Year: 2020

Location of an industry is an important management decision. It is a two-step decision: first, choice of general area or region and second, the choice of site within the area selected. Location decision is based on the organisations long-term strategies such as technological, mar­keting, resource availability and financial strategies.

The objective of plant location decision-making is to minimise the sum of all costs affected by location.

Plant location is important because of the following:

(i) Location influences plant layout facilities needed.

(ii) Location influences capital investment and operating costs.

Location decisions are strategic, long-term and non-repetitive in nature. Without sound and careful location planning in the beginning itself, the new facilities may create continuous operating problems in future. Location decision also affects the efficiency, effectiveness, produc­tivity and profitability.

The location decision should be taken very carefully, as any mistake may cause poor location, which could be a constant source of higher cost, higher investment, difficult marketing and transportation, dissatisfied and frustrated employees and consumers, frequent interruptions of production, abnormal wastages, delays and substandard quality etc.

Therefore, it should be based upon a careful consideration of all factors that are essentially needed in efficient running of a particular industry. The necessary factors in the selection of plant location vary among industries and with changing technical and economical conditions.

Site selection is not an easy problem because if the selection is not proper then all money spent on factory building, machinery and their installation etc., will go as waste and the owner has to suffer a great loss. Therefore, while selecting a site, owner must consider technical, commercial, financial aspects which may provide maximum advantages.

It is sometimes pos­sible that all the requirements and features of ideal site may not be available at one particular location but then it will be advantageous to find out suitable site with combinations of all essential requirements of the particular industry to be established as explained in following paras.

Market Location:

To solve such problems a market analysis of the area is conducted and answers of the following questions can be found out:

1. If there is a market which could be served and if retail price of product can be re­duced?
2. Whether quick delivery of the product can be made by better plant location to the particular market?
3. Whether there is a competitor for the product in the market? Whether demand for product may increase? Whether an additional plant is required to meet the future demand?
4. What is the potential purchasing power of the market?
5. What are the buying habits of local people, and what must be done to fit your service to these habits?

Economical Aspects:

Locational economics for an enterprise includes a consideration of the product to be manu­factured, the processes and machinery to be used, and the service and facilities required.

To know this the following factors may be studied:

1. Product:

(a) Nature,

(b) Volume, and

(c) Value.

2. Production process:

(a) Continuous,

(b) Intermittent, and

(c) Interrupted.

1. Manufacturing machinery.
2. Other manufacturing equipment’s.
3. Special manufacturing requirement.
4. Service:

(a) Steam,

(b) Gas,

(c) Water,

(d) Air or high pressure,

(e) Electricity, and

(f) Sewerage.

1. Facilities

The design of production facilities is the most important determinant of effective capacity. Design includes the size and also the provision for expansion of the facilities. Design facilities should be such that the employees should feel comfortable at their work place. Location factors such as distance from the market, supply of labour, transport costs, energy sources are also important. Layout of the work area determines how smoothly the work can be performed. Environmental factors such as lighting, ventilation, etc., influence the effectiveness with which employees can perform the assigned work.

2. Products or Services

Design of the company’s products or services exerts a significant influence on capacity utilization. When more uniform is the output, greater can be the standardization of materials and methods and greater can be the utilization of capacity. For instance, a restaurant that offers a limited menu, can prepare and serve meals at a faster rate. Product mix should also be considered because different products have different rates of output.

3. Process

Quantity capacity of a process is the obvious determinant of effective capacity. But if quantity of output does not meet the quality standards, the rate of output is reduced due to the need for inspection and rework activities.

4. Human factors

Job design (tasks that comprise a job), nature of the job (variety of activities involved), training and experience required to perform the job, employee motivation, manager’s leadership style, rate of absenteeism and labour turnover are the main human factors influencing the rate of output.

5. Operational Factors

Materials management, scheduling, quality assurance, maintenance policies and equipment breakdowns are important determinants of effective capacity. Late delivery and low acceptability of materials will reduce effective capacity. Inventory problems are a major hurdle in a capacity utilization. Similarly, when the alternative equipment have different capabilities there may be scheduling problems.

6. External Factors

Product standards (minimum quality and performance standards), pollution control regulations, safety requirements and trade union attributes exercise tremendous influence on effective capacity. Generally, the external factors act as constraints in capacity utilization.

