Project Financial Modelling
Project Finance Modelling focuses on applying general business and nonrecourse finance theory to cash flows forecast to arise from green field projects and special purpose vehicles (“SPVs”). This is where the numbers are provided that back up everything that has been described in the organizational and marketing sections. Conservative projections of profit and loss statements, balance sheet, and cash flow statements for the next five to ten years. These are forward-looking projections, not the current accounting outputs.
The factors that will make the project successful are emphasized and listed here so a definite pattern of revenue generation emerges. This is the most important as well as crucial part of the Project Business Plan that overwhelmingly influence investor decisions. It explains why the added equity or debt money is going to make the project viable and more profitable. A potential lender is going to want to know how successful the project is going to be. Factors that support promoter's claims for success are mentioned briefly.
Projecting Market Share
Arriving at a projection of the market share for a project business plan is very much a subjective estimate. It's based on not only an analysis of the market but on highly targeted and competitive distribution, pricing and promotional strategies. Even though there may be a sizable number of customers to form the total feasible market, the project promoter needs to be able to reach them through his distribution network at a price point that's competitive, and then he has to let them know it's available and where they can buy it. Achieving effective distribution, pricing and promotional goals determines the extent to which the project owner will be able to garner market share.
For a business plan, our experts estimate market share for the time period the plan will cover. In order to project market share over the time frame of the business plan, our experts consider two factors:
1. Industry growth which will increase the total number of users. Most projections utilize a minimum of two growth models by defining different industry sales scenarios. The industry sales scenarios should be based on leading indicators of industry sales, which will most likely include industry sales, industry segment sales, demographic data and historical precedence.
2. Conversion of users from the total feasible market. This is based on a sales cycle similar to a product life cycle where there are five distinct stages:
early pioneer users,
early majority users,
late majority users, and
Using conversion rates, market growth will continue to increase the market share during the period from early pioneers to early majority users, level off through late majority users, and decline with late users.
Defining the market is but one step in the analysis. With the information gained through market research, our experts develop strategies that will allow the promoter to fulfill the project objectives.
Positioning The Proposed Business
When discussing market strategy, it's inevitable that positioning will be brought up. A company's positioning strategy is affected by a number of variables that are closely tied to the motivations and requirements of target customers within as well as the actions of primary competitors.
Before a product can be positioned, several strategic questions need to be answered such as:
How are competitors positioning themselves?
What specific attributes does the product have that its competitors' don't?
What customer needs does the product fulfill?
Once these strategic questions have been answered based on research of the market, our experts develop the positioning strategy and illustrate that in the business plan. A positioning statement for a business plan doesn't have to be long or elaborate. It spells out exactly how the promoter wants his product perceived by both customers and the competition.
How the product is priced is important because it will have a direct effect on the success of the project. Though pricing strategy and computations can be complex, the basic rules of pricing are straightforward:
All prices must cover costs.
The best and most effective way of lowering your sales prices is to lower costs.
Prices must reflect the dynamics of cost, demand, changes in the market and response to existing competition.
Prices must be established to assure sales.
Product utility, longevity, maintenance and end use must be judged continually, and target prices adjusted accordingly.
Prices must be set to preserve order in the marketplace.
There are many methods of establishing prices:
Cost-plus pricing. Used mainly by manufacturers, cost-plus pricing assures that all costs, both fixed and variable, are covered and the desired profit percentage is attained.
Demand pricing. Used by companies that sell their product through a variety of sources at differing prices based on demand.
Competitive pricing. Used by companies that are entering a market where there is already an established price and it is difficult to differentiate one product from another.
Markup pricing. Used mainly by retailers, markup pricing is calculated by adding your desired profit to the cost of the product. Each method listed above has its strengths and weaknesses.
Distribution includes the entire process of moving the product from the factory to the end user. The type of distribution network chosen depends upon the industry and the size of the market. Our experts analyze the competitors to determine the channels they are using, then decide whether to use the same type of channel or an alternative that may provide the promoter with a strategic advantage.
As we've mentioned already, the distribution strategy the promoter chooses for his product will be based on several factors that include the channels being used by the competition, pricing strategy and own internal resources.
With a distribution strategy formed, promoter must develop a promotion plan. The promotion strategy in its most basic form is the controlled distribution of communication designed to sell the product or service. In order to accomplish this, the promotion strategy encompasses every marketing tool utilized in the communication effort.
Once the market has been researched and analyzed, conclusions are developed that supply a quantitative outlook concerning the potential of the business. The first financial projection within the business plan is formed utilizing the information drawn from defining the market, positioning the product, pricing, distribution, and strategies for sales. The sales or revenue model charts the potential for the product, as well as the business, over a set period of time. Some project business plans project revenue for up to three years, although five-to ten year projections are becoming increasingly popular among lenders.
