stages should be
so selected that they are properly balanced.

Procurement of Machinery

Plant and machinery form the backbone of any industry. The quality of output depends upon
the quality of machinery used in processing the raw materials (apart from the quality of raw
material itself). Uninterrupted production is again ensured only by high quality machines
that do not breakdown so often. Hence no compromise should be made on the quality of the
machinery and the project promoter should be on the lookout for the best brand of
machinery available in the market. The performance of the machinery functioning elsewhere
may be studied to have a first hand information before deciding upon the machinery
supplier.

Plant Layout

The efficiency of a manufacturing operation depends upon the layout of the plant and
machinery. Plant layout is the arrangement of the various production facilities within the
production area. Plant layout should be so arranged that it ensured steady flow production
and minimizes the overall cost.

The following factors should be considered while deciding plant-layout:

i) The layout should be such that future expansion can be done without much alteration of
the existing layout.
ii) The layout should facilitate effective supervision of work.
iii) Equipments causing pollution should be arranged to be located away from other plant
and machinery. For example, generator is a major source of noise pollution.
iv) There should be adequate clearance between adjacent machinery and between the wall
and machinery to enable undertaking of regular inspection and maintenance work.
v) The plant layout should ensure smooth flow of men and material from on stage to
another.
vi) The plant layout should be one that offers maximum safety to the personnel working
inside the plant.
vii) The plant layout should provide for proper lighting and ventilation.
viii) The plant layout should properly accommodate utilities like power and water
connections and provisions for effluent disposal.

8) Location of Projects: Choosing the location for a new project is to be done taking many
factors into account. The study for plant location is done in two phases. First a particular
region/ territory is chosen that is best suited for the project. Then, within the chosen region,
the particular site is selected. Thus, we may say that there are two major factors, viz.,
Regional factors and site factors, to be considered.

Factors Affecting Selections of Locations

i) Regional Factors
a) Raw Materials: Raw materials normally constitute about 50to 60 per cent of the cost of
the final product. Hence, it is important that the cost of the raw material should be minimum.
To procure raw material at minimum cost, the plant must be located nearer to the place
where raw material is available, so that transportation cost will be reduced and the number
of middle men involved in the procurement process also will be reduced.

b) Proximity to Market: If transportation of the finished product is more difficult (due to

the special nature of the finished product) than transporting the raw material and also if the
cost of transporting the finished product is more as compared to the transporting the raw
material and also if the cost of transporting the finished product is more as compared to the
transportation cost of transporting the finished product is more as compared to the
transportation cost of raw material, it is advantageous to locate the plant nearer to the
consumers, i.e., nearer to the market.
c) Availability of Labor: Though unemployed people are in plenty in our country, this does
not mean that there will be no problem in getting the labor-force required for the project.
Availability of skilled labor is what is the criterion rather than availability of unemployed
who are unemployable. If the project needs skills of general nature, getting adequate skilled
labor will not pose any problem if the plant is located in areas where skilled labor-force is
available. People in different areas develop special skills in different activities by virtue of
the work culture prevailing in their respective areas.

d) Availability of Supporting Industries: If a firm has proposed to get some of the

production operations done from outside, there must be suitable industries existing in the
surrounding areas to undertake such sub-contracting works. This can be seen by the
existence of many ancillary industrial units surrounding major industrial establishments like
BHEL, NTPC, etc.

e) Availability of Infrastructural Facilities: availability of power, water and transport

facilities are the important aspects to be considered for availability of infrastructural
facilities.

ii) Site Factors: After having chosen region that is comparatively more advantageous for
the location of a project. For choosing a particular sit in the chosen region, considerations
like cost of land, suitability of land, availability and suitability of ground water, facilities for
effluent disposal, etc., are to be taken into account.

In general, industrial projects require considerable extent of land. If the unit cost of land is
high, the investment required to be made on land may become prohibitively high which
should be looked into.
a) Choice of Location: Decision on the choice the location for the given project is to be
made after considering the points enumerated above. In view of the number of factors
involved, deciding upon the project location is a complex problem. The problem is
compounded further because of the existence of both tangible and intangible factors. If there
are only tangible factors, the solution to the problem can be arrived at mathematical means.
Arriving at a decision combining the tangible and intangible factors involve subjective
estimate.
b) Choice of Location based on Tangible Factors: When tangible factors alone are
considered, an ideal location is on for which the cost of setting up the project, cost of
procuring raw materials, cost of processing the raw material into finished product and cost
of distributing the finished product to the customers are minimum.

9) Project Scheduling:

Scheduling is nothing but the arrangement of activities of the project in the order of time in
which they are to be performed.

The schedule which broadly indicates the logical sequence of events would be as under:
i) Land acquisition,
ii) Sit development,
iii) Preparing building plants, estimates, designs, getting necessary approvals and entrusting
the construction work to contractors,
iv) Construction of building, machinery foundation and other related civil works and
completion of the same,
v) Placing order for machinery,
vi) Receipt of machinery at site,
vii) Erection of machinery,
viii) Commissioning of plant and taking trial runs,
ix) Commencement of regular commercial production.

Each of the above mentioned activities consume resources, viz., time, money and effort. The
sequence of activities should be so planned as to minimize the resource consumption.

Need for considering Alternatives:

Alternative Analysis is the evaluation of the different choices available to achieve a

particular project management objective. It is an analytical comparison of different factors
like operational cost, risks, effectiveness as well as the shortfalls in an operational
capability. It requires different tools such as life-cycle costing, sensitivity analysis, and cost-
benefit analysis. With alternative analysis, options to the solution are identified to satisfy the
needs of an existing or new program.

It is one of the crucial documents produced needed for program reviews and milestones
within a project management plan. Most project managers need an alternative analysis
before they can even start with the program. The recommendations from the alternative
analysis determine whether another program should commence or if the existing one should
be continued.

Alternative analysis is often performed to give decision-makers choices for continuing

existing programs or starting a new one. With this, it identifies cost-effective actions to
avoid duplication of efforts as well as decrease the risks in delivering successful programs in
the future.

Managing project alternatives means performing a complex activity dedicated mainly to

identifying alternate methods of achieving the same results.Project alternatives management
is closely linked to an idea generation process. Such a process assumes selection and
validation of the ideas that suggest an alternative and effective way to any given approach of
project management and delivery

The idea generation process admits using such techniques and tools as brain-storming,
lateral thinking and pair-wise comparisons. The same techniques & tools can be applied
to identifying and managing project alternatives.

Alternatives management results in developing a formal Project Alternatives Document

(PAD) that combines all the information about reasonable alternatives approved and their
unique and common features. The development of the document is highly important because
it determines all available options for successful project implementation to achieve business
buy-in and ensure that the options are under consideration of the key stakeholders. The
identified and considered alternatives for the project become potential solutions to be
analyzed later as a part of the Feasibility Study.
Development Process

The process of developing project alternatives consists of a series of steps to study business
resources invested in the project and identify reasonable opportunities for obtaining the
expected benefits and meeting the business need. The process helps the management team to
identify the critical factors associated with each design alternative, and compare the impact
of various combinations on the project’s cost, schedule, resources, and risk.

The implementation of the alternatives development process includes the next steps:

Identification

At this step of the process, a range of reasonable alternatives that address the business need
and meet the project purpose are to be identified. The key idea here is to define possible yet
reasonable options that’re developed in response to key business issues and to fit the
purpose, while minimizing environmental impacts. First, a set of possible project
alternatives will be proposed; then by means of analysis and forecast methods, the cost-
effectiveness of each alternative proposed will be measured, and thereby the reasonable
alternatives will be identified. Then a table of the alternatives will be created – this table will
include both unique and common features of each reasonable alternative. The Project
Alternatives Table (PAT) will be used further for alternatives comparing.

Comparison

During this step, a review of identified alternatives should be conducted; both unique and
common features of the alternatives should be compared. A comparison matrix of identified
alternatives will be created, using the information taken from the PAT. The matrix will
include similarities, differences, and how each of the alternatives meets the project
evaluation criteria and the business need. The Project Alternatives Comparison
Matrix (PACM) is especially helpful for complex projects with multiple alternatives.
After comparing and weighing all the benefits and impacts of all of the reasonable
alternatives listed in the PACM, one or several alternatives showing the best compliance
with the business requirements will be selected and sorted out by relevance.

Selection

At this step, the rationale for identifying and selecting the preferred project alternative
should be established. The decision on such an alternative should be analytical and clearly
address the specific evaluation criteria, with reference to the business need. Then the
preferred alternative will ensure successful achievement of the project purpose and
realization of the business benefits. It will be added to the final version of the project
alternatives document.

Technology Selection, Sources of Technology, Appropriate Technology

One of the basic accountabilities of the owner/operator in the realization of a capital project,
is to ensure that the right projects are selected. This includes ensuring a good fit with the
company’s business strategy, understanding the future trends in product markets and
selecting the best (and most cost effective) technology for the particular project.

This paper explores the factors to be considered in selecting competitive technology from a
number of available technologies. It also touches on the use of new, unproven, technologies
and in-house technology development.

Business Case for a technology selection methodology

Selecting technology for a capital project can put substantial value at risk. The influence
curve in Figure 1 shows how managements’ ability to influence the outcome (potential to
impact value) of the project diminishes with time as one moves through the project stages.

Technology options are identified during the initiation phase of a project and the selection of
the most competitive technology takes place early in a project, typically during the latter part
of pre-feasibility; hence the need for a thorough and disciplined selection methodology.
Once a technology choice is made, the engineers can use process simplification, or other
value engineering methodologies and value improving practices (VIP’s), to ensure that the
technology is optimised to provide the most cost effective solution.

Technology selection – factors to consider

A disciplined technology selection methodology involves technology and licensor

comparisons from economic, technical, environmental, operability & reliability, and
commercial standpoints. Evaluation criteria are listed in each of the categories that are
applicable and relevant to the specific project/site. Divergent thinking during the early
phases can be extremely valuable. There are usually several solutions to a problem and it
can be wise to challenge the site’s situation and identify all the paths that are available
before ultimately selecting the solution that is most appropriate for a specific situation.

Figure 1: Potential to impact project value vs. project stage (adapted from Porter, 2002)

Figure 2 illustrates the steps taken in narrowing down the technology options. If there are
two or more different technologies/process configurations to the same product, an economic
benchmarking exercise should be carried out by comparing the cash cost of production for
 each as well as initial capital expenditure requirements. The aim is to be one of the lowest
cash cost producers in order to remain competitive and in business in the long term.

The evaluation criteria are usually listed in three main categories: economics, technology
(including environmental) and commercial, with a corresponding weighting for each
category. Each of these categories is discussed, in turn.

Economics would typically have the highest weighting of the three categories, say 40 to
45%, and would include:
• Capital cost (includes approximate outside battery limits and infrastructure capital);
• Total operating cost including maintenance & manpower; utility, catalyst &
chemicals costs;
• Cash cost of production (includes feedstock costs), and;
• Economics – ROI, NPV etc.

Technology would typically be weighted 35 to 40% and would involve a technical review of
licensors’ offers and assessment of technical risk, and licensors’ experience and capability:
• Acceptable feedstock quality, products meet sales specs;
• Conversion or separation efficiency; energy efficiency;
• Licensor experience (number of recent licenses, number of plants in operation);
• Catalyst experience & availability;
• Process robustness & reliability (including turndown; shutdown & start-up
durations);
• Plot size required;
• Safety & environmental factors (solvent, catalyst disposal; waste streams, handling
& logistics), and;
• Process guarantees.
• Commercial criteria are usually weighted 20 to 25% and would include:
o License fee, PDP and Engineering fee (and payment schedule);
o PDP contents including list of proprietary equipment;
o Catalyst supply & costs (and supply agreement);
o Cost of licensor commissioning and start-up support;
o Liquidated damages;
o Licensor representation close to site, and;
o Intellectual property landscape (freedom to operate).
The Technology Selection Value Improving Practice (VIP) provides excellent guidelines
and checklists for technology evaluation and selection (IPA, 2016).
New Technologies

New technologies are developed all the time and will, almost certainly, be part of the
available technologies from which to choose. These can be licensor offerings, or
technologies developed in a company’s own research and development (R&D) facilities.