You won’t find any projects that have features in common. Plans are different even if they have the same tasks, dates, and deliverables. But there is one common thing. It is typical of all projects regardless of their complexity, number of members and industry. The point at issue is about timelines.

A timeline is a chronological order of events. In most cases, it is a line with dates, events or actions.

It is very important for project managers to develop skills to build an accurate timeline. It shows what phases are already in the past, what is in the progress now and what is supposed to be finished in future. It means it helps to be on projects’ tracks.

Timeline elements

Of course, it depends on a project. But there are typical elements that timelines should include in any case.

The key elements of a timeline:

• Tasks that are to be accomplished in a project.
• Dates of tasks.
• Duration of tasks.
• Dependencies between tasks.

Who will find timelines useful?

As we discovered, every project should be based on a timeline. So, if you want to succeed with your project regardless of its purpose and deliverables, it should include an accurate timeline. All tasks there will have start and end dates, milestones and project deliverables.

But project management is not the only sphere that benefits from timelines. They also help display historical events and depict biographies.

Types of timelines

There are different types of timelines. They may vary in lines (vertical or horizontal), states (interactive or static) and in other forms. To choose the one that will perfectly meet your needs, of course, you need to define what type of data you have and the best way to visualize it.

Let’s say a few words about them.

What is a Gantt chart timeline?

A Gantt chart timeline is the most popular and widespread type of timelines that is used for many years. That is why many project management tools have Gantt chart view where it is so easy to get a clear project picture.

Here there is a horizontal line that shows time periods. All events, actions, and tasks are labelled along this line. Thus, it is very easy to understand past, current and future assignments and actions.

Moreover, if tasks are dependent on each other, there will be no problems with visualization, either. As you see, all key elements are covered by a Gantt chart timeline making it a perfect timeline for any project.

Chronology chart timeline

This is a chart where events are depicted in chronological order from left to right. So, it shows succession of actions and events.

It is a perfect timeline for events that serves as a historical timeline maker.

Chart timeline with vertical bars

Usually this type reflects the time and some amount (for example, money) used over the time period. Thus, if a project is based on the financial gain or money raised, this timeline will show how much is gained or raised over a certain period.

It is a perfect timeline for finance teams.

Interactive and static timelines

Any timeline that is drawn or printed is a static one. It can’t be changed and it includes already formed pieces of information.

Timelines made with the help of timeline maker software are digital, therefore, interactive. It allows adding and editing data in them at any time.

Wrapping it up

Projects are different. But a timeline is a common feature for all of them. An efficient timeline should include tasks, their dates, durations, and dependencies.

If your goal is to accomplish your project with the help of a simply visualized way, then choose timeline maker software. It can be a vertical bar chart or chronological order for events depicting. But Gantt charts proved to be one of the most efficient ways to manage projects with timelines.

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. Unlike fundamental analysts, who attempt to evaluate a security’s intrinsic value, technical analysts focus on patterns of price movements, trading signals and various other analytical charting tools to evaluate a security’s strength or weakness.

Technical analysis can be used on any security with historical trading data. This includes stocks, futures, commodities, fixed-income, currencies, and other securities. In this tutorial, we’ll usually analyze stocks in our examples, but keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is far more prevalent in commodities and forex markets where traders focus on short-term price movements.

The Basics of Technical Analysis

Technical analysis as we know it today was first introduced by Charles Dow and the Dow Theory in the late 1800s. Several noteworthy researchers including William P. Hamilton, Robert Rhea, Edson Gould and John Magee further contributed to Dow Theory concepts helping to form its basis. In modern day, technical analysis has evolved to included hundreds of patterns and signals developed through years of research.

Technical analysts believe past trading activity and price changes of a security can be valuable indicators of the security’s future price movements. They may use technical analysis independent of other research efforts or in combination with some concepts of intrinsic value considerations but most often their convictions are based solely on the statistical charts of a security. The Market Technicians Association (MTA) is one of the most popular groups supporting technical analysts in their investments with the Chartered Market Technicians (CMT) designation a popular certification for many advanced technical analysts.

