Unit-II

Lesson 6: Feasibility analysis- Preparation of project report

Learning objectives

After reading this lesson incumbent Entrepreneur can prepare feasibility report for the business
idea

Contents

6.1 Feasibility analysis

6.2 Components of a Properly Conducted Feasibility Analysis
6.3 Benefits of feasibility Analysis
6.4 Timing of Feasibility Analysis
6.5 Types of feasibility studies
6.6 Meaning of Project
6.7 Preparation of Project Report
6.8 Specimen of a Project Report
6.9 Project Appraisal
6.10 Common Errors in Project Formulation

6.1 Feasibility analysis

Meaning

Feasibility analysis is the process of determining if a business idea is viable. It is the preliminary
evaluation of a business idea, conducted for the purpose of determining whether the idea is worth
pursuing.

Feasibility analysis takes the guesswork (to a certain degree) out of a business launch, and
provides an entrepreneur with a more secure notion that a business idea is feasible or viable.

6.2 Components of a Properly Conducted Feasibility Analysis

A properly conducted feasibility analysis includes four separate components, as discussed in the
following slides.
Role of feasibility analysis in developing business ideas

6.3 Benefits of feasibility Analysis

A feasibility analysis helps …………

 To assess the merit of your business idea,

 Determine whether there is a market for your idea,
 Whether the idea is financially viable,
 and ultimately, whether or not it is worth investing your time and money into the venture,
 Overall demand for new products, services, or ideas
 Characteristics of likely customers (such as demographics and buying behavior)
 Characteristics of likely competitors

6.4 Timing of Feasibility Analysis

 The proper time to conduct a feasibility analysis is early in thinking through the prospects
for a new business.
 The thought is to screen ideas before a lot of resources are spent on them
 It is estimated that only one in fifty business ideas are actually commercially viable.
Therefore a business feasibility study is an effective way to safeguard against wastage of
further investment
 The research and information uncovered in the feasibility study will support the business
planning stage and reduce the research time. Hence the cost of the business plan will also
be reduced

6.5 Types of feasibility studies

It is sometimes called as a recommendation report, is a conducted, after an exploratory work is

performed, to assess whether a larger project is advisable. It aims to find out the probable market
for the products; to determine the probable income of operating the project: and to show the
contributions the project can offer to the society, among others.

1. Market and Real Estate Feasibility: Market Feasibility Study typically involves testing
geographic locations for a real estate development project, and usually involves parcels of real
estate land. Developers often conduct market studies to determine the best location within a
jurisdiction, and to test alternative land uses for a given parcels. Jurisdictions often require
developers to complete feasibility studies before they will approve a permit application for retail,
commercial, industrial, manufacturing, housing, office or mixed-use project. Market Feasibility
take into account the importance of the business in the selected area.

2. Technology and System Feasibility: This involves questions such as whether the technology
needed for the system exists, how difficult it will be to build, and whether the firm has enough
experience using that technology. The assessment is based on an outline design of system
requirements in terms of Input, Processes, Output, Fields, Programs, and Procedures. This can be
quantified in terms of volumes of data, trends, frequency of updating, etc in order to estimate if
the new system will perform adequately or not.

3. Resource Feasibility: This involves questions such as how much time is available to build the
new system, when it can be built, whether it interferes with normal business operations, type and
amount of resources required, dependencies, etc. Contingency and mitigation plans should also
be stated here so that if the project does over run the company is ready for this eventuality

4. Cultural Feasibility: In this stage, the project's alternatives are evaluated for their impact on
the local and general culture. For example, environmental factors need to be considered and this
factors are to be well known. Further an enterprise's own culture can clash with the results of the
project.

5. Operational feasibility: Do the current work practices and procedures support a new system.
Also social factors i.e. how the organizational changes will affect the working lives of those
affected by the system.

6. Legal Feasibility: Determines whether the proposed system conflicts with legal requirements,
e.g. a Data Processing system must comply with the local Data Protection Acts. When an
organization has either internal or external legal counsel, such reviews are typically standard.
However, a project may face legal issues after completion if this factor is not considered at this
stage. it is about the authorization.

7. Schedule Feasibility: A project will fail if it takes too long to be completed before it is useful.
Typically this means estimating how long the system will take to develop, and if it can be
completed in a given time period using some methods like payback period.
8. Economic Feasibility: Economic analysis is the most frequently used method for evaluating
the effectiveness of a candidate system. More commonly known as cost/benefit analysis, the
procedure is to determine the benefits and savings that are expected from a candidate system and
compare them with costs. if benefits outweigh costs, then the decision is made to design and
implement the system.

6.6 Meaning of Project

The very foundation of an enterprise is the project. The success or failure of an enterprise
depends on the project. Hence, the project is of crucial importance to the entrepreneur. The
dictionary meaning of project is an idea or plan that is intended to be carried out in the future or
that is being carried at present. A project is a cluster of activities that is relatively separate and
clear-cut, e.g., building a factory, hospital etc. A project typically has a distinct mission that is
designed to achieve and clear termination point, the achievement of the mission. In common
parlance, the term project is used to refer to projects such as industrial projects, agricultural
projects, illiteracy eradication project etc. An entrepreneur has to implement as idea or plan and
see that he achieves it – that is, he completes the project successfully.

