EIRC - ICAI. Kolkata

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1 EIRC - ICAI Kolkata

2 Tuesday October 13, 2015 at Kolkata

3 Project Management & Raising Finances by Vikash Jain FCA Partner B. Jain & Co. Chartered Accountants Kolkata

4 Let us work hard, my brethren; this is no time for sleep. On our work depends the coming of India for the future. She is there ready waiting, she is only sleeping. Arise, and awake, and see her seated on her eternal throne, rejuvenated more glorious than she ever was, this motherland of ours Swami Vivekananda

5 FINANCIAL MANAGEMENT - An interpretation Managing the world of money and making more and more of it for the business

6 Deliverables for the Day Project Life Cycle Project viability - techniques, evaluation and appraisal Preparation of Techno Economic Feasibility Report & Financial Projections vis-à-vis financial analysis a critical examination to assess the project with respect to capital budgeting & investment decisions

7 PROJECT LIFE CYCLE Conceptualisation Project Proposal Feasibility Study Planning Organisational Structure Resources Establishment of standards Implementation Monitoring & Controlling Termination Disposal & Redeployment CONCEPTUALISATION PLANNING IMPLEMENTATION TERMINATION

8 CONCEPTUALISATION includes Project Proposal prepared to set out clearly, the rationale, proposed methods, costs and benefits Feasibility Study resulting from careful examination of practicability, costs, markets and associated costs

9 Important Ps Product / Project Identification Process Place Partners Promoters

10 Feasibility Studies Evaluation of risks & returns Managerial potential Economic considerations Commercial feasibility Financial capability Technical Feasibility

11 Feasibility Studies contd. Social Factors Marketability Compliance with statutory regulations Insurance

12 KEY FACTORS Location of the project - raw material availability - infrastructure facilities, etc Size & Capacity levels - large plants are more economical - idle capacity is a huge loss Technological Aspects - Production process, machinery Management policies - Personnel, Sales, etc.

13 The final choice in all business decisions is, of course, intuitive. It must be. Otherwise, it is not a decision, just a conclusion - a printout... Bruce D. Henderson

14 Intuition is in fact the subconscious integration of all the experiences, conditioning and knowledge of a life Bruce D. Henderson

15 Successful business strategies result not from rigorous analysis (which is necessary) but from a particular state of mind. In the mind of the strategist, insight and a consequent drive for achievement fuel a thought process which is basically creative and intuitive rather than rational - Kenichi Ohmae

16 Examples of business visions Bajaj Auto - Global Player AV Birla Group - Diversified empire in the core sector TATA Group - Technological Competence IBM - Value added leadership position Honda - No.1 producer of the best motorcycles in the world ITC - India International

17 PLANNING...includes Project Report prepared formally after conceptualizing the project & consists of write-up on the fine-prints of the project and financials of the project Project Appraisal & Evaluation for the purpose of acquisition of resources

18 PROJECT REPORT A project report is a preinvestment and comprehensive study of investment proposals of an organisation. Project report encompass a thorough investigation relating to economic, technical, financial, social, managerial and commercial aspects

19 FEATURES OF A PROJECT Separate Entity Specific Purpose & Objectives Limited Duration Target dates for Commencement & completion

20 Fine-prints of the Project Report Data collection, capacity determination Promoters Information Locational Advantages Technical Arrangement Marketing & Selling Arrangement Schedule of Implementation Project Cost & Means of Finance Profitability

21 Essentials for drafting a Techno Economic Feasibility Report (TEFR) Comprehensive Clarity Elaborate Informative Synchronized User friendly

22 Preparation of TEFR Detailed description of the project, product description and uses Promoters background & management profile Infrastructure Analysis of the schedule of implementation Manufacturing processes, technical arrangement and process flow chart

23 Preparation of TEFR contd. Marketing Financial summary of the promoters, group companies Organisation Structure Basic assumptions underlying the preparation of the TEFR Analysis of the project cost Structuring the means of finance

24 Components of Project Cost Land & Land Development Shed & Building Plant & Machinery- imported & indigenous Miscellaneous Fixed Assets Electrical installation Margin money for working capital Preliminary & pre-operative expenses Provisions & Contingencies

25 Prospective Means of Finance Share Capital - Equity or Preference Term Loans - Domestic/External Commercial Borrowings or FCNR (B) Debentures Unsecured Loans & Deposits Lease Internal Accruals Sops & Incentives

