PROJECT

MANAGEMENT
BITS Pilani Dr. Arun Maity
Pilani Campus
 BITS Pilani
Pilani Campus

FINANCIAL ANALYSIS
Lecture No. 5
TEXTBOOK T2 CHAPTER 6
5.1 FINANCIAL ESTIMATES
& PROJECTIONS
• Cost of the project

• Means of finance

• Estimates of sales and production

• Working capital requirement

• Profitability projections

• Cash flow statement and balance sheet

BITS Pilani, Pilani Campus

5.1.1 COST OF THE
PROJECT
• Land and Site Development
• Building and Civil Works
• Plant and Machinery
• Technical Know-how and Engineering Fees
• Expenses on Foreign Technicians and Training
• Misc. Fixed Assets
• Preliminary and Capital Issue Expenses
• Pre-operative Expenses
• Margin Money for Working Capital Mgmt.
• Initial Cash Losses

BITS Pilani, Pilani Campus

LAND AND SITE
DEVELOPMENT
• Basic cost of land

• Premium payable on leasehold

• Cost of levelling and development

• Cost of laying approach road and internal roads

• Cost of compound wall and gates

• Cost of tube wells

BITS Pilani, Pilani Campus

BUILDINGS AND CIVIL
WORKS
• Buildings for the main plant and equipment
• Building for auxiliary services
• Go-down, warehouses, open yard facilities
• Non-factory buildings like canteen, guest houses, time
office etc.
• Quarters for essential staff
• Silos, tanks, wells, basins etc.
• Garages, sewages. Drainage
• Other civil engineering works

BITS Pilani, Pilani Campus

PLANT AND MACHINERY

• Cost of Imported Machinery

• Cost of Indigenous Machinery
• Cost of Spares
• Cost of Storage
• Foundation and Installation Charges

BITS Pilani, Pilani Campus

TECHNICAL KNOW-HOW
AND ENGINEERING FEES
• Consultancy Fees
– Preparation of Project Reports
– Choice of Technology
– Selection of Plant And Machinery
– Detailed Engineering

• Payment of Royalty fees as a percentage of sales

BITS Pilani, Pilani Campus

EXPENSES OF FOREIGN
TECHNICIANS AND TRAINING

• Foreign technicians are required for setting up of plant

and supervision

• Expenses on training to Indian technicians

BITS Pilani, Pilani Campus

MISC. FIXED ASSETS

• Furniture
• Office machinery and equipment
• Tools
• Vehicles
• Railway Siding
• Diesel Generating Sets
• Effluent Treatment Plant
• Fire Fighting Equipment

BITS Pilani, Pilani Campus

PRELIMINARY AND CAPITAL
ISSUE EXPENSES
• Identifying the project

• Conducting market survey

• Preparing feasibility report

• Incorporating the company

• Raising capital from the public: commission, brokerage,

fees to managers and registrars, printing and postage,
advertising etc.

BITS Pilani, Pilani Campus

PRE-OPERATIVE
EXPENSES
• Expenses incurred till the commencement of production
• Establishment expenses
• Rent, taxes
• Travelling expenses
• Interest and commitment charges on borrowing
• Insurance charges
• Mortgage expenses
• Start up expenses

BITS Pilani, Pilani Campus

PROVISION FOR
CONTINGENCIES
• Provision for contingencies are made to meet the
increase in prices due to unforeseen reasons other than
the normal inflation rate

• Firm Cost: Those which have already been acquired or

for which definite arrangements have been made

• Non Firm Cost : 10 %

• Overall : 10 % for all items

BITS Pilani, Pilani Campus

MARGIN MONEY FOR
WORKING CAPITAL
• Working capital is provided by commercial banks and
trade creditors (75%)
• Some portion need to be met out from long term finance
(25%)
• Margin money is utilized for meeting overruns in capital
cost
• Financial institutions block a portion of loan equal to
margin money which is released when the project is
completed

BITS Pilani, Pilani Campus

INITIAL CASH LOSSES

• Many of the projects incur cash losses in the initial years

• Provision is made for such losses to avoid liquidity

pressures

BITS Pilani, Pilani Campus

5.1.2 MEANS OF FINANCE

• Share Capital
• Term Loans
• Debenture Capital
• Deferred Credit
• Incentive Sources
• Misc. Sources

BITS Pilani, Pilani Campus

SHARE CAPITAL

• Equity Capital: Contributions made by the owners of the

business, equity shareholders.
– It carries no fixed rate of dividend

• Preference Capital: Contribution made by preference

shareholders
– It carries fixed rate of dividend

BITS Pilani, Pilani Campus

TERM LOANS

• Provided by financial institutions and commercial banks

• Secured borrowings for financing new projects,

expansion, modernization, renovation etc.