6.6.1 Definition of project

Gittinger defines project “as the whole complex of activities involved in using resources to gain
benefits”. An entrepreneur implements a project overcoming various hurdles, with a view to get
some benefits - mainly monetary rewards. The entrepreneur originates the idea, makes a detailed
study of the various aspects of the project to be implemented, estimates the profit that would
accrue from the project, and finally implements it.

6.6.2 Project Life Cycle

A project has to pass through three distinct stages :

1. The Pre-investment Stage : It covers setting of aims and objectives, forecasting of demand,
selection of best means or strategies to achieve objectives, evaluation of characteristics of
resources or inputs required, projection of financial plan, cost-benefit analysis and ultimately, the
preinvestment appraisal. The project idea is converted into a concrete investment proposal or
scheme on which promoters and financiers can base their investment decision.

2. The Construction Stage : It starts after the investment decision is taken. Resources in the
form of land and buildings, plant and machinery, transport, communication and other services,
control systems, sales, and marketing organisation, managerial personnel, acquisition of
materials and supplies, etc., are assembled and all these resources are allocated to develop or
create a tangible project which is ready to achieve the set objectives.

3. The Normalization Stage : The allocated resources of assets (created during the second
stage) are utilized or employed to produce the end results, i.e., output of goods or services which
are required to fulfill the project objectives. The project starts operating, i.e., processing inputs
and generating outputs.

6.6.3 Project Classification

Projects have been classified in various ways by different authorities. Little and Mirreless divide
the projects into two broad categories, viz., quantifiable projects and non-quantifiable projects.
The planning commission has accepted the sectoral criteria for classification of projects. Projects
can also be classified on the basis of techno-economic characteristics. All India financial
institutions classify the projects on the basis of the nature of the projects and its life cycle. The
project classification are explained below :

1. Quantifiable and non-quantifiable projects : Quantifiable projects are those in which a

plausible quantitative assessment of benefits can be made. Non-quantifiable projects are those
where such an assessment is not possible. Projects concerned with industrial development, power
generation, mineral development are forming put of quantifiable projects. The non-quantifiable
projects category comprise health, education and defence.

2. Sectoral Projects : According to the Indian Planning Commission, a projects may fall in the
following sector :

(a) Agriculture and Allied Sector

(b) Irrigation and Power Sector
(c) Industry and Minings Sector
(d) Transport and Communication Sector
(e) Social Services Sector
(f) Miscellaneous Sector
The sector classification of projects is quite useful for resource allocation at macro levels.

3. Techno-Economic Projects : Techno-economic projects classification includes factors

intensity-oriented classification, causation-oriented classification and magnitude-oriented
classification. These three grouping are narrated as under :

(a) Factor intensity oriented classification : The factor intensity is used as base for
classification of projects such as capital-intensive or labour-intensive which depends upon
the large scale investments in plant and machinery or human resources.

(b) Causation oriented classification : The causation-oriented projects are determined

based on its causes namely demand based or raw material-based projects. The non-
availability of certain good or services and consequent demand for such goods or services or
the availability of certain raw materials, skills or other inputs is the dominant reason for
starting the project.
(c) Magnitude oriented classification : The size of investments forms the basis for
magnitude-oriented projects. Projects may thus be classified based on its investment such as
large-scale, medium-scale projects.

4. Financial Institutions Classification :

All India and State Financial Institutions classify the projects according to their age and
experience and the purpose for which the project is being taken up. They are as follows :

(i) New projects

(ii) Expansion projects
(iii) Modernisation projects
(iv) Diversification projects

The projects listed above are generally profit - oriented and the services oriented projects are
classified as under

(i) Welfare Projects

(ii) Service Projects
(iii) Research and Development Projects
(iv) Educational Projects

6.6.4 Project Identification

Project identification is a difficult task faced by an entrepreneur. He comes across several

investment opportunities. In the first instance, he has to select a few projects which have been
subjected to preliminary evaluation. Project identification is concerned with the collection,
compilation and analysis of economic data for the eventual purpose of locating possible
opportunities for investment and with the development of the characteristics of such
opportunities.

According to Peter F. Drucker, opportunities are of three kinds : additive, complementary and
breakthrough. Additive opportunity is concerned with utilizing the existing resources without
making any change. Complementary opportunity results in introduction of new ideas and
involves change. Breakthrough involves drastic and fundamental changes in the existing
business. Risk is least in additive opportunities, greater in complementary and greatest in
breakthrough opportunities. Bearing in mind these factors and expecting a fair return on
investments, the entrepreneur has to choose a project. A few guidelines which help him choose
the right line of project are given below.

A. Choosing the Right Line of Activity

The primary decision to be made by a prospective entrepreneur is choosing the right line of
activity. The very success of his venture will depend on the rationality of his decision in the
regard.
A business opportunity is born as an impulse during the course of interaction of the entrepreneur
with the environment. He proceeds if a competitive advantage is sensed in the following three
areas :

1. Procurement of scarce resources.

2. Access to technical know-how.

3. Market.

Nowadays more importance should be given to the third factor, i.e., market.

Then a business potential examination involving a cursory examination of the market, production
and financial. parameters is done through further reading/discussions to see whether the
competitive advantage sensed earlier could be exploited to set-up an industry of the magnitude
envisaged.