New technology can provide substantial capital and operating cost benefits, if it has been
properly developed through all the R&D stages, and demonstrated from bench scale through
pilot plant to semi commercial scale. This includes providing pre-marketing product
samples to potential customers for analysis and testing. However, technologies with little
real commercial demonstration represent increased risk due to uncertainty, inaccuracy in
design data and, often, operability issues during start-up. Hence, the benefits of new
technology have to be weighed against the impact that the new technology’s performance
will have on the overall complex’s operation.
 If one (or more) of the licensor offerings being evaluated includes new technology, an in
depth technology development evaluation will need to be done. An in-house R&D team
with relevant expertise (plus independent expert(s)) should visit the licensor development
facility and discuss key aspects of the development, including piloting and semi commercial
demonstration and design data collection (and repeatability). If a decision is made to go
ahead with new technology and it is “first of a kind”, there is considerable scope to negotiate
a lower, or zero, license fee, weighed against the increased risk.

Circumstances could be such that a technology is strategically important and a company has
no choice but to develop their own technology in-house.

For example:

• Existing producers closely hold the technology and are not prepared to license it;
• No technology is available that is suitable for a particular unique feedstock;
• High licence fee/royalties that make the project marginally economical, and;
• Restrictive conditions such as “one plant only” licence which restricts future plans.
In order to develop its own technology, it is essential that a company carries out a realistic
assessment of in-house expertise and resource requirements, and determines a realistic
development schedule following their R&D stage gate model. A joint development
programme with a suitable technology partner/supplier could potentially shorten the
schedule and bring additional resources and expertise. A full analysis of the intellectual
property position will need to be carried out in order to understand patent coverage. How
many players? Who is active? Have patents expired? Are there unique or special
proprietary catalysts?
Technology selection represents a crucial decision in the early stages of a project which can
have a substantial impact on the economic viability of the project. Hence the need for a
disciplined technology evaluation methodology to ensure that the most appropriate, efficient
and cost effective solution is selected. New technology can provide benefits and this should
be weighed up against the increased risk resulting from inaccuracies in, or insufficient,
design data and often prolonged start-up duration.
 In-house technology development may be the only choice and an in depth evaluation of
company resources, expertise and equipment (pilot plants) should be carried out. A realistic
schedule should be compiled, including all key development activities, following the R&D
stage gate model.

Market analysis

Conduct of Market Survey

When a company grows larger, then any changes they make affect the customers. Thus, if a
company wants to keep their customers happy, they need to involve the customers whenever
they want to make changes. At such times, the company can conduct a market survey.

Even companies which are small and have just launched their products, need to conduct
market surveys to find out the feasibility of their products in the market and how successful
it would be with the target market.

There can be many reasons to conduct a market survey

• You are starting a new product and you want to estimate demand.
• You are changing an existing product and you want to find out acceptance in the market for
this changed product
• You want to find out competitor’s market and what are the features which make the
competitor’s product a hit.
• You want to find out the most effective distribution channel out of the various channels that
you are using.
So how can you conduct a market survey? We lay out 9 simple steps to do the same
1. What is the objective of the Market survey?

As discussed above, there can be many objectives of conducting a market survey. The
objective might be for the brand to determine its equity and positioning in the market. The
survey might be conducted to find out additional features for the product and the features
which are most preferred by the customers.

Determining the objective of the market survey is as important as conducting

the market research itself. You might be spending days to conduct the market research
survey and you might be spending a good amount on it too. It can be very frustrating if the
research study does not meet your objectives. So be creative – and the first step is to
determine the objectives of the study.

Tip: There is nothing wrong with conducting to different research studies at once. Example
–You can conduct a study on the features which are most in demand for a product and at the
same time, you can also conduct which product the customers prefer in the market. This
gives you an idea of the features you need to focus on and also gives an idea of who your
strongest competitor is.
2.What is your target market?

Once the objective of the market survey is known, you need to decide WHO to conduct
this market survey on. If I wanted to know whether I can sell jewelry in online stores and
will people buy, I cannot conduct this survey offline or in retail stores. I need to go online
and ask the already existing online crowd whether they will buy jewelry. Or I need to
conduct a test market study to find out the actual potential.

So, if you have the right objective in mind, but the survey is conducted with the wrong
audience, the results will probably be skewed, and you will not get the right results in your
hands. This can affect your brand because you probably misunderstood what customers want
and you are going to spend months launching something which customers did not desire in
the first place.

Example – In March 2016, Playboy conducted a survey and decided that the magazine was
not safe for work. So it launched magazines which were non-nude and it also launched an
app which was safe for work. Both the magazine and the app failed because playboy’s
major target customers were the ones who preferred.. ahem.. nudes! So did playboy look at
the wrong target market? It probably did, and it cost them a bomb!

3) How will you collect the information?

There are many different types of Market research. For example – There is observational
research, quantitative market research, qualitative market research etc. To know more
about it, read this article on all the different types of Market research.

Bottomline is – You need to decide on how you are going to collect the information. If you
are going to collect mall shopping examples or decision making while being a silent
observer, then even a CCTV observation might do which is conducted with observational
research.

Or you may want to conduct a market survey and gain further insight by interacting with
customers. At such times, focus groups, or market survey questionnaires are found to be
most useful. In a majority of studies, market survey questionnaires are used to interview
with customers and find out their answers which become the raw data. This data is trusted
the most.

Tip: Depending on the objectives of the research and the resources you have, decide on the
process of information collection. You can read the article on Sampling plan to determine
which sample you are going to target.

4) Preparing the market survey questionnaire.

This is a major step because this is the point of interaction between your company and the
customer. The market survey questionnaire is the point where you need to spend maximum
time. The next steps are all dependent on the market survey questionnaire.

A wrong or useless question in this step becomes a problem or a missed opportunity

later on during the analysis stage. At the same time, the questions you ask should be data-
centric so that you can analyze the data later and the data is useful to you.

We have written a separate article on the 12 types of market research questions you can ask
your customers. But here are some tips for preparing a market survey questionnaire.

Use simple questions– This will keep the respondent clear in his mind and he will give
quick answers – giving further insight into his mind.

Use a professional– Wherever possible, use a professional to make market survey

questionnaires. There are sites like Survey monkey which will help you with the same.

Mix open-ended with close-ended questions– Let the respondents creativity flow. Don’t
just ask close-ended questions with definite answers. Open-ended questions can give ideas
to your brand as well as give further insight into the customers’ mind.

Be focused– Do not let the focus be lost by using complicated questions or questions with
negative or hypothetical concepts in them. Be clear and precise as the customer will then
start to give answers just to get over with the questionnaire.
 Objectivize– Each question should have an objective which it answers. No question should
be just for the sake of asking. Objectives can also be answered by combining 2 or 3
questions.

Online alternatives to physical Market survey questionnaires

• Online polls on websites and forums

• Google forms
• Survey Monkey
5) Conducting the actual on-field survey
Once you are ready for the market survey questionnaire, the next step is conducting the on
field survey and gathering the information. This looks like a simple step but might be
complicated if the desired results are not obtained. It is necessary to keep an eye on this step
and tweak any changes in the market survey questionnaire if needed.

Conducting the on field survey takes time and patience. The Validity of data and completing
the questionnaires are important. Once the field survey is conducted, the data can then be
taken forward to the next step.

6) Analyzing the information

Once the field survey has been done, the analysis is very important. There are many
feedbacks which will be received by customers especially when open-ended questions have
been asked. Making a summary of these answers and analyzing the research can help
companies have a successful result from the market survey.

There are both – Qualitative and quantitative methods available to analyze information
collected with market surveys. Examples include

• Multiple Regression
• Discriminate analysis
• Factor analysis
• Cluster analysis
• Conjoint analysis
• Multidimensional scaling
Using any of the above methods, you can do the analysis of the data and then analyze the
findings. This will help you come out with solutions to your research problems which can
then be tested in live market conditions for their viability.
It is necessary that after analyzing the information, a Plan A and Plan B be formulated for
moving forward. This is because even market survey data can sometimes be wrong or
misleading. So it is always better to have a backup plan in case the main analysis fails.

7) Test Marketing

Test marketing is necessary to determine the viability of the plan which has been finalized
after conducting the market survey. Example – Your market survey suggests a feature added
to the core product which you have now done as a prototype. Instead of launching the
prototype to the complete market, it is better suggested to do a test marketing with your
preferred clients.

You can launch the prototype to a small market, check its performance and then proceed to
launch it across multiple locations. In the first location itself, you will get to know whether
customers are comfortable with the prototype or not. If they are not comfortable, you can
anytime move to plan B which you may have devised.

8) Implement and repeat

The final step of conducting a market survey is the implement the findings on a large scale.
If in test marketing, the results are positive, you can then implement across the complete
market.

Furthermore, a large brand generally keeps a target to conduct market survey repeatedly so
that they can stay updated with the trend and keep finding insights of what the market wants
from them.
Overall, the above were the 8 steps to conduct a market survey in the most effective manner.
These steps can help you come up with insights into the customers’ mind as well as steps
which can be taken to improve your market position.

Market Planning

Market planning is the process of organizing and defining the marketing aim of a company
and gathering strategies and tactics to achieve them. A solid marketing plan should consist
of the company’s value proposition, information regarding its target market or customers, a
comparative positioning of its competitors in the market, promotion strategies, distribution
channels, and budget allocated for the plan. All relevant teams in the organization should
refer to its marketing plan.

Market Planning for Small Businesses

Over the last few decades, more individuals have been starting a journey as a small business
entrepreneur. Unfortunately, many fail to reflect upon their marketing strategy and plan.
Like other things in a project, marketing the organization is an essential decision that starts
with a plan every time. In order to get noticed in the market with a unique and consistent
promotional strategy, becoming knowledgeable about market planning and its facets is
crucial.
Benefits to a Marketing Plan

The importance of a detailed marketing plan can’t be overstated. A marketing plan:

Gives clarity about who your market is. It’s easier to find clients and customers if you
know who they are.
Helps you craft marketing messages that will generate results. Marketing is about
knowing what your product or service can do to help a target market. Your messages need to
speak directly your market.
Provides focus and direction. Email, social media, advertising, guest blogging, direct mail,
publicity, and on and on. With so many marketing choices, you need a plan for determining
the best course of action for your business.
Stages of Market Planning

The first stage of market planning involves sales projections and evaluations of past
promotional implementations to assess their effectiveness. The process of analyzing a
product allows the company to identify which areas of the plan should carry a heavier focus
or which areas should be adjusted. The evaluation not only involves evaluating the
company’s competitive position in its respective market but also to implement new
strategies for its business goals.

The second stage is to organize the marketing objectives and strategies. It is crucial here to
establish the relationships between the proposed activities so that the plan can be carried out
efficiently.

Top Market Planning Concepts

Although there are a number of marketing planning concepts to be considered, mentioned

below are a few important aspects that should be included:

Market Segmentation and Target Markets

Knowing who makes up the market the product or service plays in is crucial, yet the
importance of this aspect is often overlooked. Market segmentation involves assessing the
whole population that could be potential customers of your product and then segmenting
them based on varying criteria. Some examples of aspects to filter for are purchase behavior,
psychographics, age, average income, and more.

After the market’s been segmented, the company must choose the group that it believes its
product can best serve and is within the budget to advertise to. This segment then forms your
target market. It is generally recommended for businesses to have one target market and
have secondary ones if they see fit.

To illustrate, a company that sells colored contacts may have a primary target market of
makeup artists in the film and theater industry. However, they may find that there is
significant revenue to be found in entering more mainstream channels and marketing
towards women in their twenties who wish to experiment with new eye colors on special
occasions. They would then spend the majority of their resources marketing to their primary
target market, but also allocate some marketing budget to the latter segment for additional
revenue.

