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Introduction: 

How to prepare the projected financials to submit for bank funding is the basic work should learn by the person handling finance. It is a basic step before approaching bank funding for any purpose. With this article I would like to discuss some basic information which required understanding by a person in finance to prepare the projected financials which form part of project report. Before discussing the projected financials we need to understand about the project report also.

What is Project: 

Project is the set of activities with clear object & goals to create or do any kind of asset, activity or work which require generating income for the promoters on such project.  Project has clear start and end points with pre-defined milestones.

What is Project report: Project report is the memorandum document which contains all the basic, technical, financial details about the work which you are looking for the funding from bank. It contains the following details in:

a. Executive summary of the project

b. Techno feasibility study

c. Preliminary information about the project

d. Present scenario about the project

e. Promoter capability

f. Promoters’ experience in the field

g. Past experience fact sheet

h. Promoter`s plan & strategy to do the project

i. Viability of the project

j. Projected Capital cost

k. Projected revenue generation for the project

l. Projected Operational cost

m. Projected financials for the project period

n. Detailed cost vetting report

o. Detailed funding method (i.e. means of finance)

p. Loan required

q. Interest rate, interest payment & principal repayment plan

Purpose of the Project report:  

Very basic object and purpose of the project report is to understand by the banker for funding to the project. The submitted project report is a fundamental understanding document between promoter and banker.

Role of finance person: 

As a finance person for preparation of project report , his/her role is very critical and important, when representing the project report along with projected financials, he/she should completely aware of each and every aspect (except the technical details) in the report and their impact on the projected financial. The following points need to be understood in detailed manner for preparation of projected financials.

a. Business area of the promoter

b. Business plan

c. Nature of the project

d. Project time lines

e. Projected Capex

f. Assumption for the revenue generation

g. Assumption for Opex

h. Promoters’ funding requirement

i. Feasible interest rate for the funding

j. Collateral security offered

k. Projected EBITA comparison with industry  bench mark

l. Taxation aspects on the projects

Now we can analyze the each point in detailed:

a. Business area of the promoter: Before preparation of projected financials, first we need to understand the business area of the promoter and the industry. Past and current industry scenario & growth in terms of economic, finance, etc. We may also ensure the objective of the promoters` company as per MOA; permits to do that business (project) and also need to ensure related license and approvals if any required the same obtained from respective Government authorities. This Business area understanding will give the broad knowledge about the industry & business area of the promoters’ project.

b. Business plan: Second very important point is to understand the Business plan of the promoter for entire project period which contains the operating plan, targeted turnover, profit, Net worth etc. This will help you in understating the objective of the preparation of projected financials and also representing the promoters to the bankers.

c. Nature of the project: Understanding the project nature for preparation of projected financials is the critical one. Project natures are new project, expansion project, operation & maintenance project, construction project etc. Also need to understand the legal & statutory compliance applicable on the project. Legal & statutory understanding will help you to any real viability of the project in terms of execution and revenue generation.

d. Project time lines: While projecting the financials, we should completely aware about the project timelines. It basically understands the mile stones of the projects and the time limit to complete the same. Because fails to comply with timeline needs to cost overrun and also revenue loss due to delay in starting the operations.

e. Projected Capex: Capital cost for the project need to be estimate in very realistic manner with considering all the provisions and contingencies. Capital cost should be projected with maximum plus or minus 5% only.  Also while calculating it project time lines needs to be considered avoid the cost over runs. Project capex has to be vetted by the professional empanelled by the bankers.

f. Assumption of for revenue generation: While preparation of projected financials, we need to understand the revenue assumption very clearly and also analyze the reality of the assumption, because your total project cost investment based on  the revenue generation on the project . Also as representing projected financial on behalf of the promoter, we should also clear about any technical details in revenue generation. Each and every assumption factor need to be validated carefully.

g. Assumption for Opex: How we should understand the revenue, the same way we need to know about the expenses for operating the project. Nature of the costs like variable or fixed and their impact on the revenue generation. Each cost has to be justified their part of revenue generation. Operation cost also need to be examined very carefully by the professionals appointed by promoters as well as bankers in terms of technical or non technical.

h. Promoter funding requirement: Basic requirement of preparation of projected financial is to identify the promoter funds requirement in capital cost and operation cost.  We need to analyze and compute the feasible fund requirement and their source. In this stage only we are calculating the Projected Debt –Equity ratio for the project and working capital gap for the operations. For Equity promoter has to justify their proper source. For opex requirement working capital gap need to be calculated and compare with bench mark current ratio for the relevant industry.

i. Feasible interest rate for funding: After calculating the funding requirement, we need to check the feasible interest rate for the same with comparing the alternative funding options available in the market. Also whether the interest rate is comfort with the promoter need to be checked. Interest rate is very crucial decision before making, need to consult with the bankers also for the same.

j. Projected EBITA & PAT comparison with industry bench mark: EBITA & PAT of our projected financials should be comparable and nearest with the bench mark of the industry, so this need to be analyze and in case of major variation corrective measure need to be taken for the same.

k. Collateral security offered: For the project funding, promoter need to offer the collateral security based on the fund requirement. Collateral security value based on the percentage of funds requirement and bank to bank it will differ.

l. Taxation aspects of the project: Direct and Indirect tax application of the project need to be checked and the implications also has to be considered in the projected financials otherwise the projection may go wrong. So understanding the taxation aspects also playing very critical role in preparation of projected financials.

Conclusion: The above points which I discussed are basic and general points need to be considered while preparation of projected financials. However the nature of projects and industries some more factors and points are also need to be considered to make the projected financials more accurate.

Good luck.

Thanks

CMA Ramesh Krishnan

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