The competitive analysis is a statement of the business strategy and how it relates to the competition. The purpose of the competitive analysis is to determine the strengths and weaknesses of the competitors within the market, strategies that will provide the project promoter with a distinct advantage, the barriers that can be developed in order to prevent competition from entering one's own market, and any weaknesses that can be exploited within the product development cycle.
Design and Development Plan
The purpose of the design and development plan is to provide investors with a description of the product's design, chart its development within the context of production, marketing and the company itself, and create a development budget that will enable the company to reach its goals.
There are generally three areas you'll cover in the development plan section:
Each of these elements needs to be examined from the funding of the plan to the point where the business begins to experience a continuous income. Although these elements will differ in nature concerning their content, each will be based on structure and goals.
Scheduling and Costs
This is one of the most important elements in the development plan. Scheduling includes all of the key work elements as well as the stages the product must pass through before customer delivery. It should also be tied to the development budget so that expenses can be tracked. But its main purpose is to establish time frames for completion of all work assignments and juxtapose them within the stages through which the product must pass.
When formulating the development budget, our experts take into account all the expenses required to design the product and to take it from prototype to production.
Costs that should be included in the development budget include:
Material. All raw materials used in the development of the product.
Direct labor. All labor costs associated with the development of the product.
Overhead. All overhead expenses required to operate the business during the development phase such as taxes, rent, phone, utilities, office supplies, etc.
G&A costs. The salaries of executive and administrative personnel along with any other office support functions.
Marketing & sales. The salaries of marketing personnel required to develop pre-promotional materials and plan the marketing campaign that should begin prior to delivery of the product.
Professional services. Those costs associated with the consultation of outside experts such as accountants, lawyers, and business consultants.
Miscellaneous Costs. Costs that are related to product development.
Capital equipment. To determine the capital requirements for the development budget.
Calculate Overhead Expenses
Once the organization's operations have been planned, the expenses associated with the operation of the business can be developed. These are usually referred to as overhead expenses. Overhead expenses refer to all non-labor expenses required to operate the business. Expenses can be divided into fixed (those that must be paid, usually at the same rate, regardless of the volume of business) and variable or semivariable (those which change according to the amount of business).
Overhead expenses usually include (but not limited to) the following:
Maintenance and repair
Advertising & promotion
Packaging & shipping
Payroll taxes and benefits
Developing A Capital Requirements Table (CAPEX BUDGET)
In addition to the expense table, we develop a capital requirements table that depicts the amount of money necessary to purchase the equipment you'll use to establish and continue operations. It also illustrates the amount of depreciation your company will incur based on all equipment elements purchased with a lifetime of more than one year.
Cash Flow Statement
The cash-flow statement is one of the most critical information tools for the proposed project, showing how much cash will be needed to meet obligations, when it is going to be required, and from where it will come. It shows a schedule of the money coming into the business and expenses that need to be paid.
The Balance Sheet
The balance sheet uses information from all of the financial models developed in earlier sections of the business plan. The project business plan is, more or less, a summary of all the preceding financial information broken down into three areas:
To obtain financing for a new business, promoter may need to provide a projection of the balance sheet over the period of time the business plan covers. More importantly, promoter will need to include a personal financial statement or balance sheet instead of one that describes the business. A personal balance sheet is generated in the same manner as one for a business.
In the business plan, the promoter will need to create an analysis statement for the balance sheet just as is needed to be done for the income and cash flow statements. The analysis of the balance sheet should be kept short and cover key points about the company.