The main reason why market segmentation and targeting is important is that a company
should always be focusing their resources on the most profitable group of customers and
knowing which group that is a prerequisite.

Budget

Budgeting may be the most important term in marketing planning when it comes to
execution. Often, in order to secure funds from top management or banks, sufficient proof of
your advertising plan’s success is needed. It requires accurate forecasting of return generated
for individual advertising expenditures. It is important that returns are not overestimated to
avoid spending too much and running out of money early on.

Marketing Mix
The marketing mix is a combination of elements that influence customers to purchase a
product. The marketing mix includes four main factors: Product, Price, Place, and
Promotion. Product refers to either the tangible good that your business offers, or the
intangible good, referring to services. Key decisions made under this umbrella are branding,
product design, package and labeling details, warranties, and more.

Price can quite simply be the quantitative price the company’s customers must pay to
acquire its product. However, thorough market plans will also consider other sacrifices a
customer must make, such as travel time, shipping costs, or research time before they find
the product. Customer perceived value is also a key consideration when it comes to price.
Key decisions under this umbrella include price-setting, pricing strategies, discounts,
accepted payment methods, and more.

Place refers to where customers can contact the business and purchase its products.
Providing convenience and access to the company’s customers is the goal. Key decisions
under this umbrella include distribution, channels, partnerships, locations, transportation,
and logistics.

Promotion covers all the marketing communications the company undertakes to make its
product known and the shape the customers’ image of its product. Key decisions here
involve promotional mix, message content, message frequency, media strategies, and more.

Customer Relationship Management (CRM)

Customer relationship management is a key factor in maintaining loyalty after a company

has achieved a sustainable number of customers. There are numerous software and solutions
on the market to handle CRM for a company. For small businesses, however, keeping such
activities in-house may be recommended to keep the company lean. Things such as offering
warranties and return policies can help keep customers satisfied and let them know that the
company cares about their use of your product post-purchase.
Network Analysis

Marketing Analytics: Graphs can be used to figure out the most influential people in a
Social Network. Advertisers and Marketers can estimate the biggest bang for the marketing
buck by routing their message through the most influential people in a Social Network

Banking Transactions: Graphs can be used to find unusual patterns helping in mitigating
Fraudulent transactions. There have been examples where Terrorist activity has been
detected by analyzing the flow of money across interconnected Banking networks

Supply Chain: Graphs help in identifying optimum routes for your delivery trucks and in
identifying locations for warehouses and delivery centres

Pharma: Pharma companies can optimize the routes of the salesman using Graph theory.
This helps in cutting costs and reducing the travel time for salesman

Telecom: Telecom companies typically use Graphs (Voronoi diagrams) to understand the
quantity and location of Cell towers to ensure maximum coverage

Analysis with the help of PERT and CPM

Program Evaluation and Review Technique (PERT) is a method used to examine the
tasked that are in a schedule and determine a variation of the Critical Path Method (CPM). It
analyzes the time required to complete each task and its associated dependencies to
determine the minimum time to complete a project. It estimates the shortest possible time
each activity will take, the most likely length of time, and the longest time that might be
taken if the activity takes longer than expected.

The method was developed by the US Navy in 1957 on the Polaris nuclear submarine
project.
To conduct PERT Analysis, three time estimates are obtained (optimistic, pessimistic, and
most likely) for every activity along the Critical Path. Then use those estimates in the
formula below to calculate how much time for each project stage:
 Formula: (P+4M+O)/6

• Optimistic Time (O):the minimum possible time required to accomplish a task,

assuming everything proceeds better than is normally expected.

• Pessimistic Time (P):the maximum possible time required to accomplish a task,

assuming everything goes wrong (excluding major catastrophes).

Most likely Time (M): the best estimate of the time required to accomplish a task, assuming
everything proceeds as normal.

Example of the three time estimates

Example of a Critical Path Nodal Diagram

PERT Analysis can be conducted using Microsoft Project.

 Critical Path Method

The Critical Path is the longest path of scheduled activities that must be met in order to
execute a project. This is important for Program Managers (PM) to know since any
problems that occur on the critical path can prevent a project from moving forward and be
delayed. Earned Value Management (EVM) analysis focuses on the critical path and near
critical paths to identify cost and schedule risks. Other schedule paths might have slack time
in them to avoid delaying the entire project unlike the critical path. There might be multiple
critical paths on a project.

The Critical Path is determined when analyze a projects schedule or network logic diagram
and uses the Critical Path Method (CPM). The CPM provides a graphical view of the
project, predicts the time required for the project, and shows which activities are critical to
maintain the schedule.

The seven (7) steps in the CPM are: [1]

1. List of all activities required to complete the project (see Work Breakdown Structure
(WBS)),
2. Determine the sequence of activities
3. Draw a network diagram
4. Determine the time that each activity will take to completion
5. Determine the dependencies between the activities
6. Determine the critical path
7. Update the network diagram as the project progresses
The CPM calculates the longest path of planned activities to the end of the project, and
the earliest and latest that each activity can start and finish without making the project
longer. This process determines which activities are “critical” (i.e., on the longest path)
and which have “total float” (i.e., can be delayed without making the project longer). [1]
The CPM is a project modeling technique developed in the late 1950s by Morgan R. Walker
of DuPont and James E. Kelley, Jr. of Remington Rand.

Probability of completing the project within given time

An advantage of using probabilistic time estimates is the ability to predict the probability of
project completion dates. We learned how to calculate the expected time for each activity
with the three time estimates provided. Now we need to calculate the variance for each
activity. The variance of the beta probability distribution for each activity is

Where

p = pessimistic activity time estimate

o = optimistic activity time estimate
 UNIT – 3

FINANCING OF A PROJECT

Capital Structure is the mix of the long-term sources of funds used by a firm. It is made up
of debt and equity securities and refers to permanent financing of a firm. It is composed of
long-term debt, preference share capital and shareholders’ funds.

The capital structure is how a firm finances its overall operations and growth by using
different sources of funds. Debt comes in the form of bond issues or long-term notes
payable, while equity is classified as common stock, preferred stock or retained earnings.
Short-term debt such as working capital requirements is also considered to be part of the
capital structure.

Capital structure can be a mixture of a firm’s long-term debt, short-term debt, common
equity and preferred equity. A company’s proportion of short- and long-term debt is
considered when analyzing capital structure. When analysts refer to capital structure, they
are most likely referring to a firm’s debt-to-equity (D/E) ratio, which provides insight into
how risky a company is. Usually, a company that is heavily financed by debt has a more
aggressive capital structure and therefore poses greater risk to investors. This risk, however,
may be the primary source of the firm’s growth.
Debt vs. Equity

Debt is one of the two main ways companies can raise capital in the capital markets.
Companies like to issue debt because of the tax advantages. Interest payments are tax
deductible. Debt also allows a company or business to retain ownership, unlike equity.
Additionally, in times of low interest rates, debt is abundant and easy to access.

Equity is more expensive than debt, especially when interest rates are low. However, unlike
debt, equity does not need to be paid back if earnings decline. On the other hand, equity
represents a claim on the future earnings of the company as a part owner.

Importance of Capital Structure

Decisions relating to financing the assets of a firm are very crucial in every business and the
finance manager is often caught in the dilemma of what the optimum proportion of debt and
equity should be. As a general rule there should be a proper mix of debt and equity capital in
financing the firm’s assets. Capital structure is usually designed to serve the interest of the
equity shareholders.

Therefore instead of collecting the entire fund from shareholders a portion of long term fund
may be raised as loan in the form of debenture or bond by paying a fixed annual charge.
Though these payments are considered as expenses to an entity, such method of financing is
adopted to serve the interest of the ordinary shareholders in a better way.

The importance of designing a proper capital structure is explained below

(i) Value Maximization

Capital structure maximizes the market value of a firm, i.e. in a firm having a properly
designed capital structure the aggregate value of the claims and ownership interests of the
shareholders are maximized.

(ii) Cost Minimization

 Capital structure minimizes the firm’s cost of capital or cost of financing. By determining a
proper mix of fund sources, a firm can keep the overall cost of capital to the lowest.

(iii) Increase in Share Price

Capital structure maximizes the company’s market price of share by increasing earnings per
share of the ordinary shareholders. It also increases dividend receipt of the shareholders.

(iv) Investment Opportunity

Capital structure increases the ability of the company to find new wealth- creating
investment opportunities. With proper capital gearing it also increases the confidence of sup-
pliers of debt.

(v) Growth of the Country

Capital structure increases the country’s rate of investment and growth by increasing the
firm’s opportunity to engage in future wealth-creating investments.

Sources of Long Term Finance

The Sources of Long Term Finance are those sources from where the funds are raised for a
longer period of time, usually more than a year. Long term financing is required for
modernization, expansion, diversification and development of business operations.

Generally, the companies resort to the sources of long-term finance when they have an
inadequate cash balance and need capital to carry out its operation for a longer period of
time.

Objectives of Long-term Financing

• To purchase new asset or equipment

• To finance the permanent part of the working capital
• To enhance the cash flow in the firm
• To invest in R&D operations
• To construct or build new construction projects
• To develop a new product
• To design marketing strategies or increase facilities
• To expand business operations
The long term financing could be done internally, i.e. within the organization or externally,
i.e. from outside the organization.
The Internal Sources of long-term finance:

• Retained Earnings
The External Sources of Long Term Finance:
• Equity Capital
• Preference Capital
• Term Loan
• Debentures
Thus, the nature of business, the kind of goods produced and the technology being used in
the organization, decides the source from where the finances could be raised.

Debt Financing, Characteristics of Debt, Types of Debts

Debt Financing

Debt financing is the process of raising money in the form of a secured or unsecured loan for
working capital or capital expenditures. Firms typically use this type of financing to
maintain ownership percentages and lower their taxes.

What Does Debt Financing Mean?

What is the definition of debt financing? Debt financing is borrowing money from a third
party, i.e. a financial institution, with the promise to return the principal with an agreed
interest. Startup companies and smaller firms use debt as a way to leverage their operations
and maintain ownership of their business.
 The greatest advantage of financing with is the tax deductions, as in most cases, debt related
interest payments is viewed as a business expense on the firm’s balance sheet. On the
downside, an increase in the interest rates will have an impact on the loan repayment and on
the credit rating of the borrower. Also, the firm uses its assets as collateral for the loan to
obtain a higher line of credit; thereby, in the case of a default, the borrower may be required
to repay the remaining loan and interest in cash.

Characteristics of Debt

Debt can come in a myriad of forms, all of which represent combinations and permutations
of a fairly small number of characteristics. Know those characteristics, and you can make
sense of – and compare – any form. The key characteristics of debt include the following:

• Intended use of funds

• Anticipated source of repayment
• Term and duration
• Cost
• Risk mitigation
Intended Use of Funds
Business loans tend to be designed to accommodate three primary uses: working capital,
equipment, and real estate. As a rule of thumb, the maturity of the loan should coincide with
the lifecycle of the asset to be financed. For instance, be wary of financing long-lived
equipment with short-term loans designed for working capital. In such a circumstance, the
need for the financing is likely to extend beyond the maturity of the loan, which creates
refinancing risk.

Primary Source of Repayment

Although most lenders anticipate repayment of their loans with the free cash flow generated
by the borrower in the normal course of business, asset-based lenders look to the liquidation
of specific assets for repayment. Factoring, for instance, is a form of short-term financing
that looks to the collection of specific accounts receivable for repayment. While cash flow
lenders are primarily concerned with the viability of the borrower, asset-based lenders can
be more concerned with the viability of the borrower’s customers.

Term and Duration

The term and duration of a loan is another differentiating characteristic. Short-term loans
(those having a maturity of a year or less) are best suited to fund episodic or seasonal
working capital needs.