The Underlying Assumptions of Technical Analysis

There are two primary methods used to analyze securities and make investment decisions: fundamental analysis and technical analysis. Fundamental analysis involves analyzing a company’s financial statements to determine the fair value of the business, while technical analysis assumes that a security’s price already reflects all publicly-available information and instead focuses on the statistical analysis of price movements. Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security’s fundamental attributes.

Manufacturing process / Technology

In the simplest sense, production technology is the machinery that makes creating a tangible physical product possible for a business. To the small business, this means a workshop at the very least, with more elaborate operations making use of machines and assembly lines. Choosing a production scale model within a company’s capital means is important; simpler workshops tend to lead to lower production volume but cost less to assemble, while higher output operations require more complex and costly machines, which are sometimes cost prohibitive.

Components of Production Technology

1. The Modern Artisan Workshop

The artisan workshop represents the basic minimum effective level of modern production technology. An artisan workshop builds upon the traditional workshops of craftsmen from before the industrial revolution and replaces most of the simple hand tools used with time-saving electrically driven tools. These tools offer the skilled tradesperson the advantage he needs in order to more quickly produce goods to the same level of quality he would otherwise make with hand tools. The tablesaw, drill press and belt sander are all examples of modern variations on simple hand tools used to save the modern craftsman time. Artisan workshops focus on low or medium output of higher than average quality goods to maintain a competitive advantage over large-scale factory-produced items of similar type.

2. CNC Machining and Extending the Artisan Workshop

A computer number-controlled or CNC machine also referred to as computer-aided manufacturing – further extends the capability of an artisan workshop, allowing the skilled craftsman to program the device to perform highly detailed repetitive tasks such as router and drill operation. CNC machines are expensive investments; however, when used to address the more time-consuming steps of producing an item in the standard artisan workshop, they can significantly improve the overall profitability of that manufacturing business. Because of their high initial cost when compared to manually operated shop tools, CNC machines are generally unavailable to all but the most successful small business. Investing in a CNC machine is a pivotal decision for a small business and should be done with careful consideration of how much the machine will actually boost profits when compared to continuing with the manual method.

3. Automated Assembly Line-Style Mass Production

Automated assembly-line mass production represents the apex of modern industrial production, and is the driving force behind industrial titans such as automobile manufacturers and the makers of household appliances. The higher the degree of mechanization and use of robotics in the assembly line process, the fewer human workers are required to produce a product; however, in replacing human laborers with robots, the initial investment cost rises dramatically. The extremely high initial cost of automated assembly line mass production places such production methods far beyond the grasp of small business owners as far as practicality is concerned. Maintaining advanced automated assembly lines also requires the professional services of highly skilled robotics technicians, again making practical implementation difficult for the small business owner.

4. Practicality Considerations for Small Business

When it comes to investing in production technology, a small business’s focus should be on generating the best dollar return on capital investment within the confines of the company’s reasonable budget. The IRS states that small businesses are a success when they generate profit at least three out of every five years. This general rule means that for the small business person, if it takes more than two years to pay off the initial capital investment in production technology, the businesses likely exceeded its ideal maximum production technology budget. This doesn’t mean that smaller to medium businesses have to abandon advanced production methods entirely; instead, they can adapt some practices from larger-scale industry that suit their own needs and capabilities. For example, small and medium businesses looking to capitalize upon the mass production method of industrial manufacturing can take a page out of Henry Ford’s book and use a simple conveyor belt line along with labor division to simplify and speed up the production process while still using artisan shop-style manually operated tools.

Types of Manufacturing Process

The four main types of manufacturing are casting and molding, machining, joining, and shearing and forming.

1. Molding in Manufacturing

If the products you’re creating start out as liquid, chances are the manufacturer uses molding. One popular type of molding is casting, which involves heating plastic until it becomes liquid, then pouring it into a mold. Once the plastic cools, the mold is removed, giving you the desired shape. You can also use casting to make plastic sheeting, which has a wide variety of applications. There are four other types of molding: injection molding, which melts plastic to create 3-D materials such as butter tubs and toys; blow molding, used to make piping and milk bottles; compression molding, used for large-scale products like car tires; and rotational molding, used for furniture and shipping drums.