PROJECT FINANCING SERVICES AND RAISING CAPITAL FOR PROJECTS
Subcontracts India, with an extensive track record of providing authoritative as well as innovative advice on a wide range of project financing transactions worldwide, its global experience and local knowledge enable it to deliver the integrated strategies and services its clients require for project financing. Project Financing can be viewed as the epicenter of all aspects of project development. In order to survive the close scrutiny that lenders and investors require to approve a financing, all aspects of the project must be aligned, such that the end result will be, in all likelihood, a fully functioning, revenue-generating, and legally permitted project returning sufficient value to the investors. Transacting a project finance deal is not merely a negotiation of financial structuring but rather necessarily involves an analysis of real property rights, construction and development contracts, equipment warranties, concession agreements, power purchase and interconnection agreements, cash management, environmental permitting, regulatory matters, and, of course, tax analysis. Subcontracts India provides project owners/sponsors/promoters the much needed project financing solutions and support to raise capital for their projects through the developmental and operational stages. For both greenfield as well as brownfield projects, this is a gateway to reach project experts, investors and financiers. We have been at the forefront of several project financing transactions across various sectors of the economy around the globe. Our project support & financing services have benefited projects through their stages of inception through maturity. Startups, shovel-ready projects, green-shoots too have used our services at different stages of their project life-cycle. We have the means as well as the necessary expertise to approach numerous Banks, Investment Bankers, Non Banking Finance Companies (NBFCs), Financial Institutions (FIs), Venture Capitalists (VCs), Private Equity Investors (PE), Ultra High Net Worth Individuals (UHNWIs), Family Businesses, Hedge Funds, Pension Funds, Underwriters, Insurance Providers, etc. with great speed and efficiency. We understand how these fund providers and investors work and what are their main areas of interest. Targeting the right source is not just important but also crucial for achieving successful financial close. Subcontracts India offers:
Identification of projects with a Cash Flows Generating component and bankability potential;
Support of project development to achieve bankability;
Preparation and structure of transaction by leveraging our consulting, financial and legal expertise;
Finding the right investor and achieving financial close;
Support to the client through the project execution and construction phases.
We can be present with our services across the entire project lifecycle:
Strategy and planning: Assisting long-term planning of individual projects or a portfolio by focusing on feasibility, alignment with corporate objectives and governance procedures in order to maximize return on investment.
Financing and procurement: Raising project finance; establishing and managing the procurement process to acquire services, material or equipment to deliver the project, and prioritizing capital allocation between projects.
Project organization, execution and construction: Setting up the project for success and strengthening client capabilities to deliver on time and to budget.
Operations and maintenance: Assessing ongoing lifecycle costs and providing insights around optimizing the performance and value of assets in operation.
Asset recycling, concession maturity & decommissioning: Determining when and how to discontinue investing in an asset, and transaction advisory services for investors in infrastructure assets.
PROJECT BUSINESS PLAN PRICING
We are uniquely positioned to assist projects promoters seeking funding based on equity, debt, or a mix of both by helping them prepare advanced, project specific, and investor friendly Project Business Plans. With our large exposure to investors and funders, we exactly know what an extraordinary Project Business Plan can accomplish. Depending on the type, size, and location of a project it may take our experts between two weeks to six weeks to complete a project business plan after receiving the detailed inputs from the clients. Please choose carefully from the price options we have provided here. Clicking on a particular option would take you to the relevant payment page and upon payment, you will arrive at the input page where you can type in the information sought from you. Once you fill all the details and submit the form, an acknowledgement will be sent to you. Thereon, one of our team members will be constantly in touch with you till the assignment is complete and your Project Business Plan is ready and delivered to you.
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We are explaining below why every project needs a good Project Business Plan for raising capital for the project. You should try and get your Project Business Plan in place before pitching for funding / investment. Investors want to know when they can cash out and how good the financial projections are. Only a well-conceived and well-packaged plan can win the necessary investment and support for your idea. It must describe the company or proposed project accurately and attractively. Based on the inputs you provide to us, our experts prepare a professional, bankable, and winning project business plan for you at unbelievably low costs which will help you make a pitch for raising capital from investors and funders be it banks, non-banking financial institutions, private equity investors, investment bankers, venture capitalists, funds, HNWI's, etc.
There are no shortcuts to writing a winning Business Plan for a project that needs external funding. Business plans are critical to the success of any new venture. It’s important to outline a business plan carefully. All the variables need to be considered carefully. While creating a Business Plan it is important to get an element of objectivity in. The size and scope of a business plan depends on the specific goals. While drafting a project business plan for investors, the plan needs to be more detailed. Potential investors might not be as familiar with the proposed industry and so one needs to clearly explain the concept and where it fits in.
A project business plan can take many forms, depending on the venture. But most plans will include the following main sections:
Within the overall outline of the business plan, the executive summary will follow the title page. The summary tells the reader what the project promoter wants. The ONE LINE defining statement included in the summary clearly states what the project promoter is asking for.
The summary is kept short, probably no more than a couple of pages. Within that space, we provide a synopsis of our client's entire business plan. It provides a short, concise and optimistic overview of the planned business that captures the reader's attention and gives them an interest in learning more about it. This is the five-minute elevator pitch. It generally includes:
A table of contents
Project Structure (includes Deal Structure)
Forecasting & Scenarios Planning
Risk Structuring & Mitigation
Project SWOT Analysis
Exit Strategy and Options
Forecasting with Scenarios
Forecasting is the process of predicting future developments in business based on analysis of trends in past and present data. It refers to the tools and techniques used to predict developments in business, such as sales, expenditures, and profits. The purpose of business forecasting is to develop better strategies based on these informed predictions. Past data is collected and analyzed via quantitative or qualitative models so that patterns can be identified and can direct demand planning, financial operations, future production, and marketing operations.