• Rupee term loan

• Foreign currency term loan

BITS Pilani, Pilani Campus

DEBENTURE CAPITAL

• For raising debt capital

• Convertible debenture: debentures which are convertible

to equity shares either partly or wholly

• Non-convertible debenture: straight debt instruments,

carry fixed rate of interest and maturity period : 5-9 years

BITS Pilani, Pilani Campus

DEFERRED CREDIT

• Payment for plant and machinery can be delayed over a

period of time

• Incentive sources: government and its agencies provide

financial support as an incentive to promoters
– Seed capital assistance : low interest rate
– Deferment or exemption : tax holidays for limited period

• Misc. Sources: unsecured loans, public deposits, leasing

and hire purchase finance

BITS Pilani, Pilani Campus

5.2.1 ESTIMATES FOR SALES
AND PRODUCTION
• Considerations for estimating sales revenue:

– Reasonable assumption with respect to capacity

utilization
– Assume production equal to sales
– Selling price realizable by the company net of excise
duty, dealers’ commission
– Changes in selling price matched by proportionate
change in cost of production

BITS Pilani, Pilani Campus

5.2.2 COST OF
PRODUCTION
• Material cost

• Utilities cost

• Labour cost

• Factory overhead cost

BITS Pilani, Pilani Campus

5.2.3 WORKING CAPITAL
REQUIREMENT
• Raw materials and components
• Work In Progress
• Finished Goods
• Debtors
• Operating Expenses
• Consumable Items

25% of current assets must be supported by long term sources of

finance

BITS Pilani, Pilani Campus

 CURRENT ASSETS MARGIN

• RAW MATERIALS 10 - 15%

• WORK IN PROCESS 20 - 40%
• FINISHED GOODS 30 - 50%
• DEBTORS 30 - 50%

BITS Pilani, Pilani Campus

PROFITABILITY
PROJECTIONS
A. COST OF PRODUCTION
B. TOTAL ADMINISTRATIVE EXPENSES
C. TOTAL SALES EXPENSES
D. ROYALTY AND KNOW-HOW PAYABLE
E. TOTAL COST OF PRODUCTION (A+B+C+D)
F. EXPECTED SALES
G. GROSS PROFIT BEFORE INTEREST (F-E)
H.TOTAL FINANCIAL EXPENSES (INTEREST PAYMENTS)
I. DEPRECIATION
J. OPERATING PROFIT (G-H-I)

BITS Pilani, Pilani Campus

K. OTHER INCOME
L. PRELIMINARY EXPENSES WRITTEN OFF
M. PROFIT / LOSS BEFORE TAXATION (J + K –L)
N. PROVISION FOR TAXATION
O. PROFIT AFTER TAX (M – N)
• Less Dividend on Preferential capital, equity capital
P. RETAINED PROFIT
Q. NET CASH ACCRUAL (P+I+L)

BITS Pilani, Pilani Campus

5.2.4 PROJECTED CASH
FLOW STATEMENT
• Movement of cash into and out of the firm and its net
impact on the cash balance within the firm

• Sources of Funds
– Share Issue
– Profit before taxation with interest added
– Depreciation provision for the year
– Development rebate reserve
– Increase in secured, medium and long term borrowings for the
project

BITS Pilani, Pilani Campus

• Other medium and long term loans
• Increase in unsecured loans and deposits
• Increase in bank borrowings for working capital
• Increase in liabilities for deferred payments to machinery
suppliers
• Sale of fixed assets
• Sale of investments
• Other income
Total (A)

BITS Pilani, Pilani Campus

DISPOSITION OF FUNDS

• Capital expenditure for the project

• Other normal capital expenditure
• Increase in working capital
• Decrease in secured medium and long term borrowings
• Decrease in unsecured loans and deposits
• Decrease in bank borrowings for working capital
• Decrease in liabilities for deferred payments to
machinery suppliers
• Increase in investments in other companies