Consider the case of a manufacturer of snowboard bindings. Stocks of inventory ramp up in

the Summer and Fall, when bindings are being manufactured for the upcoming season. As a
consequence, cash reserves get drawn down. As the manufacturer’s wholesale customers sell
products to consumers in late Fall and early Winter, the manufacturer collects accounts
receivable, and its cash stock goes back up. As a result, the snowboard binding
manufacturer’s cash balance goes up and down over the course of the year in a predictable
pattern.

In this example, the manufacturer would be well-served by a short-term line of credit that
would cover the borrower’s cash shortfall between June and January in anticipation of a
seasonal cash surplus in the late Winter and early Spring.

Long-lived assets such as equipment and real estate are best financed with correspondingly
long-term debt (having a maturity of more than one year). That’s why mortgages, for
instance, can have 20 or even 30-year maturities. Somewhat more surprisingly, the rapid and
sustained accumulation of accounts receivable and inventory experienced by a rapidly
growing company can also create the need for long-term financing.

Cost

Usually, but not always, the cost of debt is expressed in terms of an annual percentage rate.
The advertised rate is sometimes known as the nominal rate, because interest is usually not
the only cost. A variety of fees and discounts add to the total effective cost of a loan.
 The best way to compare costs of different loans is to calculate the annual percentage rate or
“APR.” The APR takes into account the timing and amount of all loan costs. If a lender
won’t tell you the APR on a loan, you might want to consider a different lender.

The cost of a loan is a function of a variety of factors including, but not limited to, the
following:

• Risk
• Administration costs
• Regulation
• Cost of funds
Banks, for instance, are highly regulated but have access to low-cost deposits guaranteed by
the Federal government. Asset-based lenders, historically, have had high loan administration
costs (though the application of technology is lowering the cost for some online lenders).
Alternative lenders, in general, have a relatively high cost of funds, which contributes to
their need to charge proportionately higher rates to borrowers. Of course, the interest rate on
risky loans will reflect a “risk premium.”
Risk Mitigation

Different lenders will seek to manage – or mitigate – risk in different ways:

• Seniorityand subordination describe the relative position of different lenders in the payment
queue. Senior lenders are at the front of the line, while subordinated lenders are farther back.

• Collateral, guarantees, and securityrepresent “second ways out” of a loan by a lender—a

“bite at a second apple,” if you will. Small business owners are often asked to provide
personal guarantees of their business loan obligations. In certain circumstances, a third party
such as the Small Business Administration will provide partial guarantees of a loan. As a
general rule, banks and other secured lenders will seek collateral in the form of assets that
have value independent of the ongoing performance of the borrowing company. That’s why
accounts receivable and real estate tend to be more highly valued as collateral than are
specialized equipment or unique finished goods inventory.
• Covenantsare promises of performance (e.g. minimum current ratio or periodic operating
cash flow) or prohibitions of specific actions (e.g. payments to shareholders above a
threshold amount). The “breach” of a covenant can trigger a “default.” Uncured defaults
can, in turn, give the lender certain rights, including the right to foreclose on collateral
assets.

Price and loan duration are relatively straightforward. The bulk of a loan agreement’s “fine
print” will consist of attempts on the part of the lender to mitigate its risk. With time and
experience, you’ll come to recognize which elements are negotiable. When in doubt, it’s
often a good idea to retain the services of an experienced business lawyer.

Types of Debts

Mortgage-Related Debt Versus Consumer Debt

For people in or approaching retirement, there are two main categories of debt: mortgage-
related debt and consumer debt. Mortgage-related debt covers home-related borrowing,
while consumer debt includes all other types of debts (e.g., credit cards, student loans, car
loans).

Mortgage-Related Debt

• Primary mortgage: a method of borrowing to purchase a home

• Home equity loan: a one-time method of borrowing against the equity in a home

• Home equity line of credit: a renewable method of borrowing against the equity in a home

• Reverse mortgage: a method of borrowing against the equity in a home available only to
homeowners age 60 and older

Consumer Debt

• Installment loan: typically a method of borrowing a fixed amount of money for a large
purchase, such as a car
• Student loan: a method of borrowing to pay for higher education expenses

• Credit card loan: a renewable method of borrowing for nearly any type of consumer
expense (food, gas, health care costs, entertainment, etc.)

Equity Financing, Preferential Shares, Equity Shares

Equity Financing

Equity financing is the method of raising capital by selling company stock to investors. In
return for the investment, the shareholders receive ownership interests in the company.

How it works (Example):

In order to grow, a company will face the need for additional capital, which it may try to
obtain in one of two ways: debt or equity. Equity financing involves the sale of the
company’s stock and giving a portion of the ownership of the company to investors in
exchange for cash. The proportion of the company that will be sold in an equity financing
depends on how much the owner has invested in the company and what that investment is
worth at the time of the financing. For example, an entrepreneur who invests $600,000 in the
startup of a company will initially own all of the shares of the company.

As the company grows and requires further capital, the entrepreneur may seek an outside
investor, such as an angel investor or a venture capitalist, two main sources of early stage
equity financing. If, in this example, the investor is willing to pay $400,000 and agrees to a
share price of $1.00 (i.e. that the original $600,000 invested is still worth $600,000), then the
total capital in the company will be raised to $1,000,000. The entrepreneur will then control
60% of the shares of the company, having sold 40% of the shares of the company to the
investor through an equity financing.

Why it Matters:

During the early stages of a company’s growth, particularly when the company does not
have sufficient revenues, cash flow or hard assets to act as collateral, equity financing can
attract capital from early stage investors who are willing to take risks along with the
entrepreneur.

Similarly, when a company is established and has assets and cash flow or has the promise of
explosive growth due to new technologies or new markets, it can raise substantial capital
through an equity financing such as a public offering in the capital markets. Based on the
company’s share price, a portion of the company is sold to the new investors. For the
entrepreneur, equity financing is a method to raise capital for the company before it is
profitable in exchange for diluted ownership and control of the company.

For investors, equity financing is an important method of acquiring ownership interests in

companies. Investors are always wary that subsequent rounds of equity financing usually
require them to dilute some portion of their ownership as well.

Preferential Shares

Preference shares are those shares which carry certain special or priority rights. Firstly,
dividend at a fixed rate is payable on these shares before any dividend is paid on equity
shares.

Secondly, at the time of winding up of the company, capital is repaid to preference

shareholders prior to the return of equity capital. Preference shares do not carry voting
rights. However, holders of preference shares may claim voting rights if the dividends are
not paid for two years or more on cumulative preference shares and three years or more on
non-cumulative preference shares.

Preference shares have the characteristics of both equity shares and debentures. Like equity
shares, dividend on preference shares is payable only when there are profits and at the
discretion of the Board of Directors.

Preference shares are similar to debentures in the sense that the rate of dividend is fixed and
preference shareholders do not generally enjoy voting rights. Therefore, preference shares
are a hybrid form of financing.
 Advantages:

1. Appeal to Cautious Investors:

Preference shares can be easily sold to investors who prefer reasonable safety of their capital
and want a regular and fixed return on it.

2. No Obligation for Dividends:

A company is not bound to pay dividend on preference shares if its profits in a particular
year are insufficient. It can postpone the dividend in case of cumulative preference shares
also. No fixed burden is created on its finances.

3. No Interference:

Generally, preference shares do not carry voting rights. Therefore, a company can raise
capital without dilution of control. Equity shareholders retain exclusive control over the
company.

4. Trading on Equity:

The rate of dividend on preference shares is fixed. Therefore, with the rise in its earnings,
the company can provide the benefits of trading on equity to the equity shareholders.

5. No Charge on Assets:

Preference shares do not create any mortgage or charge on the assets of the company. The
company can keep its fixed assets free for raising loans in future.

6. Flexibility:

A company can issue redeemable preference shares for a fixed period. The capital can be
repaid when it is no longer required in business. There is no danger of over-capitalisation
and the capital structure remains elastic.

7. Variety:
 Different types of preference shares can be issued depending on the needs of investors.
Participating preference shares or convertible preference shares may be issued to attract bold
and enterprising investors.

Preference shares can be made more popular by giving special rights and privileges such as
voting rights, right of conversion into equity shares, right of shares in profits and redemption
at a premium.

Disadvantages:

1. Fixed Obligation:

Dividend on preference shares has to be paid at a fixed rate and before any dividend is paid
on equity shares. The burden is greater in case of cumulative preference shares on which
accumulated arrears of dividend have to be paid.

2. Limited Appeal:

Bold investors do not like preference shares. Cautious and conservative investors prefer
debentures and government securities. In order to attract sufficient investors, a company
may have to offer a higher rate of dividend on preference shares.

3. Low Return:

When the earnings of the company are high, fixed dividend on preference shares becomes
unattractive. Preference shareholders generally do not have the right to participate in the
prosperity of the company.

4. No Voting Rights:

Preference shares generally do not carry voting rights. As a result, preference shareholders
are helpless and have no say in the management and control of the company.

5. Fear of Redemption:
 The holders of redeemable preference shares might have contributed finance when the
company was badly in need of funds. But the company may refund their money whenever
the money market is favourable. Despite the fact that they stood by the company in its hour
of need, they are shown the door unceremoniously.

Equity Shares

Equity shares are the main source of finance of a firm. It is issued to the general public.
Equity shareholders do not enjoy any preferential rights with regard to repayment of capital
and dividend. They are entitled to residual income of the company, but they enjoy the right
to control the affairs of the business and all the shareholders collectively are the owners of
the company.

Features of Equity Shares

1. They are permanent in nature.

2. Equity shareholders are the actual owners of the company and they bear the highest risk.

3. Equity shares are transferable, i.e. ownership of equity shares can be transferred with or
without consideration to other person.

4. Dividend payable to equity shareholders is an appropriation of profit.

5. Equity shareholders do not get fixed rate of dividend.

6. Equity shareholders have the right to control the affairs of the company.

7. The liability of equity shareholders is limited to the extent of their investment.

Advantages of Equity Shares

Equity shares are amongst the most important sources of capital and have certain
advantages which are mentioned below:

1. Advantages from the Shareholders’ Point of View

 (a) Equity shares are very liquid and can be easily sold in the capital market.
(b) In case of high profit, they get dividend at higher rate.
(c) Equity shareholders have the right to control the management of the company.
(d) The equity shareholders get benefit in two ways, yearly dividend and appreciation in the
value of their investment.

1. Advantages from the Company’s Point of View:

(a) They are a permanent source of capital and as such; do not involve any repayment
liability.
(b) They do not have any obligation regarding payment of dividend.
(c) Larger equity capital base increases the creditworthiness of the company among the
creditors and investors.
Disadvantages of Equity Shares:
Despite their many advantages, equity shares suffer from certain limitations. These
are:

1. Disadvantages from the Shareholders’ Point of View:

(a) Equity shareholders get dividend only if there remains any profit after paying debenture
interest, tax and preference dividend. Thus, getting dividend on equity shares is uncertain
every year.
(b) Equity shareholders are scattered and unorganized, and hence they are unable to exercise
any effective control over the affairs of the company.
(c) Equity shareholders bear the highest degree of risk of the company.
(d) Market price of equity shares fluctuate very widely which, in most occasions, erode the
value of investment.
(e) Issue of fresh shares reduces the earnings of existing shareholders.

1. Disadvantage from the Company’s Point of View:

(a) Cost of equity is the highest among all the sources of finance.

(b) Payment of dividend on equity shares is not tax deductible expenditure.

 (c) As compared to other sources of finance, issue of equity shares involves higher floatation
expenses of brokerage, underwriting commission, etc.

Different Types of Equity Issues:

Equity shares are the main source of long-term finance of a joint stock company. It is issued
by the company to the general public. Equity shares may be issued by a company in
different ways but in all cases the actual cash inflow may not arise (like bonus issue).

The different types of equity issues have been discussed below:

1. New Issue:

A company issues a prospectus inviting the general public to subscribe its shares. Generally,
in case of new issues, money is collected by the company in more than one installment—
known as allotment and calls. The prospectus contains details regarding the date of payment
and amount of money payable on such allotment and calls. A company can offer to the
public up to its authorized capital. Right issue requires the filing of prospectus with the
Registrar of Companies and with the Securities and Exchange Board of India (SEBI)
through eligible registered merchant bankers.