The forecasting process entails:
Identify the problem, data point, or question that will be the basis of the systematic investigation.
Identify relevant, theoretical variables and determine the ideal manner for collecting datasets.
Make estimates about future business operations based on information collected through investigation.
Choose the model that best fits the dataset, variables, and estimates. The chosen model conducts data analysis and a forecast is made.
Note the deviations between actual performance and the forecast. Use this information to refine the process of predicting and improve the accuracy of future forecasts.
Quantitative Techniques in Forecasting
Quantitative forecasting is a long term business forecasting method concerned only with measurable data such as statistics and historical data. Past performance is used to identify trends or rates of change. These types of business forecasting are especially useful for long range forecasting in business. Quantitative models include:
Trend Analysis Method: Also known as “Time Series Analysis,” this forecast method uses past data to predict future events, excluding outliers and holding more recent data in higher regard. This method is most effective when there is a large quantity of historical data showing clear and stable trends. This is the most common and cost-effective method.
Econometric Modeling: This mathematical model makes use of several multiple-regression equations to test the consistency of datasets over time and the significance of the relationship between datasets, and to predict significant economic shifts and the potential effect of those shifts on the company.
Indicator Approach: This approach follows the relationship between certain indicators and uses the leading indicator data in order to estimate the performance of the lagging indicators. Lagging indicators are a type of KPI that measure business performance subsequently and provide insight into the impact of business strategies on the results achieved.
Qualitative Techniques in Forecasting
Qualitative forecasting relies on industry experts or “market mavens” to make short-term predictions. These techniques are especially useful in forecasting markets for which there is insufficient historical data to make statistically relevant conclusions. Qualitative models include:
Market Research: Polls and surveys are conducted with a large number of prospective consumers regarding a specific product or service in order to predict the margin by which consumption will either decrease or increase.
Delphi Model: A panel of experts are polled on their opinions regarding specific topics. Their predictions are compiled anonymously and a forecast is made.
Scenarios in a Business Plan explore multiple futures and multiple perspectives. A good business plan needs to provide multiple scenarios, or scenario planning, as it is best known. Scenarios are alternate futures in which today's decisions may play out. They are stories with beginnings, middles and ends. Good scenarios have twists and turns that show how the environment might change over time. A good set of scenarios will contain two to five different narratives. More than five scenarios tend to get confused with one another. Three scenarios run the danger that people will try to pick the most moderate or most apparently plausible and forget about the other two. Four is a good number — neither too many nor too few. Each scenario should contain enough detail to assess the likelihood of success or failure of different strategic options. Will there be sufficient demand for a new product? Are supply chains likely to remain intact? How much competition can we anticipate? Have new technologies rendered a product obsolete? Will political instability put those oil fields beyond our reach? Sometimes the point of a scenario is to pry attention away from the ordinary. The very process of thinking about a range of possible futures can be a useful opportunity for addressing issues that might otherwise be neglected.
Project Description and Structure
The project description usually begins with a short description of the industry and discusses the present outlook as well as future possibilities. Information is provided on all the various markets within the industry, including any new products or developments that will benefit or adversely affect the proposed project. All observations are based on reliable data. The investor wants to know just how dependable the information is, and won't risk money on assumptions or conjecture.
Emphasis is given to concentrate on its business structure. By structure we mean the type of operation, i.e. wholesale, retail, food service, manufacturing or service-oriented, etc. Also whether the business is new or already established.
In addition, the legal structure of the project is reiterated in regard to whether the business is a company, sole proprietorship, partnership or corporation, who its principals are (Ownership Structure), and what they will bring to the business (Management Structure). The Financial Structure, the Governing Structure, the Procurement Structure, the Marketing Structure, and the Risk Structure are emphasized as well.
Once the project has been described, the products or services are described as well. The product description statement is complete enough to give the reader a clear idea of the promoter's intentions. Unique features or variations from concepts that can typically be found in the industry are always helpful in giving the project a competitive edge is critical to positive assessment.
Market Research and Strategies
Target Market is defined. Market strategies are the result of a meticulous market analysis. A market analysis forces the entrepreneur to become familiar with all aspects of the market so that the target market can be defined and the project can be positioned in order to garner its share of sales. A market analysis also enables the client to establish pricing, distribution and promotional strategies that will allow the project to become profitable within a competitive environment. In addition, it provides an indication of the growth potential within the industry, and this allows the promoter to develop his own estimates for the future of his business. The target market narrows down the total market by concentrating on segmentation factors that will determine the total addressable market--the total number of users within the sphere of the business's influence. The segmentation factors can be geographic, customer attributes or product-oriented.
