Unit 2.pptx

DEPARTMENT OF ELECTRONICS & TELECOMMUNICATION ENGINEERING
P R M I T & R ,B A D N E R A
PROJECT MANAGEMENT & ENTREPRENUARSHIP
Unit - 2
Project Financing
PROF.A.S.MAHORE

DEPT OF ELECTRONICS & TELECOMMUNICATION ENGINEERING
Contents –
 Project cost estimation & working capital requirements,
 Sources of funds,
 Capital budgeting,
 Risk & Uncertainty in project evaluation.
PROF.A.S.MAHORE

Project Cost Estimation –
 Cost estimation in project management is the process of
forecasting the financial and other resources needed to complete
a project within a defined scope.
 Cost estimation is the process that takes various factors into
account, and calculates a budget that meets the financial
commitment necessary for a successful project.
 Estimating cost is an important process in project management
as it is the basis for determining and controlling the project
budget.
PROF.A.S.MAHORE

Project Cost Estimation –
 Cost estimation accounts for each element required for the
project from materials to labour and calculate a total amount that
determines a project's budget.
 Once the project is in motion, the cost estimate is used to
manage all of its affiliated costs in order to keep the project on
budget.
 Good cost estimation is essential for keeping a project under
budget.
 Many costs can appear over the life cycle of a project, and an
accurate estimation method can be the difference between a
successful plan and a failed one. PROF.A.S.MAHORE

Elements of Project Cost Estimation –
PROF.A.S.MAHORE
Labour –
The cost of team members working on the project, both in terms of wages and time.
Materials and Equipment –
The cost of resources required for the project. from physical tools to software to legal permits.
Facilities –
The cost of using any working spaces not owned by the organization.
Vendors –
The cost of hiring third-party vendors or contractors.
Risk –
The cost of any contingency plans implemented to reduced risk.

Importance of Project Cost Estimation –
PROF.A.S.MAHORE
1. More accurate planning –
By accurately predicting what tasks and resources are required to complete work,
Estimator will be able to efficiently produce a work breakdown schedule, assign work
to staff. and adhere to projected timelines.
2. Improved profit margins –
Accurate estimating accounts for expected and unexpected costs and helps protect
the profit margins.
3. Improved resource management –
With greater insight into the tasks and timelines required to complete work. One can
manage the capital and resources required in the project in the efficient way that
helps the project to move forward efficiently at low cost.

Importance of Project Cost Estimation –
PROF.A.S.MAHORE
4.4. Stronger client relationships –
5.When clients understand the 'why' behind a project's cost, they are more likely to
trust your expertise and expect changes to the cost estimate as the project
progresses, resulting in better working relationships.
5. Better reputation and repeat business –
When projects are delivered on time and on budget, it will likely to create happy
customers, win repeat business, and gain more referrals.

Process of Cost Estimation –
PROF.A.S.MAHORE
1.1. Define Estimate's Purpose:
2.Determine the purpose of the estimate and
level of detail which is required, who receives
the estimate and the overall scope of the
estimate.
2. Develop Estimating Plan:
Assemble a cost-estimating team, and outline
their approach. Develop a timeline, and
determine who will do the independent cost
estimate. Finally, create the team's schedule
3. Define Characteristics:
Create a baseline description of the purpose.
system and performance characteristics. This
includes any technology implications, system
configurations, schedules, strategies and
relations to existing systems.
4. Determine Estimating Approach:
Define a work breakdown structure (WBS),
and choose an estimating method that is best
suited for each element in the WBS. Cross-
check for cost and schedule drivers: Then
create a checklist.

PROF.A.S.MAHORE
1.5. Identify Rule and
Assumptions: Clearly define
what is included and excluded
from the estimate, and identify
specific assumptions.
6. Obtain Date: Create
a data collection plan, and
analyze data to finds cost
drivers
7. Develop Point Estimate:
Develop a cost model
by estimating each WRS
element
8. Conduct Sensitivity Analysis:
Test sensitivity of cost
to changes in estimating input
values and key assumptions,
and determine key cost drivers
9. Conduct Risk and Uncertainty
Analysis: Determine the cost,
schedule and technical risks
inherent with each item on the
WBS and how to manage them
10. Document the Estimate:
Have documentation
for each step in the process to
keep everyone on the same
page with the cost estimate.
11. Present Estimate to
Management:
Brief stakeholders on
cost estimates to get approval.
12. Update Estimate: Any
changes must be updated and
reported on the estimate
accordingly

Types of Project Cost Estimation –
Different types of project cost estimation techniques are:
PROF.A.S.MAHORE
1.1. Analogous Estimating: It assumes using the actual cost of previous or analogues
projects as the foundation for estimating the cost of the current project. This technique in
usually applied separate segments of the project and in combination with other methods
and tools.
2. Statistical Modeling: It allows using historical and statistical data to make a model of
activity parameters like scope, budget and duration). It may provide a higher degree of
accuracy depending on the data included in the statistical model. The technique can be
used separately as well as in combination with other approaches and tools.
3. Bottom-Up Estimating: This analysis supports the idea that the individual cost of each
activity or entire work package as of prime importance. By using the method scheduled
activities, or a work package can be estimated to the smallest detail.

