MODULE II SETTING NEW VENTURE

TOPICS TO BE COVERED
MAKING BUSINESS PLAN COST BENEFIT ANALYSIS FEASIBILITY ANALYSIS REPORT WRITING FOR BUSINESS

What is a Business Plan

Roadmap to success Written document describing all relevant internal and external elements and strategies for starting a new venture Where I am Where am I going How to get there? Guide and structure to manage in the dynamic world.

For preparing a Business Plan we must answer a following questions:

1. WHAT is a Business Plan? 2. WHO needs a Business Plan? 3. HOW to prepare a Business Plan?

Who draws it
Entrepreneur with help Skills required: Financial tax Plan, forecasts Mkt People mgt Designing Organizing The entrepreneur assesses his own skill and takes partners to strengthen weakness.

Who uses
Investors Banker VC Advisors Suppliers Employees Contents influence the reader Therefore all issues must be addressed.

Who needs a business plan?

You need a business plan if youre running a business; You need a business plan if youre applying for a business loan; You need a business plan if youre looking for business investment, new products or new services; You need a business plan to communicate with a management team.

Outline of a business plan

Executive summary Business description: products and services offered Market strategies Competitive analysis and positioning Operations and management plan Financial components - condensed information on each of the chapters bellow - type of business; - products and services offered; - operations plan; - ownership of the business and its - management team. legal structure; - market and target market; - profitability consideration. - demand for the product or service; - capital requirements and sources; - promotion; - balance analysis; - competitionsheet; - dissemination and delivery; - break-even analysis; - identification strategy. - pricing of competitive - strenght statement; income position. - cash flow projection.

Planning is a Process, Not Just a Plan

Successful implementation starts with a good plan

Is the plan simple? Is the plan specific? specific budgets? Is the plan realistic? Is the plan complete?.

Preparing a business plan

Define and fix objectives, and programs to achieve those objectives. Create regular business review and course correction. Define a new business. Support a loan application. Define agreements between partners. Set a value on a business for sale or legal purposes. Evaluate a new product line, promotion, or expansion.

Cost Benefit Analysis

What is Cost Benefit Analysis?
CBA has been established primarily as a tool for use by governments in making their social and economic decisions. CBA measures costs and benefits to the community of adopting a particular course of action e.g. Constructing a dam, by-pass etc. CBA is a decision making device for evaluating activities that are not priced by the market. CBA attempts to simulate a market result in areas where the market does not operate to establish prices OR attempts to quantify and include in estimates of cost and benefits to client but also to rest of community.

Cost Benefit Analysis

Costs of a project can be divided into three areas : Social cost:
being the sum total of costs involved as the result of an economic action

Private costs:
Those that affect the decisions of the performers (i.e. production costs including, labor, materials, lands and capital)

External Costs:
Resulting from damage to buildings or decline of property values through smoke emanating from a factory, etc.

Cost Benefit Analysis

Measurement Problems Difficulties encounter in measuring intangible costs such as foul atmosphere or intangible benefits such as a peaceful neighbourhood. Assuming several other costs & benefits associated with the activities; and estimating the costs and benefits involves. Affects by Market condition, state of economy etc. Uneven distribution of benefit to community.

Cost Benefit Analysis

CBA unlikely to be a useful technique unless two main conditions are met:

Investment must be sufficiently large or important to merit time and cost of CBA.
Social and other intangible costs and/or benefits must be prospectively and sufficiently large for selection by cost-in-use or investment appraisal to be invalid.

Cost Benefit Analysis

Method

Identify all possible alternatives.

Prepare table showing life of the project i.e. year to year basis.

Establish Cost of project during the year including capital, operating and maintenance costs, social and other tangible costs. Establish total benefits to be obtained from project by way of sales of goods and services including value of social benefits.
Cost calculated at rate of interest such that NPV=Zero Ranking in order of [benefit-cost] or [benefit / cost]

Cost Benefit Analysis

Establishing a steel production plant in a port community

Costs (-)
Construction. Pollution. Devaluing house prices etc.

Benefits (+) Employment Increase port trade Steel for local industry

Cost Benefit Analysis

Example of Costs and Benefits of the dam
Let us first assume a calculation period for the CBA only covers seven years: Discounted to present value = 0.71068 x $0.1 billion = $71,068,000 Conclusion: Based on a seven year time span Costs = $157 million Benefits = $71 million Conclude that Project is not acceptable

Cost Benefit Analysis

Example of Costs and Benefits of the dam Let us consider a ten year time span: Benefit: Discount $100,000,000 in year 7 = $100,000,000 x 0.71068 in year 8 = $100,000,000 x 0.67683 in year 9 = $100,000,000 x 0.64460 in year 10 = $100,000,000 x 0.61391

Total present value = 265,000,000

Conclusion: Based on a seven year time span Costs = $157 million Benefits = $265 million Conclude that Project is acceptable

Feasibility Study and Analysis

What is Feasibility Study? A feasibility study is a report designed to highlight, evaluate and structure the advantages and disadvantages over time of alternative solutions to given problems. The appraisal of the viability of property development schemes.