26 Prospective Means of Finance contd. Venture Capital Grants & Subsidies Seed Capital Assistance Deferred Payment Guarantee Debt Securitisation Forfaiting Factoring

27 Working Capital Working Capital Fund Based Non Fund Based - Cash Credit - Overdraft - Working Capital Demand Loan - Bill Discounting - Letters of credit(inland or import) - Bank gurantees

28 Financial Projections Sales Forecast Material Costs Labour Power & Fuel Freight Interest Costs Depreciation Taxation Dividend Pooling of Capital Term Loan Investment Acquisition of Fixed Assets Working Capital Miscellaneous Expenditure Deferred Revenue Expenditure

29 RISK Assumption of Capital Budgeting The projected cash flows occur in the same quantum as forecasted by the appraiser. Quantification of Risk Variation of the actual return from what was expected during the time of projections.

30 RISK ANALYSIS STANDARD DEVIATION PROBABILITY TREE METHOD SIMULATION METHOD SENSITIVITY ANALYSIS CERTAINTY EQUIVALENTS ADJUSTED DISCOUNT RATE CAPITAL ASSET PRICING MODEL (CAPM)

31 Sensitivity Analysis GOAL - Identification of variables of a project which could have an adverse effect on the overall outcome of an investment proposal. Variables commonly used - Selling Price - Cost of Factors of Production - Initial Outflow - Project Life

32 Role of Financial Instutions Critical Appraisal Lending Visits & Interactions Conducting feasibility tests Evaluation of credit worthiness Structuring Finance Period of Loan Grant of Moratorium Credit Rating Monitoring & Follow-up

33 Interactions with Financial Institutions Conviction Evaluation Attitude Credit worthiness of promoters Knowledge of the project Detailed study of the TEFR Cordial & Positive Approach

34 Sanction & Disbursal by Financial Institutions Clearance by legal department Acceptance of terms & conditions Documentation Creation of Charges Disbursal

35 Term Loan Procedure - In a nutshell Submission of loan application Processing Appraisal Issue of sanction letter Acceptance of terms & conditions Execution of loan agreement Disbursement of Loan Creation of security Monitoring

36 Analysis of Financial Results Profitability Balance Sheet - portrayal & scrutiny Cash Flows Break-even Point and Margin of Safety Debt Service Coverage Ratio Fixed Assets Coverage Ratio Sensitivity Analysis Pay-back period Internal Rate of Return

37 Analysis of Financial Results contd Important Qualitative Ratios Return on capital Employed Profit Margin Assets Turnover Ratio Inventory Turnover Ratio Pay-out Ratios Liquidity Ratios Current Ratio Debt Equity Ratios Interest Coverage Ratios Debt - Service Coverage Ratios Analysis of Financial & Operating Leverage

38 Quantitative Ratios Units sold or consumed as raw materials Unit realisation price Trends in key ratios like sales, fixed assets, working capital & operating margin Annualizing numbers especially for companies changing accounting years Inter & Intra firm companies

39 Guidelines for Project Appraisal Provision for Cost Escalation Scrutinise sources of finance Profitability adjustments Examine Financial viability Project Preference

40 Appraisal & Evaluation Qualitative Factors Intuition Vision Intangible Benefits Strategic Aspects Linkage between business planning and capital budgeting Approach to decision making Strategic Planning & Financial Analysis Organisational Considerations

41 Summarizing Appraisal & Evaluation Marketing Technical Financial Economical Managerial Quality Control & Improvements SWOT Analysis

42 Monitoring...includes Periodical Review Updating/Revision of plans

43 Monitoring during Implementation Adequate formulation Sound project organisation Proper implementation planning Advance Action Timely availability of funds Judicious equipment, tendering & procurement

44 Monitoring during Implementation contd Better contract management Effective monitoring Applying network techniques like CPM & PERT model

45 Disposal of Assets includes Redeployment of resources having alternative usage

46 CAPITAL BUDGETING planning for investment in capital assets. It involves proper project planning and commercial evaluation of projects to know in advance technical feasibility and financial viability of the project

47 Capital Budgeting Process depends on Size of the organisation Number of projects Direct financial benefit Composition of assets Timing of expenditure

48 Process of Capital Budgeting PLANNING EVALUATION Assessment of firm's fortunes and ability of the management to exploit the opportunity Techniques- Payback method, Return on Investment, Discounted Cash flow SELECTION IMPLEMENTATION CONTROL Risk & Return proposition Maximum return to shareholders Acquisition of necessary funds and purchase of assets Monitoring of progress reports Post completion audit REVIEW Performance reports & comparing it with standards set, Change in plan & evaluation