2. Bonus Issue:

Bonus in the general sense means getting something extra in addition to normal. In business,
bonus shares are the shares issued free of cost, by a company to its existing shareholders. As
per SEBI guidelines, if a company has sufficient profits/reserves it can issue bonus shares to
its existing shareholders in proportion to the number of equity shares held out of
accumulated profits/ reserves in order to capitalize the profit/reserves. Bonus shares can be
issued only if the Articles of Association of the company permits it to do so.

Advantage of Bonus Issues:

From the company’s point of view, as bonus issues do not involve any outflow of cash, it
will not affect the liquidity position of the company. Shareholders, on the other hand, get
bonus shares free of cost; their stake in the company increases.
Disadvantages of Bonus Issues:

Issue of bonus shares decreases the existing rate of return and thereby reduces the market
price of shares of the company. The issue of bonus shares decreases the earnings per share.

iii. Rights Issue:

According to Section 81 of The Company’s Act, 1956, rights issue is the subsequent issue of
shares by an existing company to its existing shareholders in proportion to their holding.
Right shares can be issued by a company only if the Articles of Association of the company
permits. Rights shares are generally offered to the existing shareholders at a price below the
current market price, i.e. at a concessional rate, and they have the options either to exercise
the right or to sell the right to another person. Issue of rights shares is governed by the
guidelines of SEBI and the central government.

Rights shares provide some monetary benefits to the existing shareholders as they get
shares at a concessional rate—this is known as value of right which can be computed
as:

Value of right = Cum right market price of a share – Issue price of a new share / Number of
old shares + 1

Advantages of Rights Issue:

Rights issues do not affect the controlling power of existing shareholders. Floatation costs,
brokerage and commission expenses are not incurred by the company unlike in the public
issue. Shareholders get some monetary benefits as shares are issued to them at concessional
rates.

Disadvantages of Rights Issue:

If a shareholder fails to exercise his rights within the stipulated time, his wealth will decline.
The company loses cash as shares are issued at concessional rate.
3. Sweat Issue:

According to Section 79A of The Company’s Act, 1956, shares issued by a company to its
employees or directors at a discount or for consideration other than cash are known as sweat
issue. The purpose of sweat issue is to retain the intellectual property and knowhow of the
company. Sweat issue can be made if it is authorized in a general meeting by special
resolution. It is also governed by Issue of Sweet Equity Regulations, 2002, of the SEBI.

Advantages of Sweat Issue:

Sweat equity shares cannot be transferred within 3 years from the date of their allotment. It
does not involve floatation costs and brokerage.

Disadvantage of Sweat Issue:

As sweat equity shares are issued at concessional rates, the company loses financially.
Retained Earnings, Short-Term Sources for Working Capital

Retained Earnings

Retained Earnings (RE) are the portion of a business’s profits that are not distributed as
dividends to shareholders but instead are reserved for reinvestment back into the business.
Normally, these funds are used for working capital and fixed asset purchases (capital
expenditures) or allotted for paying off debt obligations.

Retained Earnings are reported on the balance sheet under the shareholder’s equity section at
the end of each accounting period. To calculate RE, the beginning RE balance is added to
the net income or loss and then dividend payouts are subtracted. A summary report called a
statement of retained earnings is also maintained, outlining the changes in RE for a specific
period.

The Purpose of Retained Earnings

Retained earnings represent a useful link between the income statement and the balance
sheet, as they are recorded under shareholders’ equity which connects the two statements.
The purpose of retaining these earnings can be varied and includes buying new equipment
and machines, spending on research and development, or other activities that could
potentially generate growth for the company. This reinvestment into the company aims to
achieve even more earnings in the future.

If a company does not believe it can earn a sufficient return on investment from those
retained earnings (i.e., earn more than their cost of capital) then they will often distribute
those earnings to shareholders as dividends or share buybacks.

What is the Retained Earnings Formula?

The RE formula is as follows:

RE = Beginning Period RE + Net Income/Loss – Cash Dividends – Stock Dividends

Where RE = Retained Earnings

At the end of each accounting period, retained earnings are reported on the balance sheet as
the accumulated income from the prior year (including the current year’s income), minus
dividends paid to shareholders. In the next accounting cycle, the RE ending balance from the
previous accounting period will now become the retained earnings beginning balance.

The RE balance may not always be a positive number as it may reflect that the current
period’s net loss is greater than that of the RE beginning balance. Alternatively, a large
distribution of dividends that exceed the retained earnings balance can cause it to go
negative.

How Net Income Impacts Retained Earnings

Any changes or movement with net income will directly impact the RE balance. Factors
such as an increase or decrease in net income and incurrence of net loss will pave the way to
either business profitability or deficit. The Retained Earnings account can be negative due to
large, cumulative net losses. Naturally, the same items that effect net income effect RE.
Examples of these items include sales revenue, cost of goods sold, depreciation, and other
operating expenses. Non-cash items such as write-downs or impairments and stock-based
compensation also affect the account.

Short-Term Sources for Working Capital

1. Indigenous Bankers:

Private money-lenders and other country bankers used to be the only source of finance prior
to the establishment of commercial banks. They used to charge very high rates of interest
and exploited the customers to the largest extent possible. Now-a-days with the development
of commercial banks they have lost their monopoly.

But even today some business houses have to depend upon indigenous bankers for obtaining
loans to meet their working capital requirements.

2. Trade Credit:

Trade credit refers to the credit extended by the suppliers of goods in the normal course of
business. As present day commerce is built upon credit, the trade credit arrangement of a
firm with its suppliers is an important source of short-term finance.

The credit-worthiness of a firm and the confidence of its suppliers are the main basis of
securing trade credit. It is mostly granted on an open account basis whereby supplier sends
goods to the buyer for the payment to be received in future as per terms of the sales invoice.
It may also take the form of bills payable whereby the buyer signs a bill of exchange payable
on a specified future date.

When a firm delays the payment beyond the due date as per the terms of sales invoice, it is
called stretching accounts payable. A firm may generate additional short-term finances by
stretching accounts payable, but it may have to pay penal interest charges as well as to forgo
cash discount. If a firm delays the payment frequently, it adversely affects the credit
worthiness of the firm and it may not be allowed such credit facilities in future.
The main advantages of trade credit as a source of short-term finance include:

(i) It is an easy and convenient method of finance.

(ii) It is flexible as the credit increases with the growth of the firm.
(iii) It is informal and spontaneous source of finance.
However, the biggest disadvantage of this method of finance is charging of higher prices by
the suppliers and loss of cash discount.
3. Installment Credit:

This is another method by which the assets are purchased and the possession of goods is
taken immediately but the payment is made in installments over a pre-determined period of
time. Generally, interest is charged on the unpaid price or it may be adjusted in the price.
But, in any case, it provides funds for some time and is used as a source of short-term
working capital by many business houses which have difficult fund position.

4. Advances:

Some business houses get advances from their customers and agents against orders and this
source is a short-term source of finance for them. It is a cheap source of finance and in order
to minimize their investment in working capital, some firms having long production cycle,
specially the firms manufacturing industrial products prefer to take advances from their
customers.

5. Factoring or Accounts Receivable Credit:

Another method of raising short-term finance is through accounts receivable credit offered
by commercial banks and factors. A commercial bank may provide finance by discounting
the bills or invoices of its customers.

Thus, a firm gets immediate payment for sales made on credit. A factor is a financial
institution which offers services relating to management and financing of debts arising out
of credit sales. Factoring is becoming popular all over the world on account of various
services offered by the institutions engaged in it.
Factors render services varying from bill discounting facilities offered by commercial banks
to a total takeover of administration of credit sales including maintenance of sales ledger,
collection of accounts receivables, credit control and protection from bad debts, provision of
finance and rendering of advisory services to their clients. Factoring may be on a recourse
basis, where the risk of bad debts is borne by the client, or on a non-recourse basis, where
the risk of credit is borne by the factor.

At present, factoring in India is rendered by only a few financial institutions on a recourse

basis. However, the Report of the Working Group on Money Market (Vaghul Committee)
constituted by the Reserve

Bank of India has recommended that banks should be encouraged to set up factoring
divisions to provide speedy finance to the corporate entities.

In-spite of many services offered by factoring, it suffers from certain limitations. The most
critical fall outs of factoring include;

(i) The high cost of factoring as compared to other sources of short-term finance,

(ii) The perception of financial weakness about the firm availing factoring services, and

(iii) Adverse impact of tough stance taken by factor, against a defaulting buyer, upon the
borrower resulting into reduced future sales.

6. Accrued Expenses:

Accrued expenses are the expenses which have been incurred but not yet due and hence not
yet paid also. These simply represent a liability that a firm has to pay for the services already
received by it. The most important items of accruals are wages and salaries, interest, and
taxes.
Wages and salaries are usually paid on monthly, fortnightly or weekly basis for the services
already rendered by employees. The longer the payment-period, the greater is the amount of
liability towards employees or the funds provided by them. In the same manner, accrued
interest and taxes also constitute a short-term source of finance.
Taxes are paid after collection and in the intervening period serve as a good source of
finance. Even income-tax is paid periodically much after the profits have been earned. Like
taxes, interest is also paid periodically while the funds are used continuously by a firm.
Thus, all accrued expenses can be used as a source of finance.

The amount of accruals varies with the change in the level of activity of a firm. When the
activity level expands, accruals also increase and hence they provide a spontaneous source
of finance. Further, as no interest is payable on accrued expenses, they represent a free
source of financing.

However, it must be noted that it may not be desirable or even possible to postpone these
expenses for a long period. The payment period of wages and salaries is determined by
provisions of law and practice in industry.

Similarly, the payment dates of taxes are governed by law and delays may attract penalties.
Thus, we may conclude that frequency and magnitude of accruals is beyond the control of
managements. Even then, they serve as a spontaneous, interest free, limited source of short-
term financing.

7. Deferred Incomes:

Deferred incomes are incomes received in advance before supplying goods or services. They
represent funds received by a firm for which it has to supply goods or services in future.
These funds increase the liquidity of a firm and constitute an important source of short-term
finance. However, firms having great demand for its products and services, and those having
good reputation in the market can demand deferred incomes.

8. Commercial Paper:

Commercial paper represents unsecured promissory notes issued by firms to raise short-term
funds. It is an important money market instrument in advanced countries like U.S.A. In
India, the Reserve Bank of India introduced commercial paper in the Indian money market
on the recommendations of the Working Group on Money Market (Vaghul Committee).

But only large companies enjoying high credit rating and sound financial health can issue
commercial paper to raise short-term funds. The Reserve Bank of India has laid down a
number of conditions to determine eligibility of a company for the issue of commercial
paper. Only a company which is listed on the stock exchange, has a net worth of at least Rs
10 crores and a maximum permissible bank finance of Rs 25 crores can issue commercial
paper not exceeding 30 per cent of its working capital limit.

The maturity period of commercial paper, in India, mostly ranges from 91 to 180 days. It is
sold at a discount from its face value and redeemed at face value on its maturity. Hence, the
cost of raising funds, through this source, is a function of the amount of discount and the
period of maturity and no interest rate is provided by the Reserve Bank of India for this
purpose.

Commercial paper is usually bought by investors including banks, insurance companies, unit
trusts and firms to invest surplus funds for a short-period. A credit rating agency, called
CRISIL, has been set up in India by ICICI and UTI to rate commercial papers.

Commercial paper is a cheaper source of raising short-term finance as compared to the bank
credit and proves to be effective even during period of tight bank credit. However, it can be
used as a source of finance only by large companies enjoying high credit rating and sound
financial health. Another disadvantage of commercial paper is that it cannot be redeemed
before the maturity date even if the issuing firm has surplus funds to pay back.

