1. INTRODUCTION:
The pious and challenging resolution to adopt entrepreneurship as an occupation is the step preceding the establishment of any new business. This needs to identify attractive and effective business ideas after an in-depth evaluation of the prospects of the proposed entrepreneurship venture and the related challenges. Only conceiving of an idea is not sufficient but is just a starter of the show. The same will have to be tested vigorously and meticulously as to its acceptability, feasibility, viability and legality on techno-fiscal, economic, social and authorized viewpoints.
A PROJECT REPORT gives a Road Map for a successful business venture. It discusses in details whether the particular business requires finance or not, if required, the quantum thereof, the available sources of meeting the fund requirements, the challenging risks, the problems and obstacles on the way of implementation, the duration of implementation, the ways of implementation etc. It is therefore very important for every entrepreneur to prepare a Detail Project Report of every new business venture to acquaint them on vital issues connected to the project.
B. FORMAT OF A PROJECT REPORT OF A NEW BUSINESS:
While preparing a New Business Project Report, we should follow following sequence of presentation:
1. Background of the business: This gives a detail background of the business as to its period of existence, quality of services, social recognition, share in the market for particular products etc.
2. Customers’ Profile: Under this clause, a brief description as to Promoters’ Financial and Social Background, Experience in particular line of activity, association with different NGOs and other social platforms, Net Worth of each promoter etc. are to be given.
3. Long- and Short-Term Corporate Objectives
i. To perform a viability assessment of the proposed new venture in terms of raw materials required and availability thereof, marketability of the product, technical feasibility, sources of finance, restrictions by the Government departments and authorities. Permissions required.
ii. To be able to prepare an objective and relevant business plan without going into unnecessary details.
iii. To identify all fundamental startup issues.
4. MARKET ANALYSIS
i. Brief discussion on the type of market, chief influencing factors, competitors and market players
ii. Why to start a business in a particular market
iii. Target Clients
iv. Advantages of the services and products of the proposed new business
v. Market Consumption patterns area wise, seasons wise and age wise and on the basis of many other parameters like existing other products, comparable prices, quality attributes etc.
vi. Past and existing supply location
vii. Production prospects and limitations
viii. Export’s potential and Import’s requirements and related restrictions and regulations for particular products
ix. Price Structure
x. Flexibility of Demand
xi. Client behavior, purposes, intentions, impetus, approaches, inclinations and needs
xii. Supply network and marketing rules framed by the Government
xiii. Government and Technical limitations imposed on the promotion of the Product.
5. FINANCIAL ASSESSMENT:
i. Investment expenditure and value of the entire project head wise like Investment in Land, Site Development, Factory Building, Office Building and other ancillary buildings like Power House, Boiler Room, Utilities, Canteen Area, Staff Quarters, Godowns, Plant and Machinery, Electrical Installation, Vehicles, Furniture and Fixtures and Preoperative Expenses including Interest during construction period.
ii. Methods and sources of Investment
iii. Anticipated Productivity
iv. Money Flows for the Project (both Inflow and Outflow)
v. Investment Value evaluated in context of different points of merit
vi. Estimated Financial Ranking
6. MARKETING ASSESSMENT:
i. Product Categories on the basis of packing style, packing size, product name etc.
ii. Price ranges of different product categories according to size and quality and other factors
iii. Places of marketing of different product categories and customer segment analysis
iv. Product Promotion Strategy
7. OPERATIONAL PLAN:
i. Business Models like whether Wholesale or Retail or Both, whether direct marketing outlets or through dealers, whether push model of marketing or pull model of marketing. Under the push model, the entrepreneur normally adopts a shotgun or quick response approach of marketing to make the product or service as visible as possible to ensure quicker sale.
Under the Pull Model, the entrepreneur believes in the strategy of developing such a rand value that can ensure a permanent relation with the customer. It is always a long-term approach.
ii. Setting prescriptions in terms of clear objectives, segmenting of activities to be delivered, Quality Standards, Key Targets and Key Performance indicators, Risk Management Plan, Staffing and Resource, Implementation Time Tables and setting a process of monitoring progress.
8. FINANCIAL PLAN: A Good Financial Plan involves the following:
i. Budgeting and Taxes
ii. Liquidity Management
iii. Financing of bulk purchases to reap economies of scale
iv. Managing your risk and Insurance
v. Investing the money
vi. Planning for Business retirement and transfer of accumulated wealth
vii. Communication and record keeping
9. MANAGEMENT STRUCTURE: There are different categories and versions of management structure like
i. Hierarchical Organisation Structure,
ii. Functional Organisation Structure,
iii. Horizontal Organisation Structure,
iv. Divisional Organisation Structure (it may be market based, product based or geographical),
v. Matrix Organisation Structure,
vi. Team Based Organisation Structure and
vii. Network Organisation Structure.
10. BUSINESS STRUCTURE: Business structure refers to the legal structure of an organization that is recognized in a given jurisdiction The Project Report must bring out clearly whether the proposed project is going to be a Sole Proprietorship or a Partnership or a Company or a Limited Liability Partnership or any other Business Structure as may be permitted for the time being of any other permitted form of business structure.
