GROUP 7

FUNDAMENTALS OF PROJECT FINANCE

AND
MANAGEMENT FOR LAWYERS

VANSHIKA MATHUR | GUNJAN MISHRA | HARSH MOHAN PAL | KANHAIYA AGRAHARI

Project Financial Analysis
Project Financial is the project financial analysis of the complete life cycle of a project. The
analysis will depend upon the size of the project and the time-span over which the costs
and benefits are going to be spread.
A financial appraisal essentially views investment decisions from the
perspective of the organization undertaking the investment. It therefore measures only the
direct effects on the cash flow of the organization of an investment, decision. A financial
analysis of a project is undertaken to assess whether it will be commercially profitable for
the enterprise implementing it.
A private firm will undertake a financial analysis of a potential investment in
order to determine its impact on the firm's balance sheet. Governments and international
agencies will also routinely undertake a financial analysis, as well as an economic analysis,
of any project in which the output will be sold and a financial analysis will therefore have
some meaning.
Project Budget

 A project financial plan identifies all of the costs associated with a project.
These costs are then tailored to fit within the financial resources available for
a particular project. The project financial plan provides an outline of what
can be spent on each area of the project to ensure it remains on the budget.

 There are two steps for creating your project financial plan –
1) Preparing to create your Financial Plan
2) Creating your Project Financial Plan
Preparing to create your financial plan

 Understand the top-down approach to project budgeting- refers to the

project where the total allowable cost is known beforehand.
 Understand the bottom-up approach to project budgeting- figure out what
every part of the project will cost and add it up to determine the total
 Choose the approach for you- Analyze the pros and cons and choose
accordingly.
 Discuss the needs of the project with key stakeholders- The key project
members need to know the needs and timeline of the project.
Creating your project financial plan

 Determine your core costs-essential costs to complete the project. Core costs
would include things like labor, equipment, and materials. The bulk of any
projects costs will come from these key components.
 Consider non-core expenses- Consider things like any required travel,
insurance, legal advice, accounting advice, fuel, food/drinks, and extra
telephone/internet bills.
 Add a reserve to help reduce your risk-consider adding extra money to your
total costs just in case your cost estimates were too low. (5-10% as a reserve)
 Create a table to record your costs- Record all your information.
(Expenditure, Cost, Running total, Notes) 
WHEN TO UNDERTAKE A FINANCIAL ANALYSIS?
1. A financial analysis must be undertaken if it is necessary to determine the financial
profitability of a project. Normally it will only be worthwhile carrying out a financial analysis if
the output of the project can be sold in the market, or otherwise valued in market prices. This
will almost always be the case for a privately sponsored project, but will also apply to some
government business undertakings.

2. Commercially oriented government authorities that are selling output, such as railway,
electricity, telecommunications, or freeway authorities, will usually undertake a financial as
well as an economic analysis of any new project they are considering. They need to assess the
project's potential impact on their budget, as well as its impact on the country's welfare. For
example, the Department of Telecommunication offers provision of telephone services at a
reduced rate, it needs to examine the impact of the decision on their budget and overall public
good.

3. Even non-commercial government institutions may sometimes wish to choose between

alternative facilities on the basis of essentially financial objectives. For example, in the case of a
hospital service, the management of hospital could well be required to select the cheapest
method of providing a given standard of accommodation or care.
How are the project benefits and costs valued in a
financial analysis?
The financial benefits of a project are just the revenues received and the financial costs are
expenditures that are actually incurred by the implementing agency as a result of the project. If a
project is producing some good or service for sale, the revenue that the project implementers
expect to receive each year from these sales will be the benefits of the project. The costs incurred
are the expenditures made to establish and operate the project. These include capital costs, the
cost of purchasing land, equipment, factory building, vehicles and office machines, and working
capital, as well as its ongoing operating costs, for labour, raw materials, fuel.
In a financial analysis, all these receipts and expenditures are' valued
as they appear in the financial balance sheet of the project, and are therefore measured in market
prices. Market prices are just the prices in the local economy, and include all applicable taxes,
tariffs, trade mark-ups and commissions. Since the project's implementers will have to pay
market prices for inputs they use and will receive market prices of the output they produce, the
financial costs and benefits of the project are measured in these market prices.
Project Cash Flow
Project cash flow refers to how cash flows in and out of an organization
in regard to a specific existing or potential project. Project cash flow
includes revenue and costs for such a project.
Part of financial planning for projects is understanding the inflows and
outflows of cash that will be created by the project.

A cash flow table is the tool that is used to study such cash
flows by breaking inflows and outflows down, usually on a monthly
basis. The cash flow table also serves as an important tracking tool,
creating a baseline against which project spending can be compared

CASH FLOW PROJECTION

The projection of income and expense during the life of a project can be
developed from several time-scheduling aids used by the contractor.
Examples of Inflows and Outflows of Cash

CASH INFLOWS CASH OUTFLOWS

PAYMENT OF WAGES AND SALARIES

CASH SALES
PAYMENT OF SUPPLIERS
RECIEPT FORM TRADE CUSTOMERS
BUYING EQUIPMENT
PERSONAL FUNDS INVESTED
INTEREST ON BANK LOANS
GOVERNMENT GRANTS
INCOME TAX, GSTs, CORPORATION TAX
RECIEPTS FROM FACTORING
 Components of Cash Flow
Financial Cash Flow
Cash flows from financing (CFF), or financing cash flow, shows the net flows of cash that are used to
fund the company and its capital. Financing activities include transactions involving issuing debt,
equity, and paying dividends.

Project Life
Early in the process of constructing a project's financial cash flow it will be necessary to determine the
length of the project's economic life. This will be the optimal period over which the project should be
run to maximize its return to the project implementer. The project's life is frequently set equal to the
technical life of the equipment used.

Capital Cost
a cost incurred on the purchase of land, buildings, construction and equipment to be used in the
production of goods or the rendering of services. The capital costs of a project can be divided into
fixed capital costs, or the cost of acquiring fixed assets like plant and equipment, start-up costs, and
working capital, which finances the operating expenses of the enterprise.

Operating Cost
Operating costs are the ongoing expenses incurred from the normal day-to-day of running a
business.
Project Benefits
In a financial analysis, the project's benefits equal the cash receipts actually received by
the project from the sate of goods or services it produces.
The types of benefits are, as stated earlier, variable. Here are some concrete examples:
Quality improvement,
Production cost reduction,
Error rate reduction,
A higher level of customer service,
Increased customer retention rate.

Net Benefits
The project's net benefit stream is calculated as the difference between the total revenue
(or benefit) stream and its expenditure (costs) stream. This output provides an absolute
measure of benefits