PROF.A.S.MAHORE
4. Top-down Estimating: This technique is opposite to Bottom-up analyze it assures that the
overall budget is determined at the project’s beginning and the expert team needs to identify
the costs of each work.
5.5. Three-point Estimate: The three-point estimate technique is used in management and
information systems applications for the construction of an approximate probability
distribution representing the outcome of future events, based on very limited information. It
comes up with three scenarios: most likely, optimistic and pessimistic ranges. These are then
put into an equation to develop estimation.
6. Reserve Analysis: Since Quality Assurance and Quality Control are integrated parts of the
cost estimation process, this technique is used to deal with uncertainties by making reviews.

Working Capital –
 Businesses cannot think of functioning without sufficient working capital to meet their day-to-
day needs.
 Insufficient working capital amounts to a shortage of resources whereas if excessive working
capital results in increased cost for the business.
 Thus, it is important to have an optimum quantity of working capital to run a business.
 This means working capital should neither be more nor less than the amount actually
required by the business.
 Many times, businesses fail not because of a lack of profits but because of insufficient funds
required to run its day-to-day operations.
 Thus, working capital management plays an important part because it greatly impacts the
liquidity and profitability of the business.
PROF.A.S.MAHORE

Working Capital –
 Working capital is defined as the excess of current assets over current liabilities . It
forms a part of the aggregate capital of the business.
Working Capital = Current Assets – Current Liabilities
 Current Liabilities -
Current Liabilities are the obligations of the business that are due within one
operating cycle or a year, whichever is greater. Such liabilities are paid off by either
using the current assets of the business or by creating other current liabilities.
Therefore, Current Liabilities include:
 Accounts Payable
 Notes Payable
 Current Portion of Long Term Debt
 Accrued Liabilities
 Unearned Revenues
PROF.A.S.MAHORE

Working Capital –
 Working capital is defined as the excess of current assets over current liabilities . It
forms a part of the aggregate capital of the business.
Working Capital = Current Assets – Current Liabilities
 Current Assets -
Current Assets are the assets of the business that can be easily converted into
cash within a year or normal operating cycle of the business, whichever is greater.
These assets typically include:
 Cash and cash equivalents
 Inventory
 Accounts Receivable
 Marketable Securities
 Prepaid Expenses
 Other Liquid Assets
PROF.A.S.MAHORE

Types of Working Capital –
PROF.A.S.MAHORE
1. Gross Working Capital
• This refers to the aggregate amount of funds invested in the current assets of the
business. In other words, Gross Working Capital is the total of the current assets of
the business. These include:
• Cash
• Accounts Receivable
• Inventory
• Marketable Securities and
• Short-Term Investments
2. Net Working Capital
• Net Working Capital is the amount by which current assets exceed the current
liabilities of a business.
• The amount of working capital in a business is the indicator of liquidity, operational
efficiency and short-term financial soundness of the business. Businesses having
adequate working capital typically have the ability to invest and grow.
1.3. Permanent Working
Capital
• It is that portion of the working capital that remains permanently tied up in current
assets to undertake business activity uninterruptedly.
• In other words, permanent working capital is the least amount of current assets
needed to carry out business effortlessly. Thus, it is also known as fixed working
capital.

Types of Working Capital –
PROF.A.S.MAHORE
4. Regular Working Capital
• This is defined as the least amount of capital required by a business to fund its day-to-day
operations of a business. Examples include payment of salaries and wages and overhead
expenses for the processing of raw materials.
5. Reserve Margin Working
Capital
• Apart from day-to-day activities, a business may need some amount of capital for unforeseen
circumstances.
• These pool of funds are kept separately for unforeseen circumstances such as strikes, natural
calamities, etc
6. Variable Working Capital
• This can be defined as the working capital invested for a temporary period of time in the
business.
• Such a capital varies with respect to the change in the size of the business or changes in the
assets of the business.
6.A Seasonal Variable Working Capital
• This refers to the increased amount of working capital a business needs during
the peak season of the year.
• Such a working capital specifically meets the demands of business having a
seasonal nature.
6.B Special Variable Working Capital
• Supplementary working capital may also be required by a business to
undertake exceptional operations or unforeseen circumstances.
• Funds needed to finance marketing campaigns, unforeseen events like
accidental fires, floods, etc.