BITS Pilani, Pilani Campus

• Interest on term loans
• Interest on bank borrowings for working capital
• Taxation
• Dividends : equity, preferential
• Other expenditure

• Total (B)

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• Opening balance of cash in hand and at bank
• Net surplus / deficit (A – B)
• Closing balance of cash in hand and at bank

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EXAMPLE

LIABILITIES
1. SHARE CAPITAL : 100
2. RESERVE AND SURPLUS : 20
3. SECURED LOANS : 80
4. UNSECURED LOANS : 50
5. CURRENT LIABILITIES : 90
6. PROVISIONS : 20

BITS Pilani, Pilani Campus

ASSETS
1.FIXED ASSETS 180
2. INVESTMENTS 0
3. CURRENT ASSETS 180
CASH 20
RECEIVABLES 80
INVENTORIES 80

BITS Pilani, Pilani Campus

PROJECTED INCOME STATEMENT
AND DISTRIBUTION OF EARNINGS

SALES : 400
COST OF GOODS SOLD : 300
DEPRECIATION : 20
PROFIT BEFORE INTEREST AND TAXES: 80
INTEREST : 20
PROFIT BEFORE TAX : 60
TAX : 30
PROFIT AFTER TAX : 30
DIVIDENDS : 10
RETAINED EARNINGS : 20

BITS Pilani, Pilani Campus

COMPANY PLANS

• Raise secured term loan of 20

• Repay previous term loan of 5
• Increase unsecured loans by 10
• Current liabilities and provisions are expected to remain
unchanged
• Acquire fixed assets worth 30
• Increase in inventories by 10
• Receivables are expected to increase by 15
• Other asset would remain unchanged
• Dividend payment : 10

BITS Pilani, Pilani Campus

PROJECTED CASH FLOW STATEMENT
FOR ABOVE PROBLEM

• SOURCES OF FUNDS
– PROFIT BEFORE TAX AND INTEREST: 80
– DEPRECIATION 20
– INCREASE IN SECURED LOAN 20-5 15
– INCREASE IN UNSECURED LOAN 10
• TOTAL 125
• DISPOSITION OF FUNDS
– CAPITAL EXPENDITURE 30
– INCREASE IN WORKING CAPITAL 25
– INTEREST 20
– TAXATION 30
– DIVIDEND – EQUITY 10
• TOTAL 115

BITS Pilani, Pilani Campus

• Opening balance of cash in hand and at bank : 20
• Net surplus :125 – 115 = 10
• Closing balance of cash in hand and at bank: 20 + 10 =
30

BITS Pilani, Pilani Campus

5.2.5 PROJECTED
BALANCE SHEET
• Balance sheet shows the balances in various assets and
liability accounts

• It reflects the financial condition of the firm at a given

point of time

BITS Pilani, Pilani Campus

LIABILITIES ASSETS
SHARE CAPITAL FIXED ASSETS
RESERVES AND SURPLUS INVESTMENTS
SECURED LOANS CURRENT ASSETS,
LOANS AND
ADVANCES
UNSECURED LOANS MISC. EXPENDITURE AND
LOSSES
CURRENT LIABILITIES
AND PROVISIONS

BITS Pilani, Pilani Campus

• Liabilities: Shows sources of finance employed by the
business
• Share Capital: Consists of paid-up equity and preference
capital
• Reserves and Surplus: Accumulated earnings as shown
in different accounts like debenture redemption reserve,
general reserve
• Secured Loans: Borrowings of the firm against which
security has been provided. Includes debentures, term
loans, loans from commercial banks

BITS Pilani, Pilani Campus

• Unsecured loans: Borrowings against which no specific
security has been provided. Includes public deposits,
loans from promoters

• Current liabilities: Payables from acquiring materials and

supplies used in production, accruals from wages,
salaries and rentals

• Provisions: Tax provision, provision for provident fund,

provision for pension and gratuity, provision for proposed
dividends

BITS Pilani, Pilani Campus

• Asset side of Balance Sheet: Shows how funds are used
in the business
• Fixed Assets: Tangible fixed resources used for producing
goods and services. Shown at original cost less
accumulated depreciation
• Investments: Represent financial securities owned by the
firm
• Current assets, loans and advances: Consist of cash,
debtors, inventories, loans and advances made by the firm
• Misc. expenditures and losses:
• Outlays not covered above and accumulated losses

BITS Pilani, Pilani Campus

PROJECTED BALANCE SHEET
FOR ABOVE PROBLEM

CATEGORY O.B CHANGES C.B.