11. SWOT ANALYSIS: A SWOT Analysis is the process of outlining the following:
i. Strength (S),
ii. Weaknesses (W),
iii. Opportunities (O) and
iv. Threats (T).
Strengths
Strengths are things that distinguishes any organisation from its competitors. Examples: motivation of your staff, access to certain materials, or a strong set of manufacturing processes. Strengths are always an integral part of any organization. Any aspect of an organization is only a strength if it brings to it a clear advantage. For example, if all of the competitors provide high-quality products, then a high-quality production process is not a strength in the organisation’s market: it’s a necessity. Customised Technology for a particular product which other competitors do not have is a big strength of an organisation.
Weaknesses
Now it’s time to consider the organization’s weaknesses. A SWOT Analysis will only be valuable if we gather all the information we need. So, it’s best to be realistic now, and face any unpleasant truths as soon as possible.
Weaknesses, like strengths, are inherent features of your organization, so a clear focus on the organisation’s people, resources, systems, and procedures is required. We need to think about how and why your competitors are doing better than us. What are we lacking? Absence of a proper data information system or absence of latest technology in particular product line are the examples of weaknesses.
Opportunities
Opportunities are openings or chances for something positive to happen, but the entity will need to claim them for itself!
They usually arise from situations outside the organization, and require an eye to what might happen in the future. They might arise as developments in the market we serve, or in the technology we use. Being able to spot and exploit opportunities can make a huge difference to our organization’s ability to compete and take the lead in the market. Even small advantages can increase the organization’s competitiveness. We should also watch out for changes in government policy related to your field. And changes in social patterns, population profiles, and lifestyles can all throw up interesting opportunities. Announcement of AIIMS at Changsari was a great opportunity for the Real Estate Developers to expand to that region and start buying lands in and around the locality to reap the advantages of future demand for residences and commercial complexes in the location.
Threats
Threats include anything that can negatively affect your business from the outside, such as supply chain problems, shifts in market requirements, or a shortage of recruits. It’s vital to anticipate threats and to take action against them before we become a victim of them and our growth stalls.
We need to think about the obstacles we face in getting our product to market and selling. The Government mandating a minimum size of capital for Insurance Companies and giving a time line to existing insurance companies to increase their internal capital base to continue in Insurance Business is an example of Threat to the particular organisation if it cannot fulfil the condition within the time line. Food Corporation of India specifying that Jute Bags of particular stature and weight and size will only be purchased can become a serious threat to existing Jute Textile Unit if it cannot adapt to the requirement.
A Good Project Report must highlight the Significant success aspects depending on Strengths, Weaknesses, Opportunities and Threats to be faced by the Firm in future
12. APPENDICES: A Good Quality Project Report should invariably give an in-depth analysis of the following:
i. Break Even Assessment: Break–even analysis tells as to how many units of a product must be sold to cover the fixed and variable costs of production. The break–even point is considered a measure of the margin of safety. Break–even analysis is used broadly, from stock and options trading to corporate budgeting for various projects. A detail statement of calculation of Projected Break Even Point needs to be incorporated as an integral part of any good Project Report.
ii. Profit & Loss Synopsis: A profit and loss Synopsis is a financial statement outlines revenues, costs and expenses to show how much money a company is earning and losing during a time period.
Expenses: An expense is money the company paid out. Total Income:
Total income is the amount the company earned or lost while operating the business.
A fair Projection of Profit and Loss for next three to five years or the loan period (in case of term loan) and comparison with previous two years (minimum) in case of existing projects should form part of a good Project Report.
iii. Fund Flow Summary: Fund flow is the sum of all cash inflows/outflows from and into different financial assets. Fund flow is usually calculated on a monthly or quarterly basis; no account is taken of the output of an asset or fund. It is only the share redemptions or outflows, and share purchases or inflows. In case of a Project Report, Annual Fund Flow Statement should be provided in a most comprehensive and detailed manner for effective analysis. In case of limited period finances like Finance for Apartment Projects etc. where disbursement is in phases, it is advisable to provide a Monthly Fund Flow Statement for entire term of implementation of the project to arrive at the monthly disbursement schedule vis a vis introduction by the promoters and also to arrive at peak level fund requirements.
iv. Pay Back Period Analysis: The payback period refers to the amount of time it takes to recover the cost of an investment. Simply put, the payback period is the length of time an investment reaches a break-even point. It disregards the time value of money.
v. Debt Service Coverage: The debt service coverage ratio is a financial ratio that measures a company’s ability to service its current debts by comparing its net operating income with its total debt service The debt service coverage ratio is important to both creditors and investors, but creditors most often analyze it.
vi. Solvency Ratios: A solvency ratio is a key metric used to measure an enterprise’s ability to meet its long-term debt obligations and is used often by prospective business lenders. A solvency ratio indicates whether a company’s cash flow is sufficient to meet its long-term liabilities and thus is a measure of its financial health.