A satisfactory response invokes further probing in the form of market survey, feasibility study,
etc. If the scheme looks attractive and the degree of calculated risk provides the entrepreneur
with an adequate level of confidence, he embarks on further development like a detailed project
report, raising funds, obtaining detailed know how, etc.

Before taking a decision on the line of activity it is imperative for the promoter to have an
interaction with the environment over as wide an areas as possible, so that the ambit, within
which he makes the decision, is large enough to enclose most of the opportunities around.

B. Some important areas from which product ideas may emerge are the following :

(i) Survey of raw materials - agricultural, minerals, forest, animal husbandry, etc.

(ii) Survey of local skills based on which suitable industries can be identified.

(iii) Study of import statistics may reveal some commodities which can be indigenously
manufactured.

(iv) Study of export statistics will indicate trends in exports and the possibility of
increasing exports for certain products. It may indicate certain products which can be
further processed in the country.

(v) Study of world trade may indicate certain goods in which the country enjoys price
advantage and can be manufactured for exporting.

(vi) Study of the stores requirement for major industries and organizations will reveal the
requirement of various items.
(vii) Study of development plans will reveal future requirement for certain products or
services.

(viii) Study of Government policies regarding industrialization, exports, imports,

development of backward areas, etc.

(ix) Study of new process/products developed by organizations like National Research

Development Corporation, Directorate General of Technology. Development, Council of
Scientific and Industrial Research, Indian Space Research Organization, Bhabha Atomic
Research Centre, etc.

(x) Study of prospects for ancillarisation.

(xi) Study of potential for tourism – hotels, motels, house boats, etc.

(xii) Project ideas also develop while seeking solutions to our day-to-day problems.

But in reality, the case is quite different. A major constraint faced especially in developing
countries is the resources constraint. Hence it becomes imperative that certain project ideas are
only taken up or pursued in preference to others. How to make this decision or choose only a few
projects for implementation? Project formulation techniques help us in making a choice. When
we say project formulation, we mean that a project idea is presented in such a form that it can be
subjected to comparative appraisal.

This process will aid in definitely determining the priority of projects from the point of view of
resource allocation. The project ideas can be analysed from the point of view of inputs as well as
outputs. Such an analysis when presented to decision maker or to consulting agencies will help
them in decision-making. This strategy analysis project ideas not only from the view point of
technical feasibility and financial viability but also evaluates the sum total effect which the
project will have on the society and the immediate environment.

6.6.5 Project Formulation

Project formulation is defined as taking a first look carefully and critically at a project idea by an
entrepreneur to build up an all-round beneficial to project after carefully weighing its various
components. It is formulated by the entrepreneur with the assistance of specialists or consultants.
Project formulation is, therefore, a process where by the entrepreneur makes an objective and
independent assessment of the various aspects of an investment proposition of a project idea for
determining its total impact and also its liability. By all means, this strategy forms an important
stage in the pre-investment phase – that is the period from the conception of an idea until the
final analysis to decide about the future of a project idea. This makes it an analytical
management aid. The aim of project formulation is to achieve the project objectives with the
minimum expenditure and adequate resources. In other words, it is to derive maximum benefits
from minimum expenses in a short span of time.
Formulation of project report business plan is one of the corner stones to be laid down in setting
up an enterprise. This section is devoted to make you understand what is and how to make a right
project report.

6.7 Preparation of Project Report

After having selected the project/product or the service to be rendered, the entrepreneurs has to
prepare a project report.

A project report is a report which provides all the necessary information of the unit proposed to
be setup for the manufacture of a product or rendering a service. Financial institutions and banks
require project report for providing financial assistance. Various developmental agencies which
help set-up the project also require project report.

A well-prepared project report will help the bankers in appraising the project report and offer
financial assistance. A project report enables the entrepreneur to know how much money, man-
power and material would be required to set-up the project, type of machine and technology
required, and the economic gains from the project. Information regarding economic, technical,
financial, managerial and production aspects of the project/service are covered by the project
report.

There are chartered accountants, technical consultants, management consultants etc., who
prepare a project report on behalf of the entrepreneur. Many time an entrepreneur feels that he
would relieve himself of the botheration to prepare a project report by engaging a consultant.
Experience in developing entrepreneurs has shown that a well perceived, well made project
report by the entrepreneur himself is helpful to him while running the industry. This is so
because, the process of preparing the project report enables him to interact with realities and
makes him aware of what to expect in the future when he actually implements the project. It’s a
“drill”, a good training prior to jumping into a venture. Therefore, even when he chooses to take
the help of a consultant, he must involve himself in the preparation of the project report.

6.7.1 Significance of Project Report :

An objective without a plan is a dream. The preparation of a project report is of great

significance for an entrepreneur. The important uses of project report are :

– It helps in approaching District Industries Centre for obtaining provisional/permanent

registration.

– It helps in procuring developed land or shed from Directorate of Industries or from the
Development Corporation meant for providing developed land/sheds’ to entrepreneurs.

– It helps in securing supply of scarce raw materials.

– It helps in approaching bank for getting working capital loan.

– It helps in obtaining term loan from State Financial Corporation/Bank.

– It helps the entrepreneur in establishing techno-economic viability of the project.