LIABILITIES
SHARE CAPITAL 100 - 100
RESERVES & SURPLUS 20 + 20 40
SECURED LOANS 80 + 20 -5 95
UNSECURED LOANS 50 + 10 60
CURRENT LAIBILITIES 90 90
PROVISIONS 20 20
TOTAL 405

BITS Pilani, Pilani Campus

CATEGORY O.B CHANGES C.B.

ASSETS
FIXED ASSETS 180 + 30 – 20 190
INVESTMENTS 0 0
CURRENT ASSETS
CASH 20 30
INVENTORIES 80 + 10 90
RECEIVABLES 80 + 15 95
TOTAL 405

BITS Pilani, Pilani Campus

BALANCE SHEET OF
SWARAJ LTD
LIABILITIES
– SHARE CAPITAL : 5
– RESERVES & SURPLUS : 4
– SECURED LOANS : 4
– UNSECURED LOANS : 3
– CURRENT LIABILITIES : 6
– PROVISIONS : 1
– TOTAL : 23

BITS Pilani, Pilani Campus

ASSETS
– FIXED ASSETS : 11
– INVESTMENTS : 0.5
– CURRENT ASSETS : 11.5
• CASH :1
• RECEIVABLES :4
• INVENTORIES : 6.5
– TOTAL : 23

BITS Pilani, Pilani Campus

PROJECTED INCOME STATEMENT
AND DISTRIBUTION OF EARNINGS

SALES : 25
COST OF GOODS SOLD : 19
DEPRECIATION : 1.5
PROFIT BEFORE INT. & TAX : 4.5
INTEREST : 1.2
PROFIT BEFORE TAX : 3.3
TAX : 1.8
PROFIT AFTER TAX : 1.5
DIVIDENDS : 1.0
RETAINED EARNINGS : 0.5

BITS Pilani, Pilani Campus

PLANS FOR NEXT YEAR

INCREASE IN SECURED LOANS :1

REPAY PREVIOUS TERM LOAN : 0.5
INCREASE IN CURRENT LIABILITIES
AND PROVISIONS: 5% (6 + 1) : 0.35

ACQUIRE FIXED ASSETS : 1.5

INCREASE INVENTORIES : 0.5
INCREASE IN RECEIVABLES 5% (4) : 0.2

BITS Pilani, Pilani Campus

PROJECTED CASH FLOW
STATEMENT
SOURCES OF FUND
– PROFIT BEFORE TAX AND INTEREST : 4.5
– DEPRECIATION : 1.5
– INCREASE IN SECURED LOAN (1-0.5) : 0.5
– INCREASE IN CURRENT LIABILITIES
AND PROVISIONS : 0.35
TOTAL : 6.85

BITS Pilani, Pilani Campus

DISPOSITION OF FUNDS
– CAPITAL EXPENDITURE : 1.5
– INCREASE IN WORKING CAPITAL (INVENTORIES & RECEIVABLES) :
0.7
– INTEREST : 1.2
– TAXES : 1.8
– DIVIDEND : 1.0
TOTAL : 6.2
OPENING BALANCE OF CASH IN HAND AND AT BANK: : 1.00
NET SURPLUS (6.85 – 6.2 = 0.65) : 0.65
CLOSING BALANCE : 1.65

BITS Pilani, Pilani Campus

PROJECTED BALANCE
SHEET
LIABILITIES O.B CHANGE
C.B.
– SHARE CAPITAL 5 - 5
– RESERVES & SURPLUS 4 0.5 4.5
– SECURED LOANS 4 1 – 0.5=0.5 4.5
– UNSECURED LOANS 3 - 3
– CURRENT LIABILITIES 6 5% (0.3) 6.3
– PROVISIONS 1 5% (0.05) 1.05

TOTAL 24.35

BITS Pilani, Pilani Campus

 ASSETS O.B. CHANGE
C.B

– FIXED ASSETS 11 1.5 – 1.5 =0 11.00

– INVESTMENTS 0.5 - 0.50
– CURRENT ASSETS 11.5 12.85
• CASH 1 1.65
• RECEIVABLES 4 +5% of 4 = 0.2 4.20
• INVENTORIES 6.5 + 0.5 7.00

TOTAL
24.35

BITS Pilani, Pilani Campus