2. Machining in Manufacturing

It would be difficult to make products like metal parts without the use of some type of machine. Manufacturers use tools like saws, sheers and rotating wheels to achieve the desired result. There are also tools that use heat to shape items. Laser machines can cut a piece of metal using a high-energy light beam, and plasma torches can turn gas into plasma using electricity. Erosion machines apply a similar principle using water or electricity, and computer numerical control machines introduce computer programming into the manufacturing mix.

3. Joining in Manufacturing

You can only get so far with molds and machines. At some point you need to be able to put multiple parts together to make one piece. Otherwise, just about all you can create is IKEA-like furniture that needs to be assembled, part by part. Joining uses processes like welding and soldering to apply heat to combine materials. Pieces can also be joined using adhesive bonding or fasteners.

4. Shearing and Forming in Manufacturing

When dealing with sheet metal, shearing comes into play. Shearing uses cutting blades to make straight cuts into a piece of metal. Also known as die cutting, you’ll often see shearing used on aluminum, brass, bronze and stainless steel. Another metal-shaping process is forming, which uses compression or another type of stress to move materials into a desired shape. Although forming is often used with metal, it also can be used on other materials, including plastic.

The project cost is a cost required to procure all the needed products, services and resources to deliver the project successfully.

Example: In an example of a construction project, the cost estimation starts from land acquisition cost, construction cost, materials cost, administration cost, labor cost and other direct and indirect costs.

Cost management is concerned with the process of finding the right project and carrying out the project the right way. It includes activities such as planning, estimating, budgeting, financing, funding, managing, controlling, and benchmarking costs so that the project can be completed within time and the approved budget and the project performance could be improved in time.

Step 1: Resource planning

Resource planning is the process of ascertaining future resource requirements for an organization or a scope of work. This involves the evaluation and planning of the use of the physical, human, financial, and informational resources required to complete work activities and their tasks. Most activities involve using people to perform work. Some activities involve materials and consumables. Other tasks involve creating an asset using mainly information inputs (e.g., engineering or software design). Usually, people use tools such as equipment to help them. In some cases, automated tools may perform the work with little or no human effort.

Resource planning begins in the scope and execution plan development process during which the work breakdown structure, organizational breakdown structure (OBS), work packages, and execution strategy are developed. The OBS establishes categories of labor resources or responsibilities; this categorization facilitates resource planning because all resources are someone’s responsibility as reflected in the OBS.

Resource estimating (usually a part of cost estimating) determines the activity’s resource quantities needed (hours, tools, materials, etc.) while schedule planning and development determines the work activities be performed. Resource planning then takes the estimated resource quantities, evaluates resource availability and limitations considering project circumstances, and then optimizes how the available resources (which are often limited) will be used in the activities over time. The optimization is performed in an iterative manner using the duration estimating and resource allocation steps of the schedule planning and development process.

Step 2: Cost estimating

Cost estimating is the predictive process used to quantify, cost, and price the resources required by the scope of an investment option, activity, or project. It involves the application of techniques that convert quantified technical and programmatic information about an asset or project into finance and resource information. The outputs of estimating are used primarily as inputs for business planning, cost analysis, and decisions or for project cost and schedule control processes.

The cost estimating process is generally applied during each phase of the asset or project life cycle as the asset or project scope is defined, modified, and refined. As the level of scope definition increases, the estimating methods used become more definitive and produce estimates with increasingly narrow probabilistic cost distributions.

Cost estimating could be performed by dedicated software systems like Cleopatra Enterprise cost estimating and project cost databases like CESK that are created and maintained to support the various types of estimates that need to be prepared during the life cycle of the asset or project.

Step 3: Cost budgeting

Budgeting is a sub-process within estimating used for allocating the estimated cost of resources into cost accounts against which cost performance will be measured and assessed. This forms the baseline for cost control. Cost accounts used from the chart of accounts must also support the cost accounting process. Budgets are often time-phased in accordance with the schedule or to address budget and cash flow constraints.

Step 4: Cost control

Cost control is concerned with measuring variances from the cost baseline and taking effective corrective action to achieve minimum costs. Procedures are applied to monitor expenditures and performance against the progress of a project. All changes to the cost baseline need to be recorded and the expected final total costs are continuously forecasted. When actual cost information becomes available an important part of cost control is to explain what is causing the variance from the cost baseline. Based on this analysis corrective action might be required to avoid cost overruns.