6.7.2 Contents of a Project Report

Having gone through the significance of project report, it is now clear that there is no substitute
for a well-prepared business plan or project report and also there are no short-cuts to preparing it.
The more concrete and complete the business plan, the more likely it is to earn the respect of
outsiders and their support in making and running an enterprise. Therefore, the project report
needs to be prepared with great care and consideration. A good project report should contain the
following contents :

1. General Information : Information on product profile and product details.

2. Promoter : His/her educational qualification, work experience, project related experience.

3. Location : Exact location of the project, lease or freehold, vocational advantages.

4. Land and Building : Land area, construction area, type of construction, cost of construction,
detailed plan and estimate along with plant layout.

5. Plant and Machinery : Details of machine required, capacity, suppliers, cost, various
alternatives available, cost of miscellaneous assets.

6. Production Process : Description of production process, process chart,

technical know how, technology alternatives available, production programme.

7. Utilities : Water, power, steam, compressed air requirements, cost estimates, sources of
utilities.

8. Transport and Communication : Mode, possibility of getting, costs.

9. Raw Material : List of raw material required by quality and quantity, sources of procurement,
cost of raw material, tie-up arrangements, if any, for procurement of raw material, alternative
raw material, if any.

10. Manpower : Manpower requirement by skilled and semi-skilled sources of manpower

supply, cost of procurement, requirement for training and its cost.

11. Products : Product mix, estimated sales distribution channels, competitors and their
capacities, product standard, input-output ratio, product substitute.
12. Market : End-users of product, distribution of market as local, national, international, trade
practices, sales promotion devices, proposed market research.

13. Requirement of Working Capital : Estimation of working capital required, sources of

working capital, need for collateral security, nature and extent of credit facilities offered and
available.

14. Requirement of Funds : Break-up of project cost in terms of costs of land, building,
machinery, miscellaneous assets, preliminary expenses, contingencies and margin money for
working capital, arrangements for meeting the cost of setting up of the project.

15. Cost of Production and Profitability of first ten years.

16. Break-Even Analysis.

17. Schedule of Implementation.

6.7.3 Formulation of a Project Report

A project is a report which provides all the necessary information of the unit proposed to be set-
up. It is required by various developmental agencies that help, setting-up of the unit and
particularly by financial institutions and banks to provide financial assistance. The report should
be prepared in such a way that it is able to provide complete information that may be required by
financial institutions for appraising the project. A well prepared project report will not only save
the time energy of the banker but also help the entrepreneur, who will not face many objection
and queries from the banker.

A general set of information given in any project report is listed by Vinod Gupta in his study on
“Formulation of a Project Report”, which is reproduced, below, the following are broad heads
under which complete information on relevant aspects should be included in the project report:

1. General Information.
2. Project Description.
3. Market Potential.
4. Capital Costs and Sources of Finance.
5. Assessment of Working Capital Requirements.
6. Other Financial Aspects.
7. Economic and Social Variables.

1. General Information :

To begin with, some information of general nature should be provided. The following ate some
such aspects :

Bio-Data of Promoters
– Name and address of the entrepreneur.

– The qualifications, experience and other capabilities of the entrepreneur. If there are
partners, state the characteristics of all the partners individually.

Industry Profile : A little reference of analysis of industry to, which the project belongs, e.g.,
past performance, present status, the way it is organised, the problems it faces, etc.

Constitution and Organisation

– The constitution and the organisational structure of the enterprise. In case of a

partnership firm, whether it is registered with the Registrar of Firms.

– Whether a Registration Certificate from the Directorate of Industries/ District Industries

Centre has been obtained or will be applied later on.

Product Details : The utility of the product and the range of products to be manufactured. One
could even provide the product designs/drawings alongwith and made a mention of the
advantages the proposed product offers over its substitutes.

2. Project Description :

A brief description of the project covering the following aspects should be given in the project
report.

(a) Site : Location (town, street, number etc.) whether owned or leasehold land; whether the site
is in approved industrial area? Is it suitable to the type of enterprise being planned? The
open/covered area availability needed should be mentioned. If the location is in a residential area
then the copy of No Objection Certificate from the Municipal authorities should be attached.

(b) Physical Infrastructure : Availability of physical infrastructure consisting of the following

items :

(i) Raw Material : Whether imported raw material is also required? If so whether the licence has
been obtained. Which are the sources of raw material and what is the probability of getting it on
a continuous basis at fair prices?

(ii) Skilled Labour : Whether skilled labour is available in that area? If not, what arrangements
have been made to train the labour in various skills?

(c) Utilities

(i) Power : Inadequate supply of electricity or its high unit cost in an area may become a major
constraint in running a project. The project report should contain the information regarding the
power requirements, the load sanctioned, stability of supply of power and the price at different
consumption levels.
(ii) Fuel : Whether other fuel items like coal, coke, oil or gas, are required and if yes, then state
their avail ability position.

(iii) Water : Water is an important factor for projects like brewery, tannery, ice plant, soft drinks
and chemicals. The source and the quality of water in such cases should be clearly stated.

(d) Pollution Control : Most industrial plants produce waste material or emissions that may
create significant problems. The emission may be of various types like

(i) gaseous (smoke, fumes, etc.)

(ii) physical (noise, heat, vibration, etc.) or

(iii) liquid or solid discharge through pumps and sewers. State clearly the aspects like scope of
dumps, sewage system and sewage treatment plant.

(e) Communication System : Availability of communication facilities, e.g., telephone, telex

etc. should be stated in. the report.

