Financial Analysis

Evaluasi Proyek #4
Magister Ekonomika Pembangunan
FEB UGM
 Introduction
• Financial analysis should be carried out for every
entity which was established by the project or
whose activities are substantially modified by it.
• In an ex-ante situation (i.e. before the project is
inplemented)
– demand studies: market size, estimate of future
demand (nature, quantities, growth, prices, structure),
the likely market share of the project, marketing
conditions, regulations, etc.;
– technical studies: selection of technology, scale of
operation, input requirements, training requirements,
location.
• In an ex-post situation (i.e. after the end of the
project), these studies may be undertaken
simultaneously, although financial analysis may
precede the others in order to determine what
market and technical studies are needed.
• The aim of financial analysis is to:
– understand the entity's operations by reviewing its
physical and money flows;
– assess the entity's financial balance, and thus the
viability of its operations;
– assess the entity's efficiency and estimate the likely
financial return on investment.
 Investment
• The start-up investments made in establishing
productive capacity are of two kinds:
– those linked to the actual investment: studies and research,
land purchase, buildings, equipment;
– those linked to the start-up of the project: initial expenses,
personnel training, working capital requirements.
• Other investments will be made during the course of
the operation, so as to:
– maintain productive capacity: e.g., replace worn out plant
and equipment;
– increase (or diversify) productive capacity: purchase new
equipment, increase working capital
• Finally, interest payments during construction
are sometimes added to the total investments.
• This interest is incurred on the borrowed
capital paid during the initial investment
phase, before the start of production
operations.
Investment Table
Investment Schedule
• Depreciation comprises the non-cash expenses representing
the annual loss in value of fixed investments
• Two types of contingencies can be distinguished:
• the provision for physical contingencies. These enable the
analyst to take into account the uncertainty inherent in
technical forecasts and cost estimates (in constant prices).
– For example, based on the data available at the time of planning,
the depth of foundations required for a dam or a school may be
underestimated thus increasing expected costs; poor weather
conditions may make additional pumping operations at the
construction site necessary thus creating new costs;
• the provisions for financial contingencies resulting from
relative variations in prices of key inputs (in constant
prices). These are independent of the general rise in prices.
Raw materials or spare parts are especially subject to such
rises, which are difficult to predict.
• Similarly, the prices of some goods, for which
substitutes are not easily obtained, can vary as
a result of production difficulties, new
government regulations, or because the project
suddenly creates an increase in demand.
 Operating Cost and Benefit
• The set of inflows and outflows is identified as:
– output volume and value;
– input value (raw materials, transportation, other services and
products consumed, management charges), labour charges and
taxes.
• In an ex-ante analysis, it is customary to analyse both the
cash flow statement (receipts and outlays) and a flow
balance account (revenues and expenses, with flows which
do not give rise to actual monetary compensation being
valued at market prices).
• In an ex-post situation, a lack of information often means
that data are available for only a fraction of the operating
period (one or two years) and an operating account is thus
used (revenues and expenses).
 Financial Plan
• The next stage in the financial analysis of an
entity involves:
– determining the working capital needed for
continuous and regular operations;
– working out the financing plan to allow the
planned investments to be made without solvency
problems.
Reference
• https://ec.europa.eu/europeaid/sites/devco/files/methodology-
financial-and-economic-project-analyses-decision-making-
tool_en_2.pdf
• http://www.adb.org/sites/default/files/institutional-
document/32256/eco-analysis-projects.pdf