Feasibility Study and Analysis

Step 1: Planning and Organization
task task task task task 1a: Meeting with top management 1b: Form a Team and inform staff 1c: Pre-assessment to collect general information 1d: Select focus areas 1e: Prepare assessment proposal for top management approval

But first
In what step(s) of the methodology is financial feasibility analysis relevant?

Step 2: Assessment
task task task task task 2a: Staff meeting and training 2b: Prepare focus area flow charts 2c: Walkthrough of focus areas 2d: Quantify inputs and outputs and costs to establish a ba seline 2e: Quantify losses through a material and energy balance

Step 3: Identification of Options

task 3a: Determine causes of losses task 3b: Identify possible options task 3c: Screen options for feasibility analysis

Step 4: Feasibility Analysis of Options

task 4a: Technical, economic and environmental evaluation of options task 4b: Rank feasible options for implementation task 4c: Prepare implementation and monitoring proposal for top management approval

Step 5: Implementation and Monitoring of Options

task 5a: Implement options and monitor results task 5b: Evaluation meeting with top management

Step 6: Continuous Improvement

task 6a: Prepare proposal to continue with energy efficiency for top management approval

Feasibility Study and Analysis

Companys priority

Technical Other
- Regulatory - Organizational - Health/safety - Community

Project Selection
Environmental

Financial

Feasibility Study and Analysis

Questions Management Will Ask
1. Is the project profitable?
Initial investment costs
Annual operating costs and savings Cost of operating inputs Cost of waste management Less tangible costs Revenues

2. Determine availability of internal investment funds for bigger projects 3. Obtain external financing for remaining projects

Feasibility Study and Analysis

Capital Budgeting Process
Process by which organisation decides: Which investment projects are
- Needed - Possible -Special focus on projects that require significant up-front capital investment

How to allocate available capital between different projects. If additional capital is needed

Feasibility Study and Analysis

Main techniques
Payback period

Residual
Discounted cash flow
- Net Present Value - Internal Rate of Return

Feasibility Study and Analysis

CASH FLOW
Common management planning tool Distinguishes between

Costs: cash outflows

Revenues/savings: cash inflows

Feasibility Study and Analysis

Types of Cash Flow
Outflow
One-time
Initial investment cost Operating costs & taxes Working capital

Inflow
Equipment salvage value

Annual

Operating revenues & savings Working capital

Other

Feasibility Study and Analysis

CASH FLOW
Projects Costs / Revenues are broken up into periodic cash flows. Discounting is applied to the cash flows i.e.. Allowance make for the Time Value of Money Discounting is bringing future costs back to an equivalent current cost (present value).

Example Assume we have Rs.10 now, then with an inflation rate of 10% per annum this should be worth Rs.11 at the end of the year, or Rs.11 at the end of the year should be worth Rs.10 now if the inflation rate is 10% per annum.

Feasibility Study and Analysis

Payback Period
Time taken to recoup outlay. The shorter the PB, the more favourable is the project. The PB period for development projects will be either:
Time to when project is sold; or Time to when rental income exceeds development costs.

Feasibility Study and Analysis

Payback Period
Definition: number of years it will take for the project to recover the initial investments Usually a rule of thumb for selecting projects, e.g. payback must be < 3 years

Simple Payback (in years)

Investment Cash Flow

Feasibility Study and Analysis

Converting Cash Flows to Present Value
Discount rate: Converts future year cash flows to their

present value
Incorporates:
Desired return on investment Inflation

Reverse of an interest rate calculation

Feasibility Study and Analysis

Which Discount Rate?
Equal to the required rate of return for the project investment, based on : A basic return - pure compensation for deferring consumption

Any risk premium for that projects risk

Any expected fall in the value of money over time through inflation

At least cover the costs of raising the investment financing from investors or lenders (i.e. the companys cost of capital)
A single Weighted Average Cost of Capital (WACC) characterises the sources and cost of capital to the company as a whole

Feasibility Study and Analysis

Calculating Present Value
Value of the cash flow in year n

Present Value = Future Valuen x (PV Factor)

Value of cash flow at Time Zero, i.e. at project start-up

Present Value (PV) Factors or discount factors For various values d (discount rate): 10%, 15%, 20% For various years n (number of years) Tables available

Feasibility Study and Analysis

IRR INTERNAL RATE OF RETURN
Definition: discount rate for which NPV = 0, over

the project lifetime.

Tells you exactly what discount rate makes the

project just barely profitable

Similar to NPV, considers
Time value of money All future year cash flows

Feasibility Study and Analysis Summary

Advantages
Simple Payback & ROI NPV
Easy to use

Disadvantages
Neglect TVM

Neglect out-year costs

Do not indicate project size Considers TVM Needs firms discount rate Indicates project size Considers TVM Requires iteration Does not indicate project size

IRR

Prepare Project Report

The project report is a document Created through Systematic recording of all the details about a project, with an analysis and validation of data/ information. Report is useful to the entrepreneur for planning and implementing the project

Contents of a project report

1 Executive summary 2 Company details 3 Operational details 4 Project details 5 Project cost 6 Means of finance 7 Project status 8 Profitability and risk analysis 9 Company vis--vis Related industry 10 Employment generation 11 Conclusion 12 Annexure

THANK YOU