(f) Transport Facilities : The distances over which the basic material inputs will have to be
transported and the available as well as potential means of transportation should be stated
together with expected bottlenecks, if any.

(g) Other Common Facilities : Availability of facilities like machine shops, welding shops and
electrical repair shops, etc.

(h) Manufacturing Process : The details of production and the process involved should be
clearly stated. Also state the period of conversion from raw material into finished goods. A
process flow chart should be presented.

(i) List of machinery and Equipment : A complete list of items of machinery and other
equipment indicating their type, size and cost should be furnished. Sources of supply of capital
equipment and the construction services should also be given. Check machinery/equipment for
each of the above stated processes is ensured. If not, explain how such processes will be get
done.

(j) Capacity of the Plant : The installed licensed capacity should be stated. Also state whether
the unit will run on single, double or triple shift basis.

(k) Technology Selected : Is it up-to-date and appropriate? Which other units are using the same
technology and with what results? How is required know how proposed to be arranged?

(l) Balancing of Plant : While stating the stages of production, also state whether the capacity of
various plants at different stages of production is sufficient. Balancing equipment required at a
later stage and the consequent increase in capacity should be assessed.
(m) Quality Control/Testing and Inspection : Whether some system has been designed to
check the quality of products on a continuous basis? Obtaining quality marks like ISI, Agmark
help in creating confidence among consumers if there is a probability of getting them for the
products, the fact should be included in the project report.

(n) Research and Development : Besides the quality control, wether any cell to study
improvement of quality is proposed to be formed in the enterprise?

3. Market Potential :

The following aspects relating to market potential should normally be covered in the project
report:

(a) Demand and Supply Position : State the data regarding total expected demand of the
product and present supply position. How-much of this gap will be filled up by the proposed
unit?

(b) Price Expected to be Realised : An estimate of the price expected should be furnished to
assess the margin of profit. A comparative statement of competitor’s selling price would be
helpful.

(c) Marketing Strategy : What strategy for selling the products is proposed to be followed?
Whether any arrangements have been made with reputed suppliers and distributors for lifting the
production? Sometimes, particularly in electrical goods, owners of reputed brands may enter into
contract to lift the entire production and sell it later after putting their trade mark on it.

(d) After-Sales Service : In some items it is very vital. Even due to a loose screw or snapping of
a wire, the customer may find the instrument either not working or working improperly and
without after-sales service. Due to this, the product gets a bad name. Normally it has been found
that money spent on after -sales service by a manufacturer is repaid many times over the long
run.

(e) Seasonality Factor : Whether the product has seasonal fluctuations in sales? If so, the
arrangements made for warehousing or stocking of the goods in off-season should be stated.

(f) Transportation : Whether the unit will depend for the transportation of goods on public
carrier or will it like to own its own transport? If own transport is needed, state the probable cost
and the amount of assistance required.

4. Capital Costs and Sources of Finance :

An estimate of the various components of capital items required by the unit should be given in
the report These components may be the following:

- Land and building

- Plant and machinery
- installation costs
- Other miscellaneous assets like furniture/fixtures, vehicles, tools, dies, jigs, fixtures, patterns,
types etc.
- Preliminary and preoperative expenses.
- Contingency cushion against price rise/unforseen expenses:
- Margin for working capital.
Besides the cost factors, the report should includes probable sources of finance. These sources of
funds should equal the cost of a project as otherwise the project cannot be set-up in full. The
resources would include the owner’s funds together with loans and deposits raised as well as the
limits expected from financial institutions/banks.

The estimation of funds for the cost factors involved should be realistic and correct. Many units
run into serious financial problems because of inadequate estimate of funds requirement.

5. Assessment of Working Capital, Requirements :

Planning for working capital requirements is equally crucial for an entrepreneur. While
estimating the capital costs, margin for working capital has taken into account. Any unit will be
able to function only when adequate working capital requirements have been made and shown
along with the total cost of the project.

Sometime back formats for working capital assessment has been designed for limits up to Rs.
50,000, for limits between Rs. 50,000 and Rs. 2 lakhs and above Rs. 2 lakhs. As such if the
entrepreneurs present their estimates in those prescribed formats, it will save time and energy
for-them as well as for the baker.

It has been generally noticed that the entrepreneurs present the working capital requirements in
their own way which is ultimately recasted by the banker. This wastes time and creates
problems. Hence, if they project their requirements in the prescribed way, it will minimise
objections from the banker’s side.

6. Other Financial Aspects:

One of the objectives of setting-up a project is to earn a livelihood. Besides the project set-up
must be able to retrieve the investments made within its life cycle. This would be possible only if
the products taken up for production are adequately profitable. This would require preparation of
a projected Profit & Loss Account which would indicate likely sales revenue, cost of production,
allied cost and profit. These estimates especially the likely sales revenue, should be made on a
realistic basis.

A projected Balance Sheet and Cash Flow Statement would be have to prepared to indicate
financial position and requirements at various stages of the project. After all the smooth
functioning of the unit necessitates availability of adequate funds for various commitments.
Next the Break-Even Analysis must be presented. Break-even point is the level of
production/sales where the industrial enterprise shall make no profit no loses it will just break-
even. This facilitates knowing the gestation period and the likely moratorium required for
repayment of loans.