Funds –
 Funding refers to the money required to start and run a business.
 Funding for projects may be via a single source or through multiple investors.
 The governance of the project will vary to meet the needs of the investors in the
project and the life cycle option chosen.
 It is a financial investment in a company for product development, manufacturing,
expansion, sales and marketing, office spaces, and inventory.
 Many startups choose to not raise funding from third parties and are funded by their
founders to prevent debts and equity dilution.
 However, most startups do raise funding, especially as they grow larger and scale
their operations.
Different types of funds for starting a project are:
1. Governmental Grant: A grant is a sum of money given by a government or other
organization for a particular purpose.
2. Fund by Partners: Partnerships can help manage costs by sharing buildings,
equipment, expertise and workloads.
PROF.A.S.MAHORE

Funds –
3. Borrowed Money - Borrowing money can be an option if your project can repay the loan.
4. Investor Funds - Investors are looking for opportunities to put their funds into providing
this private equity returns a profit.
5. Donation - If a project is appealing to the community people like to show support for a
good cause by giving a donation.
6. Crowd Funding - Crowd funding uses the internet to connect with potential funders.
7. Revenue Fund - Growing revenue and conserving cash are effective ways to improve a
bank balance that support the project financially.
8. Selling up - Selling up a project might sound drastic, but when the time is right
sometimes it is better to let go of a project and allow someone else to take control.
PROF.A.S.MAHORE

Sources of Funds –
 Source of Funds refers to the origin of the particular funds or any other monetary
instrument which are the subject of the transaction between a Financial Institution
and the customer.
 Classification of sources of funds:
PROF.A.S.MAHORE
Sources of
Funds
On the basis
of Period
Long Term Medium Term Short Term
On the basis
of Ownership
Owner Funds
Barrowed
Funds
On the basis
of Source of
Generation
Internal
Sources
External
Sources

 On the basis of the period, sources of funds can be classified into three
1. Long-term sources - These sources fulfill the financial requirements of a business for
period more than 5 years. Such financing is generally required for the procurement
of fixed assets such as plant, equipment, machinery, etc
2. Medium-term sources - These are the sources where the funds are required for a
period of more than one year but less than five years.
3. Short-term sources - Funds which are required for a period not exceeding one year
are called short-term sources.
PROF.A.S.MAHORE

 On the basis of Ownership -
1. Owners Funds - funds which are procured by the owners of a business which may
be a sole entrepreneur or partners or shareholders of a business. It also includes
profits which are reinvested in the business.
2. Borrowed funds - The funds raised with the help of loans or borrowing. This is the
most common type of source of funds and is used the majority of the time.
 On the basis of Sources of Generation –
1. Internal sources of funds - These are type of funds that are generated inside the
business.
2. External sources of funds - These are the sources that lie outside anorganization,
such as suppliers, lenders, and investors.
PROF.A.S.MAHORE

Capital Budgeting –
 Capital Budgeting process is the process of planning which is used to evaluate the
potential investments or expenditures whose amount is significant.
 It helps in determining the company's investment in the long term fixed assets such as
investment in the addition or replacement of the plant & machinery, new equipment,
research & development, etc.
 It is the process of deciding whether or not to invest in a particular project as all the
investment possibilities may not be rewarding. While capital budgeting several phases
are involved in the process.
PROF.A.S.MAHORE

Process of Capital Budgeting –
PROF.A.S.MAHORE
1.1. Planning - The planning phase encompasses investment
strategy and the general and preliminary screening of project
proposals. The investment strategy offers the framework that shapes
and guides the identification of induvial project opportunities.
2. Analysis – If the preliminary screening proposes that the project
is worth investing a detailed analysis of the marketing, technical,
financial, economic and ecological is conducted.
3. Selection - The selection process addresses the matter whether
the project is worth investing. Several appraisal criteria are used to
judge the value of a project.

Process of Capital Budgeting –
PROF.A.S.MAHORE
4. Financing - After choosing a project, proper financing must be made. Flexibility, risk, income, control and taxes
are the vital business considerations that influence the capital structure decision and the choice of specific
instruments of Financing.
5. Implementation: The implementation phase has following stages:
Project and engineering designs
Negotiations and contracting
Construction
Training
Plant commissioning
6. Review: Once the project is commissioned, a review phase has to be done Performance review should be done
occasionally to compare the actual performance with the projected performance.

Unit 2.pptx

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Unit 2.pptx