Project Risk Management

Risk can be defined as uncertainty of outcome, whether positive opportunity or negative impact. Some amount of risk-taking is inevitable, whatever the project. There has to be a deliberate acceptance of some degree of risk because the value to the business makes it worthwhile. Project risk management includes the processes concerned about conducting risk management planning, identification, analysis (both qualitative and quantitative), responses, and monitoring and control on a project; most of these processes are updated throughout the project.

Risk management in projects involves identifying and assessing the risks in terms of impact and probability, establishing and maintaining a joint risk register, agreed by the integrated project team, establishing procedures for actively managing and monitoring risks throughout the project and during occupation on completion, ensuring that members of the team have the opportunity to engage in a dialogue that will promote agreement of an appropriate allocation of risk, updating risk information throughout the life of the project, ensuring control of risks by planning how risks are to be managed through the life of the project to contain them within acceptable limits, allocating responsibility for managing each risk with the party best able to do so. Management of risk is an ongoing process throughout the life of the project, as risks will be constantly changing. Risk management plans should be in place to deal quickly and effectively with risks if they arise.

Risks should be allocated to individual risk owners within the integrated project team, who should fully understand the risks for which they are responsible.… Read the rest

Project Planning

Project Planning is foreseeing with blue print towards some predicted goals or ends. Project plan is a skeleton which consists of bundle of activities with its future prospects; it is a guided activity. It is a plan for which resources are allocated and efforts are being made to commence the project with great amount of pre-planning, project is a way of defining what we are hoping to do about certain issue. The project alone is not responsible for what happens during the course of a planning. Project is a final form of written documents that guides us as to what steps need to be taken next.

Nature of Project Planning

One cannot conceive a project in a linear manner. It involves few activities, resources, constrains and interrelationships which can be visualized easily by the human mind and planned informally. However, when a project crosses a certain threshold level of size and complexities, informal planning has to be substituted by formal planning. Besides that it is an open system oriented planned change attempt which has certain parameters and dimension. So that, the need for formal planning is indeed much greater for project work than for normal operations. The pre-defined and outlined in detail plan of action helps than managers to perform their task more effectively and efficiently.

There are always competing demands on the resources available in a region or a country because of the limited availability and ever expanding human needs. Planning for the optimum utilization of available resources becomes a pre-requisite for rapid economic development of a country or a region.… Read the rest

Commercial or Financial Profitability

In order to assess the operational efficiency of a project and its profitability most of the industrially advanced countries employed various technique for the purpose of financial profitability analysis.

Profit is the primary objective of an enterprise. The word profit implies a comparison of the operations of business between two specific dates which are usually separated by an interval of one year. The maximization of profit within a socially acceptable limit implies that a proper regard for public interest has been shown. Really it is the growth of profit which enables a firm to pay higher dividends to its ordinary shareholders.

According to the Economists point of view profit is the reward for entrepreneurship.  Various factors influence the profit variations. They are as follows.

  1. The volume of sales plays a tremendous part in profit making. So long as a sustained maximum volume continues at the top of capacity curve, break – even point would be far away.
  2. To attain real sophistication in profit calculation, the true profits at any given volume which should exist at a planned break even point are separated from the profits created by the performance at one attained volume. 
  3. A change in variable costs and selling prices changes both the break even point and the marginal profit.
  4. The rate of marginal profit is affected by a change in variable costs, selling price and operating performance as against planned performance.
  5. When both the fixed and variable costs change and when they move in tandem, the effect of break even point is pronounced and definite. 
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Social Cost Benefit Analysis of a Project

The foremost aim of all the individual firm or a company is to earn maximum possible return from the investment on their project. In this aspect project promoters are interested in wealth maximization. Hence the project promoters tend to evaluate only the commercial profitability of a project. There are some projects that may not offer attractive returns as for as commercial profitability is concerned but still such projects are undertaken since they have social implications. Such projects are public projects like road, railway, bridge and other transport projects, irrigation projects, power projects etc. for which socio-economic considerations play a significant part rather than mere commercial profitability. Such projects are analysed for their net socio economic benefits and the profitability analysis which is nothing but the socio-economic cost benefit analysis done at the national level.

All the projects imposes certain costs to the nation and produces certain benefits to the nation. The cost may be of two types i.e. direct cost and indirect cost. In this respect the benefit derived from any project will also be of two types i.e. direct benefits and indirect benefits.

The social cost benefit analysis is a tool for evaluating the value of money, particularly of public investments in many economies. It aids in decision making with respect to the various aspects of a project and the design programmes of closely interrelated project. Social cost benefit analysis has become important among economists and consultants in recent years.

Features of Social Cost Benefit Analysis
  1. Assessing the desirability of projects in the public as opposed to the private sector
  2. Identification of costs and benefits
  3. Measurement of costs and benefits
  4. The effect of (risk and uncertainty) time in investment appraisal
  5. Presentation of results – the investment criterion.
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Term Loans as a Project Financing Method

Project financing may be defined as the raising of funds required to finance a capital investment proposal which is economically separable. The assets, contracts cash flows are separated from the parent company and the assets acquired for the projects serve as collateral for loans. The repayments are made from the revenue generated from the projects. Also, the lending institution has to ensure that the investment on the proposed project will generate sufficient returns on the investments made and that loan amount disbursed for the implementation of the project will be recovered along with interest within a reasonable period of time.

Term loans are meant for tying up the capital cost of the project. The primary source of such loans is financial institutions. Commercial banks also provide term finance in a limited way. The financial institutions provide project finance for new projects as also for expansion/diversification and modernization, whereas the bulk of term loans extended by banks is in the form of working capital term loan to finance the working capital gap. Though they are permitted to finance infrastructure projects on a long term basis, the quantum of such financing is marginal. The term may be 6 to 10 years.

Terms and Conditions

Terms loans are granted subject to the following terms and conditions.

  1. Clear title to land as security.
  2. Insure all the assets, building and machinery separately.
  3. Scrutiny of Articles of Association to ensure that it does not contain any restrictive clause against covenants of the financial institutions.
  4. Lien on all fixed assets.
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Cash Flow Computations in Project Management

Financial appraisal or evaluation is a must for every project even though the outcome may not be the decision criteria for establishing the project. Financial appraisal of a project deals with cash flows. Cash, which goes out of the firm, is known as cash outflow. Typically an investment in a project is an out flow. The cash that is received in future from the project is an inflow. We should remember that cash is different from income. Cash flow and not income flow is central to project evaluation. The results of an evaluation of a project are only as good as the accuracy of our estimation of cash flows. The following illustrates computation of cash outflow.

Cash outflow on installation of a machine includes;

  1. Cost of new equipment
  2. Labor and erection costs
  3. Maintenance cost

While computing such outflows we should not include interest costs on debt employed. If the cost is not incurred all at once but over a period of time say as in installment purchase then the out flow will continue in subsequent years also till the entire cost is paid out. In computing cash flows sunk cost are ignored and only incremental costs and benefits must be considered. If the machinery bought has any scrap value or salvage value the same would be an inflow in the year of actual receipt and this may improve the overall cash flow pattern. When the implementation of a project involves additional inventory receivables etc., then the same are treated as cash outflow at the time they occur.… Read the rest