Break-even point (BEP) Where,

F = Fixed Costs

S = Sales Projected

V = Variable Costs

The break-even point thus calculated will show at what percentage of projected sales the unit
will break-even.

It is also a good idea of calculate and indicate the following ratios

1. Profitability Ratio = (Net Profits / Sales) x 100

2. Return on Investment = ( Net Profits / Capital Employed ) x 100

3. Debt Equity Ratio = Debt / Equity

4. Debt Service = (Net Profit after tax + Depreciation Coverage ratio + Interest for one
year ) / ( Instalments + interest (for one year))

7. Economic and Social Variables : What will be the abatment costs i.e., costs for controlling
the environmental damage (e.g., pollution)? The abatment cost will constitute the value of the
additional engineering and technology needed for treating the effluents -and emissions.

Whether the project will have some socioeconomic benefits, of which the following are a few
examples:

(a) Employment Generating : The number of persons proposed to be employed vis-a-vis

employment situation of that area may be mentioned.

(b) Import Substitution : The manner in which it is planned to be achieved and the amount of
benefit expected may be mentioned.

(c) Ancillarisation : Whether the unit will need sub-contracting functions of such type that
ancillary industrial units may be promoted to meet them?

(d) Exports : Quite likely the products proposed for manufacture may be exported in full or in
part.
6.8 Specimen of A Project Report

Look at the following illustrative project report of a manufacturing unit, it will help you
understand how to prepare a project report.

A.. PRODUCT DESCRIPTION

B. PRODUCTION AND GENERAL EVALUATION OF PROSPECTS;

C. MARKET ASPECTS

1. Users:

2. Sales Channels & Methods

3. Geographical Extent to Market.

4. Competitive Situation:

(a) Domestic Market

(b) Export Market

5. Market needed for plant described

D. PRODUCTION REQUIREMENT:

1. Annual Capacity (One/Two/Three-Shift Operation)

2. Capital Requirements

Land & Buildings on rent (Mention value, if owned)

Equipment, furniture and fittings

Working capital

3. Total capital which the entrepreneur would needed for the whole project provided he uses agencies planned by the
Government for financial accommodation.

(i) Own

(ii) Own Borrowings

4. Expected net profit per annum

E. CAPITAL REQUIREMENTS

1. Fixed assets & working capital

(a) Land (.........sq. meters) and Rs.

Building (...........sq. meters), on rent

at Rs. ......................... per annum

(b) Equipments:
(i) Production Equipment (List down in an appendix, giving values, etc., of each machine separately)

(ii) Other Tools & Equipment

(iii) Furniture and Fittings

(c) Working Capital

[This would be calculated keeping in view the periods in which capital on an average in various forms, i.e.
manufactured goods, semimanufactured goods, raw material etc., would remain locked up. Often you may calculate
it at 3 months requirement level; unless the situation (line of industry) warrants otherwise.]

. Total .

II. Raw Material & Allied Supplies (Annual)

Description Qty. Rate Annual Requirements

1. Power, Fuel & water

2. Maintenance & Allied Supplies

3. Other Supplies

. Total .

III. Manpower (Annual)

No. Rate (Rs.) Actual Description per month Cost (Rs.)

Manager

Foreman

Supervisors

Skilled Workers

Semi-Skilled Workers Unskilled Workers Office Staff Others

. Total .

IV. Other Costs (Annual)

(a) Depreciation on equipment, furniture & fittings......annum

(b) Interest on capital (fixed and working.....per annum on average)

(c) Administrative Costs

(d) Sales cost (including sales commission, advertisement, etc.)

(e) Provision for discount, bad debts and miscellaneous contingencies

(f) Training costs.

F. TOTAL ANNUAL COSTS, SALES REVENUE AND NET PROFITS

(a) Annual Costs

(i) Rent for Land & Buildings

(ii) Raw Materials & Allied Supplies

(iii) Manpower

(iv) Other Costs

(b) Annual Sales Revenue

(c) Expected Annual Net Profit (b-a)

(d) % Profit on Own Capital

(e) % Profit on Total Annual Sales Turnover

6.9 Project Appraisal

Project appraisal means the assessment of a project. It is critical and analytical evaluation of the
project from different angles. While appraising a project, technical, commercial, economic,
ecological, social and managerial aspects are taken into consideration. Project appraisal is
usually done by a financial, institution which besides making an anlaysis of costs and benefits of
a proposed project assesses the project from the various aspects of an investment proposition
before extending finance. Project appraisal is, therefore, a process whereby a leading financial
institution makes an independent and objective assessment of the various aspects of an
investment proposition for arriving at a financial decision and is aimed at determining the
viability of a project and sometimes, also in modifying its scone and content so as to improve its
viability.

A project involves employment of scarce resources. Hence, the entrepreneur has to appraise
various projects before allocating the scarce resources for a project. First a project has to be
appraised from economic aspects. The economic aspects of appraisal include production of
goods or services, generation of additional revenue, employment of labour, better rewards for the
owners of capital, etc. A good organisation is required for the implementation of the project.

An entrepreneur usually has three types of organisation to fall upon: sole trade proprietorship,
partnership and joint stock companies. The type of organisation suitable for the project has to be
setup. The financial institutions have to take special care with regard to the managerial aspects of
the project. The management should be competent and efficient, otherwise a good project may
fail. Technical appraisal includes the location and site of the project the technology used,
technical collaboration if any, capacity utilization, plant layout, project design etc.