a. Debt to Assets Ratio: The debt-to-assets ratio measures a company’s total debt to its total assets. It measures a company’s leverage and indicates how much of the company is funded by debt versus assets, and therefore, its ability to pay off its debt with its available
b. Interest Coverage Ratio: The interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. Lenders, investors, and creditors often use this formula to determine a company’s riskiness relative to its current debt or for future borrowing.
c. Debt to Equity Ratio: The debt-to-equity(D/E) ratio compares a company’s total liabilities to its shareholder equity and can be used to evaluate how much leverage a company is using. Higher-leverage ratios tend to indicate a company or stock with higher risk to shareholders.
d. Inventory Turnover Ratios: Inventory turnover measures how many times, in a given period, a company is able to replace the inventories that it has sold. A slow turnover implies weak sales and possibly excess inventory, while a faster ratio implies either strong sales or insufficient inventory.
e. Debtors Turnover Ratios: A high debtors or receivables turnover ratio can indicate that a company’s collection of accounts receivable is efficient and the company has a high proportion of quality customers that pay their debts quickly. A high receivables turnover ratio might also indicate that a company operates on a cash basis.
f. Earnings Per Share: Earnings per share or EPS is an important financial measure, which indicates the profitability of a company. It is calculated by dividing the company’s net income with its total number of outstanding shares. The higher the earnings per share of a company, the better is its profitability.
vii. Sensitivity Analysis: Sensitivity analysis is the study to measure the impacts of fluctuations in parameters of a mathematical model or system on the outputs or performance of the system. In other words, sensitivity analysis can be employed to apportion the changes in outputs of a system to different sources of uncertainty in its inputs.
viii. Internal Rate of Return: The internal rate of return (IRR) is a discounting cash flow technique which gives a rate of return earned by a project. The internal rate of return is the discounting rate where the total of initial cash outlay and discounted cash inflows are equal to zero. IRR has its own advantages and disadvantages:
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- Advantage: Finds the Time Value of Money.
- Advantage: Simple to Use and Understand.
- Advantage: Hurdle Rate Not Required.
- Disadvantage: Ignores Size of Project.
- Disadvantage: Ignores Future Costs.
- Disadvantage: Ignores reinvestment rates
ix. Return on Capital Employed: Return on capital employed or ROCE is a profitability ratio that measures how efficiently a company can generate profits from its capital employed by comparing net operating profit to capital employed. Net operating profit is often called EBIT or earnings before interest and taxes.
x. Internally Generated Funds: Internally Generated Funds are the most reliable source of funds in any enterprise. Internally Generated Funds means funds not constituting the proceeds of any Loan, Debt Issuance, Equity Issuance, Asset Sale, insurance recovery or Indebtedness
xi. Turnover Ratios: Technically, the turnover ratio is the lower of the total sales or total purchases over the period divided by the average of the net assets. Higher the turnover ratio, greater the volume of trading carried out by the fund. If high turnover can generate high returns, then there should be no problems.
a. Capital Employed Turnover Ratio: The capital employed turnover ratio indicates the ability of a company to generate revenues from the capital employed. The higher the working capital turnover ratio, the higher is the efficiency of the company to use its short-term assets and liabilities for the purpose of generating sales.
b. Total Assets Turnover Ratio: The asset turnover ratio measures the efficiency of a company’s assets in generating revenue or sales. It compares the dollar amount of sales (revenues) to its total assets as an annualized percentage. Thus, to calculate the asset turnover ratio, divide net sales or revenue by the average total assets.
c. Fixed Assets Turnover Ratios: The fixed asset turnover ratio(FAT) is, in general, used by analysts to measure operating performance. The fixed asset balance is used as a net of accumulated depreciation. A higher fixed asset turnover ratio indicates that a company has effectively used investments in fixed assets to generate sales.
d. Average Collection Period: The average collection period is calculated by dividing the average balance of accounts receivable by total net credit sales for the period and multiplying the quotient by the number of days in the period. Average collection periods are most important for companies that rely heavily on receivables for their cash flows.
All the above stated ratios are quite important to the internal as well as the external parties.
xii. Working Capital Permissible Limits: A Good Project Report should invariably contain CMA Data i.e., Credit Monitoring Arrangement Report on the basis of which the Intending lender can decide on maximum permissible Working Capital Limit that can be given to the particular entity.
xiii. Flow Charts and Diagrams. A Good Project Report should always contain Process Flow Chart, Project Lay Out, Machine Lay Out etc. to give an insight into the proposed set up.
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COURTESY: CA RATAN KUMAR AGARWALA, B.Com., FCA, DISA(ICA)| Mobile : +91-94350-10021, +91-78966-19967 | Mail: suratanin@yahoo.co.in, suratanin1965@gmail.com
NOTE: The topic is so vast that a full book can be written on the subject. The Author has made a humble attempt to give an idea to the reader about the basic contents of a Good Project Report. The same are some of the general issues which must be addressed in a good project report and have been shared on the basis of author’s own experience in the field of project reporting and project consultancy. The topics covered are of much general nature and any similarity or otherwise with any other published contents on the same or allied subject will be mere coincidental and not mala fide.
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