Once the target market has been detailed, it is further defined to determine the total feasible market. This is done in several ways, but we delineate the feasible market by concentrating on product segmentation factors that may produce gaps within the market.
The total feasible market is the portion of the market that can be captured provided every condition within the environment is perfect and there is very little competition. In most industries this is simply not the case. There are other factors that will affect the share of the feasible market a business can reasonably obtain. These factors are usually tied to the structure of the industry, the impact of competition, strategies for market penetration and continued growth, and the amount of capital the business is willing to spend in order to increase its market share. Spelling out the market analysis and describing the marketing strategy, including sales forecasts, deadlines and milestones, advertising, public relations decides how the proposed project stacks up against competition.
Management and Personnel
The project business plan provides bios of the project promoter's company executives and managers and explains how their expertise will help the promoter meet project goals. Since investors evaluate inherent risks, a management team with lots of experience generally lower perceived risks.
Project Risk Identification, Analysis, Mitigation, and Allocation
The core of Project Finance is the analysis of project risks, namely construction risk, operating risk, market risk, regulatory risk, insurance risk, and currency risk. There are risks related to the pre-completion phase such as activity planning risk, technological risk, and construction risk or completion risk. Then there are risks related to the post-completion phase such as supply risk, operating risk, and demand risk. And then there are risks related to both phases such as interest rate risk, exchange risk, inflation risk, environmental risk, regulatory risk, political risk, country risk, legal risk, and credit risk or counterparty risk. These risks are allocated contractually to the parties best able to manage them. The process of risk management is usually based on the following interrelated steps:
risk transfer and allocation;
residual risk management;
Essential to structuring a project finance package are the crucial elements of successful identification, analysis, mitigation and allocation of project risks. These risks are related to events that could endanger the project during development, construction and operation.
During the development stage the main risk is rejection by the host government or by the financiers – for reasons including commercial weakness, failure to obtain licenses, permissions and clearance. Sponsors can hedge their risks by obtaining technical assistance grants for project preparation and planning.
During the construction stage the main risk is failure to complete the project with acceptable performance levels and within an acceptable time frame and budget. Sponsors can hedge construction risks by purchasing various forms of insurance and obtaining guarantees from contractors with regard to costs, completion schedule and operational performance.
After construction, the main risk is ongoing operations and performance and include technical failures, availability of funds, market demand, prices, foreign exchange rates or environmental issues. The sponsors can hedge these risks through contractual and guarantee agreements that transfer some of the risk to other parties.
Operations & Management
The operations and management plan is designed to describe just how the business functions on a continuing basis. The operations plan will highlight the logistics of the organization such as the various responsibilities of the management team, the tasks assigned to each division within the company, and capital and expense requirements related to the operations of the business. In fact, within the operations plan you'll develop the next set of financial tables that will supply the foundation for the "Financial Components" section.
The financial tables that you'll develop within the operations plan include:
The operating expense table
The capital requirements table
The cost of goods table
There are two areas that need to be accounted for when planning the operations of your company. The first area is the organizational structure of the company, and the second is the expense and capital requirements associated with its operation.
SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis.
A SWOT analysis is a compilation of your project's strengths, weaknesses, opportunities and threats. A SWOT analysis focuses on the four elements of the acronym, allowing companies to identify the forces influencing a strategy, action or initiative. The primary objective of a SWOT analysis is to help organizations develop a full awareness of all the factors involved in making a business decision, whether you are exploring new initiatives, revamping internal policies, considering opportunities to pivot or altering a plan midway through its execution. SWOT analysis helps discover recommendations and strategies, with a focus on leveraging strengths and opportunities to overcome weaknesses and threats.
Calculating Project Cash Flow Ratios
In the world of Project Finance, a project’s capacity to generate cash is at its core. Cash Flow Available for Debt Service (CFADS) is a measurement of precisely this.
CFADS is a measurement of how much cash you have available to make your debt interest and principal repayments. It is commonly used to “sculpt” your repayments, and it is a component of some of the most common Project Finance ratios such as the Debt Service Coverage Ratio (DSCR), the Loan Life Coverage Ratio (LLCR) and the Project Life Coverage Ratio (PLCR).
The Debt Service Coverage Ratio (DSCR) is the most commonly used ratio in Project Finance. It is a periodic measure of a project company’s ability to meet its debt obligations. Without going into the details of how DSCR or other project ratios are calculated, we would like to confirm that these ratios are an essential component of any project business plan and our experts do the job for you.