The financial appraisal should ensure that the projects has a sound financial base. Analysis of
cost, pricing, availability band utilization of funds, income and expenditure and fair return on
investments are the areas to be covered under financial appraisal. Commercial/marketing aspects
of appraisal are concerned with potential demand for the product/service, quality of
product/service, price, design, marketing channels etc. Ecological and social aspects of a project
have assumed much importance today. The project should be eco- friendly and should aim at
society’s well-being.

In short, a financial institution requires a detailed evaluation of the feasibility from the point of
view of

1. Managerial Competence.

2. Technical Feasibility

3. Market Analysis.

4. Economic Viability

5. Financial Viability.

1. Managerial Competence: Successful entrepreneurs are found to be possessing managerial

and entrepreneurial traits. Funding agencies would therefore, like to find out whether the
individual interested in setting up the venture possesses needed managerial traits.

A project report should contain information such as family background, educational

qualifications, past experience of service, business or industry, interest in other firms and
innovative ideas of promoters so as to enable financial institutions to assess managerial
capabilities of the individual. It is not necessary that entrepreneur should possess all managerial
traits and perform all the functions himself. He should either be in a position to perform all such
functions himself or should be competent and resourceful enough to hire and use the required
managerial resources. Project report, should therefore, mention about the managerial structure of
the enterprise.

It is very difficult indeed to evaluate managerial and entrepreneurial capabilities of an individual.

Even if the promoter himself wants to evaluate his capabilities the evaluation may not be very
correct. It is likely to happen because of the fact that the sense of self-esteem is prevalent in
every individual and it inhibits proper self-assessment.

2. Technical Feasibility : The technical feasibility of the proposal/project contains the resource
and technically analysis of the feasibility study. It deals, with the production cost of the item. If
the production cost of the item is low, the item can be sold at a competitive price in relation to a
similar quality product. For example, hand operated fan at cheaper cost will be economically
feasible but technically unsound. The use of solar energy may be technically viable but it is not
economically feasible yet because the experiment on this line has not been finalised.

Technical appraisal deals with the following components:

(a) Location of the unit.

(b) Size of the plant.

(c) Process of Manufacture.

(d) Factory layout

(e) Personnel.

(f) Availability and cost of raw material.

(g) Power and water, facilities.

(h) Technological viability in the application of the finished product.

3. Market Analysis : The success of project depends on how it is able to sell the product/service
in the market. This is because marketing is the only activity which produces revenue while all
other activities incur expenditure. Therefore, the product/service should be marketable. The
supply and demand for the product/service have to be estimated and see whether there is any
market opportunity. A detailed market analysis should be conducted covering market opportunity
and strategy for converting the opportunity into a reality. It is, therefore, suggested that the report
should contain the following information:

- The size and composition of the present demand.

- Market segment (s) identified for the proposed venture (The market segmentation may
be done on the basis of income, age and sex of consumers, geography of the area, etc.)

- Short and long- term demand projection of the overall market and of the segment(s)
identified for the proposed project.

- The market penetration that the proposed unit is expected to achieve over the, projected
period. This may be planned in view of the increasing national and international
competition and changing need of the consumers.

- Broad pricing structure on the basis of which future demand has been made and market
penetration ratio has been calculated.

- The strategy of marketing in the target markets.

4. Economic Viability: Economic viability is an important criteria for evaluating a project.

Whatever may be the motivation in starting a project from the point of view of the promoters, it
shall be necessary that the operations quantified on a year to year basis should generate sufficient
profits. A project without adequate profits or which is likely to incur losses, could not be
classified as commercially viable.
Evaluation of economic viability can be carried out through projection of profitability worked
out for a period ranging from three to ten years. In case of financial applications, such
projections should be carried out for a period covering the term of the loan to be negotiated with
banks and financial institutions. In any case, the profitability of a project should be established
on a long-term basis, keeping in view a spread of five years after a reasonable level of capacity
utilization is achieved.

A Projected Profitability Statement has to be prepared by taking into account-capacity utilization

and all costs, it shall be necessary to proceed further and calculate certain ratios to evaluate the
economic viability of the project. Some of the ratios are debt service coverage ratio, pay back
period, average rate of return, net present value, break-even sales and internal rate of return. The
format of the. Profitability Statement is given below:

5. Financial Viability: The appraisal of the financial aspects involves scrutiny of:

(a) Cost of the project and means of financing.

(b) Cash flow estimates.

(c) Project balance sheets.

(a) Cost of the Project and Means of Financing :

The financial plan for meeting the cost of the project depends on how accurately the cost is
estimated. The estimate will have to provide for:

(i) Land and site development

(ii) Plant and machinery.
(iii) Buildings.
(iv)Technical –know how fees.
(v) Miscellaneous fixed assets.
(vi) Preliminary expenses.
(vii) Pre-operative expenses.
(viii) Provision for contingencies.
(ix) Margin money for working capital.

Cost of the project having been accurately estimated, sources of finance should be identified.
This is in the form of own funds and borrowed funds. Borrowed funds also referred to-as debt
consists of term loans, deferred payment guarantees, public deposits, debentures etc. The debt-
equity proportion of 2:1 should be generally adhered to.