9. Working Capital Finance by Commercial Banks:

Commercial banks are the most important source of short-term capital. The major portion of
working capital loans are provided by commercial banks. They provide a wide variety of
loans tailored to meet the specific requirements of a concern.
The different forms in which the banks normally provide loans and advances are as
follows:

(a) Loans
(b) Cash Credits
(c) Overdrafts
(d) Purchasing and discounting of bills.
Retained Earnings, Short-Term Sources for Working Capital

Retained Earnings

Retained Earnings (RE) are the portion of a business’s profits that are not distributed as
dividends to shareholders but instead are reserved for reinvestment back into the business.
Normally, these funds are used for working capital and fixed asset purchases (capital
expenditures) or allotted for paying off debt obligations.

Retained Earnings are reported on the balance sheet under the shareholder’s equity section at
the end of each accounting period. To calculate RE, the beginning RE balance is added to
the net income or loss and then dividend payouts are subtracted. A summary report called a
statement of retained earnings is also maintained, outlining the changes in RE for a specific
period.

The Purpose of Retained Earnings

Retained earnings represent a useful link between the income statement and the balance
sheet, as they are recorded under shareholders’ equity which connects the two statements.
The purpose of retaining these earnings can be varied and includes buying new equipment
and machines, spending on research and development, or other activities that could
potentially generate growth for the company. This reinvestment into the company aims to
achieve even more earnings in the future.
If a company does not believe it can earn a sufficient return on investment from those
retained earnings (i.e., earn more than their cost of capital) then they will often distribute
those earnings to shareholders as dividends or share buybacks.

What is the Retained Earnings Formula?

The RE formula is as follows:

RE = Beginning Period RE + Net Income/Loss – Cash Dividends – Stock Dividends

Where RE = Retained Earnings

At the end of each accounting period, retained earnings are reported on the balance sheet as
the accumulated income from the prior year (including the current year’s income), minus
dividends paid to shareholders. In the next accounting cycle, the RE ending balance from the
previous accounting period will now become the retained earnings beginning balance.

The RE balance may not always be a positive number as it may reflect that the current
period’s net loss is greater than that of the RE beginning balance. Alternatively, a large
distribution of dividends that exceed the retained earnings balance can cause it to go
negative.

How Net Income Impacts Retained Earnings

Any changes or movement with net income will directly impact the RE balance. Factors
such as an increase or decrease in net income and incurrence of net loss will pave the way to
either business profitability or deficit. The Retained Earnings account can be negative due to
large, cumulative net losses. Naturally, the same items that effect net income effect RE.

Examples of these items include sales revenue, cost of goods sold, depreciation, and other
operating expenses. Non-cash items such as write-downs or impairments and stock-based
compensation also affect the account.
Short-Term Sources for Working Capital

1. Indigenous Bankers:

Private money-lenders and other country bankers used to be the only source of finance prior
to the establishment of commercial banks. They used to charge very high rates of interest
and exploited the customers to the largest extent possible. Now-a-days with the development
of commercial banks they have lost their monopoly.

But even today some business houses have to depend upon indigenous bankers for obtaining
loans to meet their working capital requirements.

2. Trade Credit:

Trade credit refers to the credit extended by the suppliers of goods in the normal course of
business. As present day commerce is built upon credit, the trade credit arrangement of a
firm with its suppliers is an important source of short-term finance.

The credit-worthiness of a firm and the confidence of its suppliers are the main basis of
securing trade credit. It is mostly granted on an open account basis whereby supplier sends
goods to the buyer for the payment to be received in future as per terms of the sales invoice.
It may also take the form of bills payable whereby the buyer signs a bill of exchange payable
on a specified future date.

When a firm delays the payment beyond the due date as per the terms of sales invoice, it is
called stretching accounts payable. A firm may generate additional short-term finances by
stretching accounts payable, but it may have to pay penal interest charges as well as to forgo
cash discount. If a firm delays the payment frequently, it adversely affects the credit
worthiness of the firm and it may not be allowed such credit facilities in future.

The main advantages of trade credit as a source of short-term finance include:

(i) It is an easy and convenient method of finance.

(ii) It is flexible as the credit increases with the growth of the firm.
(iii) It is informal and spontaneous source of finance.
However, the biggest disadvantage of this method of finance is charging of higher prices by
the suppliers and loss of cash discount.
3. Installment Credit:

This is another method by which the assets are purchased and the possession of goods is
taken immediately but the payment is made in installments over a pre-determined period of
time. Generally, interest is charged on the unpaid price or it may be adjusted in the price.
But, in any case, it provides funds for some time and is used as a source of short-term
working capital by many business houses which have difficult fund position.

4. Advances:

Some business houses get advances from their customers and agents against orders and this
source is a short-term source of finance for them. It is a cheap source of finance and in order
to minimize their investment in working capital, some firms having long production cycle,
specially the firms manufacturing industrial products prefer to take advances from their
customers.

5. Factoring or Accounts Receivable Credit:

Another method of raising short-term finance is through accounts receivable credit offered
by commercial banks and factors. A commercial bank may provide finance by discounting
the bills or invoices of its customers.

Thus, a firm gets immediate payment for sales made on credit. A factor is a financial
institution which offers services relating to management and financing of debts arising out
of credit sales. Factoring is becoming popular all over the world on account of various
services offered by the institutions engaged in it.

Factors render services varying from bill discounting facilities offered by commercial banks
to a total takeover of administration of credit sales including maintenance of sales ledger,
collection of accounts receivables, credit control and protection from bad debts, provision of
finance and rendering of advisory services to their clients. Factoring may be on a recourse
basis, where the risk of bad debts is borne by the client, or on a non-recourse basis, where
the risk of credit is borne by the factor.

At present, factoring in India is rendered by only a few financial institutions on a recourse

basis. However, the Report of the Working Group on Money Market (Vaghul Committee)
constituted by the Reserve

Bank of India has recommended that banks should be encouraged to set up factoring
divisions to provide speedy finance to the corporate entities.

In-spite of many services offered by factoring, it suffers from certain limitations. The most
critical fall outs of factoring include;

(i) The high cost of factoring as compared to other sources of short-term finance,
(ii) The perception of financial weakness about the firm availing factoring services, and
(iii) Adverse impact of tough stance taken by factor, against a defaulting buyer, upon the
borrower resulting into reduced future sales.
6. Accrued Expenses:
Accrued expenses are the expenses which have been incurred but not yet due and hence not
yet paid also. These simply represent a liability that a firm has to pay for the services already
received by it. The most important items of accruals are wages and salaries, interest, and
taxes.

Wages and salaries are usually paid on monthly, fortnightly or weekly basis for the services
already rendered by employees. The longer the payment-period, the greater is the amount of
liability towards employees or the funds provided by them. In the same manner, accrued
interest and taxes also constitute a short-term source of finance.

Taxes are paid after collection and in the intervening period serve as a good source of
finance. Even income-tax is paid periodically much after the profits have been earned. Like
taxes, interest is also paid periodically while the funds are used continuously by a firm.
Thus, all accrued expenses can be used as a source of finance.

The amount of accruals varies with the change in the level of activity of a firm. When the
activity level expands, accruals also increase and hence they provide a spontaneous source
of finance. Further, as no interest is payable on accrued expenses, they represent a free
source of financing.

However, it must be noted that it may not be desirable or even possible to postpone these
expenses for a long period. The payment period of wages and salaries is determined by
provisions of law and practice in industry.

Similarly, the payment dates of taxes are governed by law and delays may attract penalties.
Thus, we may conclude that frequency and magnitude of accruals is beyond the control of
managements. Even then, they serve as a spontaneous, interest free, limited source of short-
term financing.

7. Deferred Incomes:

Deferred incomes are incomes received in advance before supplying goods or services. They
represent funds received by a firm for which it has to supply goods or services in future.
These funds increase the liquidity of a firm and constitute an important source of short-term
finance. However, firms having great demand for its products and services, and those having
good reputation in the market can demand deferred incomes.

8. Commercial Paper:

Commercial paper represents unsecured promissory notes issued by firms to raise short-term
funds. It is an important money market instrument in advanced countries like U.S.A. In
India, the Reserve Bank of India introduced commercial paper in the Indian money market
on the recommendations of the Working Group on Money Market (Vaghul Committee).
But only large companies enjoying high credit rating and sound financial health can issue
commercial paper to raise short-term funds. The Reserve Bank of India has laid down a
number of conditions to determine eligibility of a company for the issue of commercial
paper. Only a company which is listed on the stock exchange, has a net worth of at least Rs
10 crores and a maximum permissible bank finance of Rs 25 crores can issue commercial
paper not exceeding 30 per cent of its working capital limit.

The maturity period of commercial paper, in India, mostly ranges from 91 to 180 days. It is
sold at a discount from its face value and redeemed at face value on its maturity. Hence, the
cost of raising funds, through this source, is a function of the amount of discount and the
period of maturity and no interest rate is provided by the Reserve Bank of India for this
purpose.

Commercial paper is usually bought by investors including banks, insurance companies, unit
trusts and firms to invest surplus funds for a short-period. A credit rating agency, called
CRISIL, has been set up in India by ICICI and UTI to rate commercial papers.

Commercial paper is a cheaper source of raising short-term finance as compared to the bank
credit and proves to be effective even during period of tight bank credit. However, it can be
used as a source of finance only by large companies enjoying high credit rating and sound
financial health. Another disadvantage of commercial paper is that it cannot be redeemed
before the maturity date even if the issuing firm has surplus funds to pay back.

9. Working Capital Finance by Commercial Banks:

Commercial banks are the most important source of short-term capital. The major portion of
working capital loans are provided by commercial banks. They provide a wide variety of
loans tailored to meet the specific requirements of a concern.

The different forms in which the banks normally provide loans and advances are as
follows:

(a) Loans
 (b) Cash Credits
(c) Overdrafts
(d) Purchasing and discounting of bills.
Newer Sources of Finance, Venture Capital
Here’s an overview of seven typical sources of financing for start-ups:

Personal Investment

When starting a business, your first investor should be yourself—either with your own cash
or with collateral on your assets. This proves to investors and bankers that you have a long-
term commitment to your project and that you are ready to take risks.

Personal Money

This is money loaned by a spouse, parents, family or friends. Investors and bankers
considers this as “patient capital”, which is money that will be repaid later as your business
profits increase.

When borrowing love money, you should be aware that:

• Family and friends rarely have much capital

• They may want to have equity in your business
• A business relationship with family or friends should never be taken lightly
Venture Capital
The first thing to keep in mind is that venture capital is not necessarily for all entrepreneurs.
Right from the start, you should be aware that venture capitalists are looking for technology-
driven businesses and companies with high-growth potential in sectors such as information
technology, communications and biotechnology.

Venture capitalists take an equity position in the company to help it carry out a promising
but higher risk project. This involves giving up some ownership or equity in your business
to an external party. Venture capitalists also expect a healthy return on their investment,
often generated when the business starts selling shares to the public. Be sure to look for
investors who bring relevant experience and knowledge to your business.

Angels

Angels are generally wealthy individuals or retired company executives who invest directly
in small firms owned by others. They are often leaders in their own field who not only
contribute their experience and network of contacts but also their technical and/or
management knowledge. Angels tend to finance the early stages of the business with
investments in the order of $25,000 to $100,000. Institutional venture capitalists prefer
larger investments, in the order of $1,000,000.

In exchange for risking their money, they reserve the right to supervise the company’s
management practices. In concrete terms, this often involves a seat on the board of directors
and an assurance of transparency.

Business incubators

Business incubators (or “accelerators”) generally focus on the high-tech sector by providing
support for new businesses in various stages of development. However, there are also local
economic development incubators, which are focused on areas such as job creation,
revitalization and hosting and sharing services.

Commonly, incubators will invite future businesses and other fledgling companies to share
their premises, as well as their administrative, logistical and technical resources. For
example, an incubator might share the use of its laboratories so that a new business can
develop and test its products more cheaply before beginning production.

