Project Report _ Importance of Ratio Analysis in Project Financing

1. PROJECT REPORT | IMPORTANCE OF RATIO ANALYSIS IN
PROJECT FINANCING
AUTHOR :SHIV786
https://taxguru.in/finance/project-report-importance-ratio-analysis-project-financing.html
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

2. 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.

3. 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