(b) Cash Flow Estimates : A cash flow statement is a projection of future sources of cash and
their application. In the cash flow statement, profit is the most important source of inflow and
profit depends on how accurately the cost of production and sales estimated have been arrived at.
Profit that is considered as an inflow could increase or decrease-depending on management
policies followed in the borrowing units. This is referred to as personal judgment concept.

For example, if there is a change in the method of inventory valuation, the profit would rise or
fall. This does not indicate a corresponding increase or decrease in cash flows.

Debt Service Coverage Ratio (DSCR) : The DSCR establishes the relationship between net
profits and the repayment of term loan and interest thereon. It is calculated as:

(Net Profit after Tax + Interest on term Loan + Depreciation) / ( Term Loan Instalment +
Interest on Term Loan)

A ratio of 2:1 is considered satisfactory, indicating that even if only, 50% of the net profits are
earned, still repayment of installments of term loan and interest would not pose a problem.

(c) Projected Balance Sheets : Projected balance sheets are to be prepared for. each of the years
covering the entire period of the term loan. The projected balance sheets report the effect of the
plan of operations on the assets, liabilities and capital of the business unit. In analysing the
projected balance sheets, attention is to be focussed on the movement of funds and also analysis
its impact of the term loan granted by the financial institution on the assets and liabilities of the
business unit.

A project should comply with all the above broad feasibility/viability criteria. However a project
report need for necessarily cover all the above aspects. The depth and coverage of the above
feasibility aspects could be planned in accordance with the purpose of preparation of the report
and the size of investment in the project. Normally, discounted cash flow and calculation of
economic rate of return are avoided in case of small scale projects. The detailed market survey is
required only when the products to be manufactured have fierce competition. Therefore, prior to
preparation of project report one need to consider the purpose of project report and the cost of its
preparation. In case of a tiny project an expenditure of even two thousand rupees on preparation
of project report may look quite high. For such projects one should attempt to prepare a project
report covering, entrepreneurial capabilities, demand for the product( s), and managerial,
technical and financial viability. It may not cost too much to the entrepreneur and at the same
time it will serve the desired purpose. In case of bigger projects the project report should contain
all those details which have been discussed in this lesson.

A project report is not a document covering precise details especially in respect of financial and
economic viability. It is essentially a projection of performances based on certain assumptions.
Most of the long-term projections have some weaknesses and suffer from limitations. Similarly,
project report may have certain limitations and should be used carefully.
6.10 Common Errors in Project Formulation

Project formulation is as important as not so easy. However, the entrepreneurs often make errors
while formulating project reports or business plans.

The errors widely noticed in project formulation are:

1. Product Selection: It is noticed that some entrepreneurs commit mistakes by selecting a

wrong product for their enterprises. They select the product without giving due attention to
product for their enterprises. They select the product without giving due attention to product
related other aspects such as size of the product markets, its future demand, competitive position,
lifecycle, availability of required labour, raw material and technology. Hence, when you are
selecting a product, take a comprehensive View.

2. Capacity Utilisation Estimates : The entrepreneurs usually make overoptimisitc estimates of

capacity utilization. Their estimates are based on a completely false premises. The estimates are
made in complete disregard of present-enterprise performance, prevailing market conditions,
competitive atmosphere, the technical snags, etc. A business plan formulated as such falls prey to
financial jugglery. Hence, avoid such temptations while estimating capacity utilization for your
enterprise.

3. Market Study: Product production is ultimately meant for eventually sale. Hence, market
study of the product assumes importance. Market study continues to be a grey area. But, there
are some entrepreneurs who pass by this component of their business plan completely. Based on
their nebulous ideas and scanty and scattered information on demand and supply of their
proposed product, they conclude that market is just there waiting to be tapped. This is a wrong
attitudinal block. Avoid it.

4. Technology Selection: The requirement for technology differs from product to product
depending upon the nature of products. Swayed by the reported profit margins, the entrepreneurs
sometimes plan for a technology not possible to set up within limited financial resources. Thus,
in the absence of technological feasibility, enterprise is foredoomed to failure. Hence, make sure
your technological feasibility.

5. Location Selection: The entrepreneur often makes two types, of errors while selecting
location for their enterprises. First, they are completely swayed by the Government offer of
financial incentives and concessions to establish industries in a particular location. This becomes
their sole and overriding concern completely disregarding other factors like market proximity,
availability of raw materials, manpower and infrastrutural facilities. Second, the entrepreneurs
select a location for their enterprises merely because it is their home town or they own ancestral
land there which is, however, to an appropriate location. Make sure you do not fall prey to such
temptations.
6. Selection of Ownership Form: Many enterprises fail merely because the ownership form of
enterprises is not suitable. Hence, select a suitable form of ownership taking a comprehensive
view of the factors affecting the selection of a form.

The project report/business plan is a blue-print of all those activities that an entrepreneur
proposes to engage in. It is not only a guide frost for business’ activities, but also an essential
exercise for developing cost and benefit estimates resources planning and feasibility testing of
the proposed business activity. The project report is required for purposes of obtaining funds
from the financial institutions and banks. The project report for an entrepreneur is what a guide
map is for a traveller. In order to complete the project within a stipulated period and cost, all
activities involved in the project are scheduled in a sequential relationship called network or
scheduling of activities. The common errors made by the entrepreneurs while formulating project
reports/ business plans are also highlighted.