Below figure is a process map for project performance measurement. This process should be run in a continuous improvement cycle until project completion:

The process for performance assessment starts with planning and having the right tools in place. Dedicated cost control software tools can be valuable to define cost control procedures, track and approve changes and apply analysis. Furthermore, reporting can be enhanced and simplified which makes it easier to inform all stakeholders involved in the project. 

Cleopatra Cost Control helps you achieve

• Project cost control and always tracing back cost components to its original budget.
• Scope change management. Estimate costs and add it to your project controls document.
• Project completed? The feedback process will be in place. Send the actuals to your cost models to increase their accuracy and quality for future estimating. Where most tools are limited to either being cost estimating software or a cost control tool, Cleopatra Enterprise is both.

Bonus Step: Benchmarking

As a bonus step, it is wise to add Benchmarking to the project cost management process.

Benchmarking helps close the loop between project A and project B. The knowledge from project A (referring to the running and executed projects) are analyzed and the feedback is reflected in project B (the next projects). That’s how an improvement cycle is created to increase project performance. Benchmarking is widely used by technical industries to improve the performance of the projects. Software systems such as Cleopatra project benchmarking aid estimators and project controllers in answering the complex question: How to use project big data to execute projects within time and budget?

The goal of project benchmarking is to store data from executed and running projects to extract valuable project metrics and to benchmark current estimates. Performing statistical analysis on historical data can result in valuable information on relationships between variables, which can be used to set up a reliable cost knowledgebase or calibrate existing ones.

It is important to note that project benchmarking does not only include the comparison between projects, as it is also interesting to compare revisions within a project.

 What you can achieve with Cleopatra Benchmarking

• Collect historical project data that can provide valuable analysis and project comparison to make critical business decisions.
• Benchmark your estimates against your previous projects and improve your cost estimate significantly.
• Extract metrics across projects to enhance future cost estimating accuracy.
• Develop meaningful and interactive reports.
• Export & Import data easily from Excel.

Types of Cost

1. Direct Cost

A direct cost is a price that can be directly tied to the production of specific goods or services. A direct cost can be traced to the cost object, which can be a service, product, or department. Direct and indirect costs are the two major types of expenses or costs that companies can incur. Direct costs are often variable costs, meaning they fluctuate with production levels such as inventory. However, some costs, such as indirect costs are more difficult to assign to a specific product. Examples of indirect costs include depreciation and administrative expenses.

Direct Costs Examples: Any cost that’s involved in producing a good, even if it’s only a portion of the cost that’s allocated to the production facility, are included as direct costs. Some examples of direct costs are listed below:

• Direct labor
• Direct materials
• Manufacturing supplies
• Wages for the production staff
• Fuel or power consumption

Because direct costs can be specifically traced to a product, direct costs do not need to be allocated to a product, department, or other cost objects. Direct costs usually benefit only one cost object. Items that are not direct costs are pooled and allocated based on cost drivers.

2. Indirect cost

Indirect Costs are costs that are not directly accountable to a cost object (such as a particular project, facility, function or product). Indirect costs may be either fixed or variable. Indirect costs include administration, personnel and security costs. These are those costs which are not directly related to production. Some indirect costs may be overhead. But some overhead costs can be directly attributed to a project and are direct costs.

There are two types of indirect costs. One are the fixed indirect costs which contains activities or costs that are fixed for a particular project or company like transportation of labor to the working site, building temporary roads, etc. The other are recurring indirect costs which contains activities that repeat for a particular company like maintenance of records or payment of salaries.

3. Recurring Cost

A Recurring Cost is a regularly occurring cost or estimated cost which is documented with one record a Recurring Cost record that describes the income or expense and its pattern (how often it occurs, the rate at which it increases or decreases, the time period during which the cost applies, and so forth). Recurring costs are stored in the Recurring Costs table

Recurring Costs provide a means of quickly modeling the major components of your finances. You first establish a series of recurring costs to represent such items as tax expenses, estimated maintenance costs, and monthly income from leases. Once you enter this information, you can use these costs to generate Cost, Cash Flow, and Base Rent reports.