Generally, the incubation phase can last up to two years. Once the product is ready, the
business usually leaves the incubator’s premises to enter its industrial production phase and
is on its own.
 Businesses that receive this kind of support often operate within state-of-the-art sectors such
as biotechnology, information technology, multimedia, or industrial technology.

MaRS – an innovation hub in Toronto – has a selective list of business incubators in Canada,
plus links to other resources on its website.

Government grants and subsidies

Government agencies provide financing such as grants and subsidies that may be available
to your business. The Canada Business Network website provides a comprehensive listing of
various government programs at the federal and provincial level.

Criteria

Getting grants can be tough. There may be strong competition and the criteria for awards are
often stringent. Generally, most grants require you to match the funds you are being given
and this amount varies greatly, depending on the granter. For example, a research grant may
require you to find only 40% of the total cost.

Generally, you will need to provide:

• A detailed project description

• An explanation of the benefits of your project
• A detailed work plan with full costs
• Details of relevant experience and background on key managers
• Completed application forms when appropriate
Most reviewers will assess your proposal based on the following criteria:
• Significance
• Approach
• Innovation
• Assessment of expertise
• Need for the grant
Some of the problem areas where candidates fail to get grants include:
• The research/work is not relevant
• Ineligible geographic location
• Applicants fail to communicate the relevance of their ideas
• The proposal does not provide a strong rationale
• The research plan is unfocused
• There is an unrealistic amount of work
• Funds are not matched
Bank Loans
Bank loans are the most commonly used source of funding for small and medium-sized
businesses. Consider the fact that all banks offer different advantages, whether it’s
personalized service or customized repayment. It’s a good idea to shop around and find the
bank that meets your specific needs.

In general, you should know bankers are looking for companies with a sound track record
and that have excellent credit. A good idea is not enough; it has to be backed up with a solid
business plan. Start-up loans will also typically require a personal guarantee from the
entrepreneurs.
 UNIT - IV

Project Monitoring & Control Process

• Evaluation and comparison of actual measured results against those planned is the
fundamental principle of project monitoring process.

• Whenever there is a variance, corrective action is required to keep the project on schedule
and to budget.

• The inputs are the project plan and progress reports that contain data collected from the
project team.

• Where progress deviates significantly, and this usually means outside of a predetermined
tolerance limit, it is important to identify the underlying causes and take corrective action.

Following diagram shows the project monitoring cycle to be followed at regular period of
intervals of the project duration.
 Monitoring Process (on a Regular Basis)

o Get the data about the current status of your project.

• Measure and Compare.
o Compare with baseline plan, highlight any deviation, and make a projection based on current
data.
• Assess and Re-plan.
o Decide whether corrective actions are necessary.
o If so, plan, document, and take the corrective actions.
Monitoring and Controlling Activities
• Involves tracking, reviewing, and regulating project progress
• Includes status reporting, progress measurement, and forecasting
• Reports on scope, schedule, cost, resources, quality, and risks
• Controls project and project document changes
• Includes control of scope, schedule, costs, and risks
• Formalizes acceptance of deliverables
• Records quality control results
• Implements risk treatment plans and actions
• Administers suppliers
Key Results from Monitoring Process
• Progress and status reports
• Plan updates
• Risks registers
• Change requests
• Work products/deliverables
Project Evaluation

The project evaluation process uses systematic analysis to gather data and reveal the
effectiveness and efficiency of your management. This crucial exercise keeps projects on
track and informs stakeholders of progress.
Every aspect of the project is measured to determine if it’s proceeding as planned, and if not,
inform how project parts be improved. Basically, you’re asking the project a series of
questions designed to discover what is working, what can be improved and whether the
project is in fact useful.
The project evaluation can be broken down into three main types: pre-project evaluation,
ongoing evaluation and post-project evaluation. So, let’s look at the project evaluation
process, what it entails and how you can improve your technique.

Three Types of Project Evaluation

(i) Pre-Project Evaluation

In a sense, you’re pre-evaluating your project when you write your project charter to pitch to
the stakeholders. You cannot effectively plan, staff and control a new project if you’ve first
not evaluated it. Pre-project evaluation is the only sure way you can determine the
effectiveness of the project before executing it.
(ii) Ongoing Evaluation
To make sure your project is proceeding as planned and hitting all the scheduling and budget
milestones you set, it’s crucial that you are constantly monitoring and reporting on your
work in real-time. Only by using metrics can you measure the success of your project and
whether or not you’re meeting the project’s goals and objectives.
(iii) Post-Project Evaluation
Think of this as a postmortem. The post-project evaluation is when you go through the
project’s paperwork, interview the project team and principles, and analyze all relevant data
so you can understand what worked and what went wrong. Only by developing this clear
picture can you resolve issues in upcoming projects.
What’s a Project Evaluation Process Look Like?
Regardless of when you choose to run a project evaluation, the process always has four
phases: planning, implementation, completion and dissemination of reports.
Planning
When planning for a project evaluation, it’s important to identify the stakeholders and what
their short- and long-term goals are. You must make sure your goals and objectives for the
project are clear. It’s critical to have settled on a criterion that will tell you whether these
goals and objects are being met.
So, you’ll want to write a series of questions to pose to the stakeholders. These queries
should include subjects such as the project framework, best practices and metrics that
determine success.By including the stakeholders in your evaluation plan, you’ll receive
direction during the course of the project while simultaneously developing a relationship
with the stakeholders. They will get progress reports from you throughout the project’s
phases, and by building this initial relationship, you’ll likely earn their belief that you can
manage the project to their satisfaction.
Implementation
While the project is running, you must monitor all aspects to make sure you’re meeting the
schedule and budget. Some of the things you should monitor during the project is the
percentage completed. This is something you should do when creating status reports and
when meeting with your team. To make sure you’re on track, make the team accountable for
delivering on their tasks. Also, maintain baseline dates to know when tasks are due.
Don’t forget to keep an eye on quality. It doesn’t matter if you deliver within the allotted
time frame if the product is poor. Maintain quality reviews, and don’t delegate that
responsibility. Take it on yourself.
Maintaining a close relationship with the project budget is just as important as tracking the
schedule and quality. Keep an eye on costs. They will fluctuate throughout the project, so
don’t panic. However, be transparent if you notice a need growing for more funds. Let your
steering committee know as soon as possible, so there are no surprises.
 Completion
When you’re done with your project, you still have some work to do. You want to take the
data you gathered in the evaluation and learn from it, so you can fix problems that you
discovered in the process. Figure out what the short- and long-term impacts are of what you
learned in the evaluation.
Reporting and Disseminating
Once the evaluation is complete, you need to record the results. This creates a historic record
that will provide lessons for the future. Deliver your report to your stakeholders to keep
them updated on the progress of the project.

Post Project Evaluation (Post Audit)

Meaning of Post Project Evaluation:
Post project evaluation represents assessment of the project after its completion, analyzing
the actual, as against the projected estimates in respect of time, cost and quality
specifications. The evaluation includes investigation of the variances per constituent of the
project objectives (and, within such constituent, major elements of variances) leading to the
assessment of the overall situation.
The project appraisal is the pre-investment evaluation of estimates/forecasts etc. as
envisaged in the proposed project which helps in taking a decision in favour or against such
investment.
The post project evaluation, on the other hand, is the audit and assessment of the actual as
against the project budgets, based on which the project was launched and completed. While
the ‘appraisal’ contains estimations for future, the ‘evaluation’ is to find the ‘valuation’ of
what has happened practically.
In India, such evaluation of many government projects are carried out by:

1. Programme Evaluation Organisation (PEO) to evaluate the working of Community

Development Projects,

2. Office of the Comptroller and Auditor-General for the Public Sector Projects.
 The post project evaluation should be open-minded and courageous in revealing and
analyzing the facts. International financial institutions like World Bank have emphasized
post project evaluation, as the outcome of such evaluation is very much useful for its
assistance and dealing with possible future projects.

Objective of Post Project Evaluation:

By the process of implementation of a project, the project owner, the financial institution
involved in the project, and the project management is all enriched with abundant
experience, as also the contractor employed for the project. The objective of evaluation of
the project after its completion is to learn from such experience.
The details of such evaluation can be interpreted and used in different ways according to the
perspectives of the concerns interested in the project. The fundamental objective, however,
is the possible use of the valuable knowledge and experience gathered from the completion
of the project.
The project owner as well as the project management is, on completion of the project,
equipped with a store of information the invaluable database which can be retained for
possible future usage.
The financial institution may find from the post project evaluation the weakness in project
appraisal at the initial stage and/or lack of necessary monitoring by itself during the
implementation process etc. and, thus, modify its lending policy for the future.
A contractor may achieve his scheduled targets but, in doing so, suffer severe financial loss
due to inadequacy in his bidding, and, by post project evaluation, he can make use of his
experience and take necessary safeguard measures in his tender for future projects.
It will appear from the above that the fundamental objective is to record the findings from
the evaluation, so that the observations can be of immense help in future.
The objectives of post project evaluation also include the need for assessment of the
situation on completion of the project as such evaluation may reveal the need for some
corrective measures.
 Process of Post Project Evaluation:
In spite of all the latest tools and techniques and helps from sophisticated automation
system, the track record of larger and complex project is in general poor. There are endless
instances where actual on completion of the projects are wide out of the budgets.
In view of this the post project evaluation is immensely important.
The process of such evaluation can be carried out in two phases:
(a) Soon after the completion of the project; and
(b) After the lapse of about two years since the completion of the project.
(A) Evaluation soon after the completion of the project:
The process of evaluation can be carried out by questioning method and include:
1. What has happened in actual?
2. How do the actual stand as compared to projected estimates?
3. What are the areas showing variances?
Such variances are to be located and investigated individual area-wise. This is
because considerable unfavourable variance in an area may be set-off with favourable
variances in other area leading to insignificant difference between the totals of actual and
estimates. Analysis of small variances ranging within seven to eight per cent may be
avoided.
What are the reasons for such variances and:
How much of it was unavoidable and how?
How much of it was avoidable:
(a) What are the reasons for such avoidable variances?
(b) What else could have been done?
(c) How and when it could have been done?
(B) Evaluation after the lapse of about two years since completion of the project: The
questions include:

1. Whether the goal with regard to the technology envisaged is achieved, e.g. the quality, the
capacity of the plant etc.?

2. What are the reasons for shortfalls, if any, as evaluated in (1) above. The reasons for
shortfalls may include deficiencies in the plant layouts, the machineries installed, the
standard of inputs etc.
3. What else could have been done to avoid the shortfalls noted as in (2) above?