49 CAPITAL BUDGETING TECHNIQUES Capital Budgeting Techniques Traditional or Non- Discounting Time Adjusted or Discounted Cash Flows Payback Period Net Present Value Accounting Rate of Return or Return on Investment(ROI) Profitability Index Internal Rate of Return(IRR) Terminal Value Discounted payback Period

50 PROJECT CASH FLOWS defined as the financial costs and benefits associated with a project

51 COSTS & BENEFITS EVALUATION Capital Costs Operating Costs Revenue Depreciation Residual Value

52 Principles used in developing Projected Cash Flows Incremental principle Long Term Funds principle Exclusion of Financing Costs principle Post Tax principle

53 INFLATION Inflation has the tendency to cause a major impact on the ultimate success or failure of capital projects. The timing of project appraisal is significant from the point of view of appraisers. In the likelihood that the presumed normal conditions seldom exist for a project, inflation is bound to affect the project appraisal and implementation process.

54 EFFECT OF INFLATION Change in Projected Statement of Profitability and Cash Flows Increase in rate of interest by lending institutions. Increase in all Expenditure heads: Labour, Raw Material, Fixed Assets,etc Remuneration to technicians & managerial personnel

55 Dealing with Inflation Build into each Cash Flow element estimated rate of inflation on the basis of information available

56 Role of VC Venture Capitalist fills this gap by providing Value Added Finance

57 What is Venture Capital Spirit of partnership Alignment of interest Active participation and Value Addition Long term perspective Returns linked to performance Risk - Reward sharing Investment and not Assistance

58 Approaching VC Evolve Long Term Growth Strategy Strong Value Proposition High probability of Commercealisation Scalable Business Model Prepare well thought-out Business Plan Business Focus & Growth Strategy Milestones Realistic Projections Exit Options

59 Approaching VC - contd. Prepare to dilute Owning Large Part of a Small Business or Small Part of a Large one Select a Partner (Strategic / VC) that Shares Vision and Objective Provides Strategic Inputs & Complementary Relationship

60 BUSINESS PLAN - WHAT VCFs LOOK FOR SIMPLE -CLEARLY HIGHLIGHTING : CORE STRENGTHS Promoters & Team Value Proposition, Competitive Advantage Key Customers, Market,Growth Potential GROWTH PLANS STRATEGY & TIME FRAME TO ACHIEVE SET MILESTONES FUND REQUIREMENTS & DEPLOYMENT PLAN REALISTIC FINANCIAL PROJECTIONS Exit Options

61 Investment Criteria Risk Analysis Promoters Background / Quality of Management Vision Experience Ability to Innovate / Change Rapidly Ability to Build Team Marketing and Branding Skills

62 Investment Criteria - Contd Product / Service / Idea Product Concept / Value proposition Stage of Development / Level of Acceptance Competitive Advantage and its sustainability / Entry Barrier Scalability

63 Investment Criteria - Contd. Valuation Revenue Model IPR Customer Base Exit Options Trade Sale Merger IPO

64 Value Addition Implementation of Business Plan Using Network Team Building Resource Planning Implementation of systems Evolving Growth Strategy Provide Outside View

65 VC Expectation Post Investment Transparency / Corporate Governance Openness to Constructive suggestions Growth Appetite Organic / Non Organic Growth Build Team Build System Preparedness to dilute and facilitate Exit

66 Social Cost Benefit Analysis(SCBA) Urgency to fulfill long-term interest of the nation Planning Commission decided to include social rate of return in feasibility study in case of public sector projects Private Sector projects may be easily acceptable to Govt. institutions while granting various licenses & approvals A project with monetary loss but social benefit may be acceptable.

67 Indicators of Social Desirability Employment Potential Criterion Capital Output Ratio Value added per unit of capital Foreign Exchange benefit criterion Cost benefit ratio criterion

68 Relationship Among employees Between management, executives and work force With financial institutions, banks and suppliers of capital - customers - competitors - government bodies - suppliers of resources

69 THANK YOU

BY A.R MANICKAM DEPUTY GENERAL MANAGER UNION BANK OF INDIA

TERM LOAN FINANCING 28.06.2012 BY A.R MANICKAM DEPUTY GENERAL MANAGER UNION BANK OF INDIA Term Loan A Term Loan is an advance which is granted usually against the security of the borrower s Fixed Assets