Recurring Cost Examples

Use recurring costs to:

• Record fixed expenses and income, or costs that change at a fixed rate – For costs that are fairly static, enter one Recurring Cost record describing the cost, rather than create individual Scheduled Cost records for each time you encounter this cost. For example, enter one Recurring Cost record describing your monthly rent for a year rather than enter 12 Scheduled Cost records for each rent bill. For costs that change at a fixed rate, complete the Yearly Factor field of the Recurring Costs table.
• Record estimates of your expenses and income – Rather than enter the exact amount of each monthly utility bill as a Scheduled Cost, enter a monthly estimate with a Recurring Cost record by completing the Period field with “Month”, the Amount-Expense with an estimate of the monthly bill, and the Start Date field. Since utilities are ongoing costs do not complete the End Date field.
• Model seasonal costs – If you incur landscaping costs only between April and September, create a Recurring Cost record for landscaping with a Seasonal Start Date of April 01 and a Seasonal End Date of September 01 (the year value is ignored). The system will only consider this recurring cost during the specified time frame.

4. Non- Recurring Cost

Unusual charge, expense, or loss that is unlikely to occur again in the normal course of a business. Non recurring costs include write offs such as design, development, and investment costs, and fire or theft losses, lawsuit payments, losses on sale of assets, and moving expenses. Also called extraordinary cost.

5. Fixed Cost

A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any specific business activities. In general, companies can have two types of costs, fixed costs or variable costs, which together result in their total costs. Shutdown points tend to be applied to reduce fixed costs.

6. Variable Cost

A variable cost is a corporate expense that changes in proportion to production output. Variable costs increase or decrease depending on a company’s production volume; they rise as production increases and fall as production decreases. Examples of variable costs include the costs of raw materials and packaging.

• A variable cost is a corporate expense that changes in proportion with production output.
• Variable costs are dependent on production output.
• A variable cost can increase or decrease depending on several factors, as opposed to a fixed cost which is one-time or constant.

The total expenses incurred by any business consist of fixed costs and variable costs. Fixed costs are expenses that remain the same regardless of production output. Whether a firm makes sales or not, it must pay its fixed costs, as these costs are independent of output.

Examples of fixed costs are rent, employee salaries, insurance, and office supplies. A company must still pay its rent for the space it occupies to run its business operations irrespective of the volume of product manufactured and sold. Although fixed costs can change over a period of time, the change will not be related to production.

Variable costs, on the other hand, are dependent on production output. The variable cost of production is a constant amount per unit produced. As the volume of production and output increases, variable costs will also increase.

Conversely, when fewer products are produced, the variable costs associated with production will consequently decrease. Examples of variable costs are sales commissions, direct labor costs, cost of raw materials used in production, and utility costs. The total variable cost is simply the quantity of output multiplied by the variable cost per unit of output.

There is also a category of costs that falls in between, known as semi-variable costs (also known as semi-fixed costs or mixed costs). These are costs composed of a mixture of both fixed and variable components. Costs are fixed for a set level of production or consumption and become variable after this production level is exceeded. If no production occurs, a fixed cost is often still incurred.

7. Normal Cost

Normal costing is cost allocation method that assigns costs to products based on the materials, labor, and overhead used to produce them. In other words, it’s a way to find the price of an item that is being produced using three different cost factors (which make up the product cost).

The product costs that make up normal costing are actual materials, actual direct costs and manufacturing overhead. The materials and direct costs are the true costs that are associated with producing the item such as raw materials (the materials that make up the product) and labor.

8. Expedite Cost

“Expedite Fees” are fees added to another fee, often a fee for service, to ensure that the service provided will be expedited, meaning that it will be provided sooner than the same service would be provided without such a fee.

Project Financing and Budgeting

Developing the project budget is a process for allocating administered and departmental funds necessary to build a financial foundation for producing stated project deliverables. When we talk about the project budget and financial resources, we mean the solid framework that helps project managers to deal with the “on budget” part of the project implementation process. This framework involves cost planning and control.

For successful delivery of the project product, the project manager should effectively estimate costs, track expenditure over time and adequately react to situations when the financial resources are over-spent or under-spent, or there are opportunities for savings in the project budget.

