prpri Project Report | Importance of Ratio Analysis in Project Financing Project Report | Importance of Ratio Analysis in Project Financing

Dear Friends, Indian Economy is open again after lifting of lockdown restrictions, caused due to Second wave of Covid -19. Now MSME sector is again facing cash crunch situation. They are facing challenges in recovering their dues from debtors and needs working capital to restart there business again. Some peoples have lost their jobs due to economical slow down and they are planning to start their own venture, for this they require funding. In this article we will discuss about the options available with MSMSE Enterprises to recover their dues and raise funding from banks for there working capital requirements and to start new projects.

If a MSME Registered enterprises, is not receiving payment from its customers for more than 45 days, then they can file complain against that customer through MSME Samadhaan Portal. I have already written an article on this topic, the link of which is given below

https://taxguru.in/corporate-law/msme-samadhaan-tool-msme-enterprises-recover-outstanding-dues.html

Some MSME enterprises needs working capital loan to restart their business activities again and some persons who have lost their jobs due to economic slowdown are planning to set up their own business, for which they require loan. In today’s time, the Government of India has launched many schemes to grant loans to MSME Enterprises like Mudra Loan, KVIC Loans etc. These loans are granted by banks for which they require below details (may vary from bank to bank)

  • Duly Filed loan Proposal form
  • Basic KYC of Promotor/ Proprietor (Like Aadhar Card, PAN Card)
  • Good CIBIL score of Promoters
  • Experience in same field (If any)
  • Business existence certificates like GST Registration, Incorporation Certificate etc
  • Project Report

Project Report is the main part of any loan application, in which you have to explain the future plan of your dream organisation on to paper. Project report must be prepared with due care, so that it can explain your vision to the banks credit team. In explaining your dream project, financial figures drafted in a logical manner with ratio analysis along with well drafted written documents plays a vital role in approving your loan application. Our main focus area of this article will be drafting of financial figures with ration analysis.

Your project report must provide brief details about below information: –

  • Introduction about the Organisation
  • Details about Owner/ Proprietor/ Promotors
  • Brief analysis of Techno Feasibility Report
  • SWOT Analysis of new business
  • Location of Project
  • Brief idea of manufacturing Process (If establishing manufacturing Unit)
  • Applicability of Licenses to set up/ start business
  • Brief idea about the required funds and how the funds will be arranged
  • Financial Analysis Report
  • Profitability Statement

In the past few years, there are many financial frauds are done by borrowers and due to increase number of NPA in banks, now they are taking many precautionary measures before granting any loan. Banks are willing to know, before granting any loan to borrower, how the loan and interest will be repaid by the borrower and how secure is there sanctioned loan amount. For this, they check borrower past credit history, there work experience in business and deep analysis of forecasted figures will be done by credit team of bank before sanctioning any loan. Financial figures must be drafted in such a logical manner that, it helps bank in analysis the future prospect of projected business. If these financial figures are given in the form of ratio analysis, then it helps bank credit team to analyse the business project easily.

Now, we will discuss about the mainly used ratios, that must be indicated in your forecasted project report.

  • Short Term Solvency Ratio
  • Long Term Solvency Ratio
  • Turnover Ratio

Current Ration: This is the mainly used ratio to analyse the financial position of the organisation. It shows whether business have enough current assets to meet the payment of its current liabilities. The Ideal ration is 2:1

Net Working Capital Analysis:  This is calculated to analyse the cash flow in the organisation. It must be positive in the healthy organisation.

Debt Ratio: To know this ratio, we have to divide total debts of the organisation by Net assets of the organisation. This ratio is used to know the long-term solvency of a firm. In ideal position, this ratio must not be more than 1. A ratio greater than 1 would mean greater portion of organisation assets are funded by debt.    

Proprietary Ratio: This ratio is used to know the proportion of total assets financed by shareholders/Proprietor Fund. Higher the ratio, less risky scenario it shall be.

Debt Service Coverage Ratio:  Banks are keen to know this ratio, because this ratio show the firm’s ability to pay off interest and instalments. Ratio of 1.5 to 2 is an ideal one.

Interest Coverage Ratio:  This ratio is calculated when Earning before Interest and taxes are divided by Interest Liability of the organisation. A high interest coverage ratio means that an enterprise can easily meet its interest obligation. A lower ratio means excessive use of debt or inefficient operations.

Fixed Assets Turnover Ratio: This ratio is used to know the efficiency with which the organisation uses its Fixed Assets. A high fixed Assets turnover ratio indicates efficient utilisation of Fixed assets in generating Sales.

Stock Turnover ratio: This ratio is used to know; how fast inventory is sold. A Low ratio indicates bad management of inventory. It indicates stock is lying in warehouse for a long time. A high ratio is good from the view point of liquidity.

Apart from above ratio analysis, there are many other ratios are used by banks credit team to analyse the solvency of the organisation before approving any loan proposal. While preparing project report we must analyse all these factors.

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Disclaimer: This article is for the purpose of information and shall not be treated as solicitation in any manner and for any other purpose whatsoever. It shall not be used as legal opinion and not to be used for rendering any professional advice. This article is written on the basis of author’s personal experience and provision applicable as on date of writing of this article. Adequate attention has been given to avoid any clerical/arithmetical error, however; if it still persists kindly intimate us to avoid such error for the benefits of others readers.

The Author “CA. Shiv Kumar Sharma” can be reached at mail –shivsharma786@gmail.com and Mobile/Whatsapp – 9911303737/ 9716118384 

Author Bio

Qualification: CA in Practice
Company: Shiv Kumar Sharma & Associates
Location: Delhi, Delhi, India
Member Since: 03 Dec 2018 | Total Posts: 73
My Self CA. Shiv Kumar Sharma. I am a member of "The Institute of Chartered Accountants of India" since 2012. I have Qualified my B.Com (H) in 2010 And Cleared CS- Executive Exam in June 2013. Currently, I am in Practice and dealing in Direct and Indirect taxation along with ROC Compliances. View Full Profile

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