4. Whether the market share as envisaged in the project is being achieved? If not, what are the
reasons for missing the target?
Additionally, the process of evaluation should also aim towards the assessment of necessary
corrective measures.
Abandonment Analysis
Abandonment is the act of surrendering a claim to, or interest in, a particular asset. In
securities markets, abandonment is the permitted withdrawal from a forward contract that is
made for the purchase of deliverable securities. For instance, in some cases an options
contract may not be worthwhile or profitable to exercise, so the purchaser of the option lets
it expire without being exercised.
An abandonment option in a contract allows either party to leave the contract before
fulfilling obligations. Neither party incurs penalties for withdrawing from the contract. For
example, when a worker withdraws from an employment contract containing an
abandonment clause, the employer cannot contest the resignation.
Abandonment of Business Asset
Abandonment of a business asset requires accounting for the asset’s removal on the
company’s financial statements. Abandonment typically results in a loss affecting net
income and is reported on the income statement. If using the indirect method when creating
the cash flow statement, the section on cash flows from/used by operating activities reflects
non-cash-related activities affecting net income. The loss incurred on the asset’s
abandonment is included as an adjustment in that section.
Abandonment Clause
An abandonment clause may be part of an insurance contract allowing the owner to abandon
damaged property while still receiving a full settlement. The insurance company then owns
the abandoned property. Such clauses are common in marine property insurance policies on
homes at greater risk for flood or other damage from natural disasters. Policyholders may
evoke the clause when recovering or repairing the property is greater than the property’s
value, or the damage results in a total loss. For example, when a boat is lost at sea,
recovering the boat is more expensive than replacing it with proceeds from an insurance
policy.
Abandonment and Salvage
Abandonment and salvage involves one party’s relinquishment of an asset and another
party’s subsequent claim to the asset. A clause allowing this action commonly appears in
insurance contracts. If the owner abandons an insured asset or piece of property, the
insurance company may rightfully claim the item for salvage. The owner must express in
writing his intention in abandoning the asset or property. For example, if a homeowner
abandons a house due to heavy flood damage, the owner provides a written notice of
intentionally abandoning the home to the insurance company. The insurance company lays
claim to the house and attempts to resell it. Because abandonment and salvage can be
lucrative for the salvager, multiple parties may try laying claim to an abandoned asset or
property.
Social Cost, Social Benefit
Social Cost-Benefit Analysis: Thing # 1. Criteria for Social Cost-Benefit Analysis:
The objective function of CBA is the establishment of net social benefit (NSB) which can be
expressed as NSB = Benefits – Costs.
There are four benefit-cost criteria. They are ‘В — С/I’, ‘∆В /∆С’, ‘В — С’ and ‘B/C’,
where В and С refer to benefits and costs respectively, I relates to direct investment and ∆ is
incremental or marginal.
Of these, the formula В – C/1 is “for determining the total annual returns on a particular
investment to the economy as a whole irrespective of to whom these accrue.” Here I does
not include the private investment that may have to be incurred by the beneficiaries of the
project, such as the cultivators from an irrigation project.
If the private investment happens to be very large, even a high value of В – С/I may be less
beneficial to the economy. Thus this criterion would not give satisfactory results.
The criterion of ∆В/∆С = 1 is meant to determine the size of a project that has already been
selected and is not for selecting a project. The adoption of the В – C. criterion would always
favour a large project, and make small and medium size projects less beneficial. Thus this
criterion can only help in determining the scale of the project on the basis of the
maximisation of the difference between В and C.
But the best and the most reliable criterion for project evaluation is B/C. In this criterion, the
benefit-costs ratio is the measure for the evaluation of a project. If B/C = 1, the project is
marginal. It is just covering its costs. If B/C > 1, the benefits are more than costs and it is
beneficial to undertake the project.
If B/C < 1, the benefits is less than costs and the project cannot be undertaken. The higher
the benefit-cost ratio, the higher will be the priority attached to a project.
Social Cost-Benefit Analysis: Thing # 2. Identifying Benefits and Costs:
Identifying benefits and costs is essential for the evaluation of benefits and costs of a
project:
(a) Identifying Benefits:
A project is evaluated on the basis of the benefits accruing from it. Benefits refer to the
addition to the flow of income accruing from a project. A project is beneficial to the extent it
tends to increase the income of the people, increase in income being measured by the actual
increase in production and consumption. Benefits may be real or nominal and direct or
indirect.
Real or Nominal Benefits:
In CBA, we are concerned with the real benefits rather than with the nominal benefits
flowing from a project. A river valley project may increase irrigational facilities to the
cultivators. But if at the same time the state leaves heavy betterment levy on them, the
benefit is nominal. For, whatever benefit accrues from the project it goes to the treasury. But
if the same project, besides increasing irrigational facilities, raises the productivity of land
per acre and leads to a number of other external economies whereby, the level of real
income of the farmers raises then it leads of real benefits.
Direct and Indirect Benefits:
Direct benefits are those benefits which are immediately and directly obtainable from a
project. They are the values of the immediate products and services for which direct costs
are incurred. A number of direct and immediate benefits flow from a multipurpose river
valley project such as flood control, irrigation, and navigation facilities, the development of
fisheries, power, etc. A project may also lead to certain indirect or external benefits. These
are the benefits to the non-users of the project.
For instance, the construction of the Bhakra Nangal Project has led to the construction of a
new railway line connecting Nangal township and the Bhakra Dam with the rest of the
country. New roads have been laid. A new town, Nangal, has come up.
A fertilizer factory has been started there which is the harbinger of more factories. The
Bhakra-Nangal Dam has been developed into a tourist resort, thereby augmenting income.
Usually external benefits are nonmonetary, but sometimes they may result in direct financial
benefits.
Tangible and Intangible Benefits:
A project may also lead to tangible or intangible benefits. Tangible benefits are those which
can be computed and measured in terms of money while intangible benefits cannot be
measured in monetary terms. For example, benefits flowing from the Bhakra-Nangal Project
are tangible and can be computed.
Intangible benefits enter into individual evaluations for which there is neither a market nor a
price. They may be positive or negative. The former are the scenic beauty and recreational
value of the Bhakra Dam while the latter refer to the uprooting of the people as a result of
the Dam.
Identifying Costs:
Just as there are various forms of benefits, so there are various types of costs
Project Costs:
They are the value of the resources used in constructing, maintaining and operating the
project. They relate to the cost of labour, capital, intermediate goods, natural resources,
foreign exchange, etc., including allowance for induced adverse effects.
Indirect or Secondary Costs:
They are the value of goods and services incurred to provide indirect benefits of a project,
viz., houses, school, hospital, etc., or the people working at the project site. They also
include the costs of processing the immediate products of the project.
Real and Nominal or Pecuniary Costs:
Costs may be real or nominal. If a Block Samiti borrows from the people of the area for
digging a canal, it is a case of nominal costs. For no real sacrifice is involved on the part of
the people, money having been transferred to the Block Samiti from the people. But if the
people of the block are asked to dig the canal themselves, it would be real cost for them.
Primary or Direct Costs:
In cost-benefit analysis, we are concerned more with primary or direct costs. These are costs
properly incurred for the construction, maintenance and execution of a project.
External Costs:
There are of two types:
(i) Monetary Costs:
That relate to the loss of profits to competitors. In the case of Delhi Metro, external
monetary costs would include the loss of profits to other transport operators such as three
wheelers, buses, taxis, etc.
(ii) Non-monetary Costs:
These include pollution and other types of inconveniences to local residents. Construction of
an airport may lead to externalities resulting from its operation, such as noise.

Conclusion:
Thus in evaluating a project, we are to identify, compute and compare its total direct benefits
and total direct costs. If it is found that the benefits are expected to be more than the costs, it
will be beneficial to undertake the project, otherwise not costs.
Social Cost-Benefit Analysis: Thing # 3. Valuation of Costs and Benefits:
In the valuation of social costs and benefits of a public project, the shadow prices of inputs
and outputs of the project are used instead of actual market prices. Shadow prices reflect
true values of goods and services, including the factors of production.
Their money values are computed on the basis of price indices in different markets, giving
weights to inflationary and deflationary situations. Economists estimate three such prices:
shadow wage rate, shadow interest rate and shadow exchange rate. However, for many items
of social costs and benefits, there may not be any shadow price at all.
Role of IT in Project Management
In the past, project management and collaboration were done through emails and sharing
platforms. Today, the recent advancements in technology have contributed in providing the
right project management tools that can help your projects succeed. Previous generations of
project managers and teams could just dream of these worthwhile tools and wished that they
were available during their time. These project management tools have created smoother
operation in the performance of the project tasks. They have also increased the members’
efficiency and have created a better overall collaborative experience.;
 Project Management Tools
The following tools and features have greatly helped revitalize the project management
performance:

• Data storage and Backup. Gone are the days that businesses use filing cabinets as an
essential organizational tool as they have become obsolete with the arrival of project
management technologies. Storing data on the cloud or on a hard drive has made it possible
to back up all the data and securely keep records on file even when the computer encounters
problems.

• Accessibility and Communication. In the past, having team members in the same area can
be considered accessible. However, technology has changed this setting in the past years.
Team members in various projects need not be located in the same area or company. In fact,
they are located in different parts of the world. Technology has improved accessibility and
promoted instant communication. Many team members work at home and even if they are
located in the opposite side of the world, they can be accessible almost any time of the day
or night.

• Project Management Platforms Keep the Team up with Deadlines. It cannot be argued
that the project management platforms have helped project teams keep up with the
deadlines. Keeping deadlines can be extremely difficult at times but with the support of
technology and software, collaborators can easily complete their tasks on a schedule that is
convenient to everybody.

• Budget Tracker. Excel spreadsheets have long served its purpose of keeping track of
business expenses. Even until now, some organizations still make use of the Excel
spreadsheets to keep track of their expenses as well as their revenues. However, new project
management software have now simplified the budgeting challenges that Excel has not
resolved, such as the complicated formulas in the multiple varieties of expenses.

• Time Tracking. In the past, it was hard to calculate the time that was spent on a specific
task. Today’s project management programs have features that make it easy for the team
members to calculate or track the time spent on each project tasks.
Technology’s revitalizing role in project management cannot be argued. Project
management programs have various features that have contributed to a more efficient
 project completion. As time goes on, there will be more enhancements that will greatly
change the way project managers and members handle the tasks and various aspects of their
project. Technology will always be a great help as it continues to support the project teams
in managing the various tasks, roles and responsibilities that are assigned to them.
Future of Project Management
Projectification of Societies
Projectification of societies is defined as the degree of diffusion of project management in
all sectors of the societies. Indicators of this trend are the time and money spent in projects
as well as the amount of economic, cultural and social benefits and losses caused by
projects.
Increasingly more sectors of societies will implement the methodologies of project
management for solving their complex unique tasks
Drivers of Trend
• Post-industrialization of the societies, which creates more complex tasks
• New technologies enabling and creating new forms of collaboration
• The changing values of generation Y that may foster and transform project management in
the future.
Possible Implications of Trend
Project Management will become a basic competence for everybody: not only engineers and
managers will be supposed to know the techniques, but also professionals that have no
contact with project management today like in the health or education sector. Project
management will become more elaborated and diversified.
Women in Project Management
The increasing number of women in managing and leading projects, programs and portfolios
will change the way how projects are managed in the future, but also the evaluation criteria
for project managers.
This involves the leadership style, communication style, meeting style, team composition
and development, and the cooperation culture when people are dealing with complexity,
coping with challenges and risks
Drivers of Trend

• The corporate cultures and quotas for managerial gender compositions in the organizations.
• Further drivers are the gender specific education, motivation, training and development
opportunities as well as the lack of qualified male specialists particularly in the aging
societies.
Possible Barriers
A common barrier against this development is the so-called “glass ceiling that keeps
qualified women from rising to the upper rungs of the corporate ladder regardless of their
qualifications or achievements.
Other barriers include the missing support that women receive from organizations to
integrate their work with family life as well as a lack of understanding on behalf of male
colleagues and superiors when women give priority to their family responsibilities.
Coping with Complexity
Complexity of projects is driven by size & volume of projects, by the number of
stakeholders involved in the project, and the ambiguity of their expectations.
Drivers of Trend

• Projects are having to cope with an increasing uncertainty e.g. concerning technological
developments, regulatory changes, competitive moves, and changing customer
requirements.

• Globalization, Virtualization, Urbanization and Growth

Possible Implications of Trend:
To better react with these circumstances particularly in the area of ICT agile methods
derived. These methods are expected to further develop to hybrid methods integrating the
classic procedures with agile concepts. Further implications are:
• Collaborative methods will increase
• Standardization, modularization and integrating tools will proliferate
• Big data, simulation and statistical analysis tools will augment
• Systemic approaches will be increasingly demanded
 REFERENCES

Books

• Pandey I M: Financial Management [9th ed.], Vikas Publishing House Pvt Ltd.
• Chandra Prasanna, Financial Management (6th ed.), Tata McGraw-Hill.
• Lasher William R., Practical Financial Management(2nd edition), South-Western
College Publishing.
• Sharan Vyuptakesh, Fundamentals of Financial Management, Pearson Education, New
Delhi.

Websites

• www.google.com
• www.managementparadise.com
• www2.tec.ilstu.edu
• nadfm.nic.in/learning/OTHERTM/TMRC/CDABR/d.../PM_Text.doc
• www.slideshare.net
• www.fao.org/docrep/w7506e/w7506e06.htm