A Project Budget is the total amount of authorized financial resources allocated for the particular purpose(s) of the sponsored project for a specific period of time. It is the primary financial document that constitutes the necessary funds for implementing the project and producing the deliverables. The project budget gives a detailed statement of all the direct and overhead costs required to carry out the project goals and objectives.

A project budget template should be designed and managed under supervision and control of the project manager. Also the customer and sponsor should be involved in allocating and managing financial resources. Project budget management is a set of activities for estimating the necessary amount of financial resources for the project, controlling project costs within the approved budget and delivering the expected project goals.

Steps of the Budgeting Process

As an independent process, project budget management includes a series of steps to define and produce a budget sheet. The key steps include:

• Development: estimating a necessary amount of financial resources and creating a project budget sheet.
• Use: utilizing the authorized financial resources and executing the budget.
• Measurement: viewing cost performance and controlling the budget.
• Updating: viewing changes to the cost baseline and making updates to the project budget sheet.

1: Budget Development

The first step of the project budget management process involves the project manager in developing cost estimates and identifying the total amount of money resources necessary for implementation of all the tasks and activities defined and stated in the WBS and the Schedule.

Budget development should cover both capital and operating expenses to ensure successful project completion. The project manager needs to define funding requirements and then send a formal request to the sponsor who reviews the requirements and make a package decision on providing the necessary money and financial resources. The sponsor can use the initiation documents (like Feasibility Study, Business Case and Project Charter) to make that decision.

Such estimation methods as expert judgement, cost baseline measurement and cost aggregation can be used for developing a project budget sheet. The project manager in cooperation with the key stakeholders can use a combination of the methods to estimate a necessary amount of financial resources and develop a project budget template.

2: Budget Use

The second step in project budget management is to allocate the identified financial resources and start executing the budget. The project manager should control and keep track of the budgeted resources in order to make sure that every scheduled task or activity is performed with necessary funding and that there is no lack of money for the implementation of the entire project.

The greatest way to track and control budget use is to develop an investment plan. This formal document includes justifications and approvals for the acquisition of necessary procurement items and services required in support of the project. An investment plan describes the acquisition process with reference to the feasibility study (often in larger projects a feasibility study template serves as a foundation for developing a project investment plan).

The project manager needs to send an investment approval request form to the stakeholders and wait for their approval/rejection. In case the plan is approved, the manager uses it to control the budget execution. In case the document is rejected, the project manager should receive stakeholder suggestions and make necessary amendments to the plan template. Then the process may repeat until the plan is approved.

3: Budget Measurement

The third step in managing the project budget refers to taking actions necessary for providing appropriate cost performance. The manager needs to use work performance data (like status of the deliverables, cost-schedule estimates), the funding requirements request and the cost performance baseline to check the budget appropriateness.

By conducting variance analysis, performance reviews and forecasting, the project manager can compare the current cost performance against the planned amount of financed resources stated in the project budget template. In case of any gaps or deviations it is necessary to make formal change requests and modify the budget accordingly.

The project manager can develop corrective actions and send suggestions for approval to the key stakeholders. The further budget control and measurement should be done with the necessary evaluations and approvals.

4: Budget Updating

Once all the changes have been approved by the key stakeholders, the project manager can proceed with updating the budget sheet and make changes to the existing breakdown structure of financial resources. This will be the forth step of project budget management.

Cost estimates, resource activity estimates, the cost performance baseline and the cost management plan should be updated in accordance with the approved changes.

Project Finance

Project finance is a means of funding projects that are typically infrastructure heavy, capital-intensive or related to public utilities. During its lifetime, these projects are treated as distinct entities from its parent. A project finance venture undertaken is completely an off-balance sheet item for the parent. Therefore, all financing this entity avails, must be repaid exclusively out of its own cash flow and subject to its own assets. The assets of the parent cannot encroach for payback of its subordinate’s liabilities even if the venture fails. Popular sectors where project finance finds its applications include real estate, mining, telecommunication and power to name a few.

In estimating sales revenues, the following considerations should be borne in mind:

• It is not advisable to assume a high capacity utilization level in the first year of operation. Even if the technology is simple and the company may not face technical problems in achieving a high rate of capacity utilization in the first year itself, there are likely to be other constraints like raw material shortage, limited power, marketing problems, etc. it is sensible to assume that capacity utilization would be somewhat low in the first year and rise thereafter gradually to reach the maximum level in the third or fourth year of operation.
• It is not necessary to make adjustment for stocks of finished goods. For practical purposes, it may be assumed that production would be equal to sales.
• The selling price considered should be the price realizable by the company net of excise duty. It shall, however, include dealers’ commission which is shown as an item of expense as part of sales expenses.
• The selling price used may be the present selling price: it is generally assumed that changes in selling price will be matched by proportionate changes in cost of production. Sales and production are closely interred –related. Hence, they may be estimated together.

Working Capital Management implies the management of cur­rent assets and current liabilities. Considering the importance of work­ing capital, we can very well, say that the management of wording capital is very significant and should be efficient to keep the business going smoothly.

To be more explicit, working capital management includes proper handling of inventories, accounts receivable, cash and bank and liabil­ities such as accounts payable, outstanding expenses etc. In a big manufacturing organization, working capital occupies a pre-eminent position. Over half the total assets consists of working, capital. So its management deserves careful consideration.

The financial management today, because of various complexi­ties in the market and competitive business environment, finds it nec­essary to deal with working capital in two parts — overall manage­ment and management of each item separately.

Overall management of working capital requires proper estima­tion of working capital needed for the business, ratios of investments on different items of current assets and proper policy as to the rate of profit earning, possibility of loan procurement, advances etc.

One point is worth noting regarding management of working cap­ital. Since working capital consists of varieties of items, management of one in the desirable way may affect another. For instance, making prompt and regular payments of bills receivable may affect cash bal­ance and the company may face difficulties in liquid cash.

Liquidity, flexibility is to be balanced in working capital management in such a wise and prudent way that the over-all management of the working capital contributes to the general welfare of the company.

Profitabil­ity, liquidity, flexibility all is important in managerial exercises but a happy compromise of these factors is no easy task. Financial as­tuteness is absolutely necessary to ensure a brilliant bright-forward management of working capital.

A deep study of the trend of business is absolutely essential to keep the business on right track. It is all the more important to plan the ratio of different items of working capital in the best interest of the company.

It may be that the outside creditors are to be satisfied in the interest of the company but at the same time requisite amount of cash balance must always be kept ready for day-to-day compliance of various obligations. Working capital management formulates pol­icy that is based on experience.

If the policy of the top management is to ensure more profit, then more money is blocked in inventories and cash becomes depleted. It may create problem. Income of the company may suffer if more money is kept always ready to meet any current obligation. Obviously, idle cash does not earn any income.

In regard to cash in hand, working capital management is rather difficult and needs very careful consideration. A company is likely to face an adverse situation if the principles of liquidity and profit­ability are rigorously followed. Small cash in hand cripples a compa­ny to meet the obligation of creditors on demand.

In such a situation small suppliers will be naturally reluctant to supply raw materials to such a company and as a consequence the company will have pro­duction difficulty. This will lead to fewer sales and less profit. There­fore, a very balanced ratio profitability and liquidity will have to be maintained through sound management.

It emerges from the above discussion that it is rather impractica­ble to draw up any invariable standard for the management of work­ing capital. And it also transpires that cash is the major and very sen­sitive component of working capital, so the working capital manage­ment is, as a matter of fact, the management of cash (liquidity) with reference to profitability.

To conclude, working capital management is the planning and controlling of current assets (assets convertible into cash). Working capital indicates circular flow of cash (cash flow cycle). From cash to inventories to receivables and back to cash.

The two concepts of working capital are net working capital and gross working capital. Net working capital is a qualitative concept; the management will also get an idea about the ease and cost of raising working capital. Net working capital is measured by the current ratio viz. current as­sets/current liabilities.

Normally the current ratio should be 2:1. A larger ratio indicates greater solvency and vice versa. Of course, ex­cessive current ratio would point out poor financial planning and it would reduce income.

The concept of gross capital is a financial concept whereas that of net concept is an accounting concept. For the management more interest is in the amount of current assets with which it has to oper­ate. “However, in an ever changing economy it is very difficult to secure perfect equilibrium between inflow and outflow of cash”.

So, enough supply of working capital is the objective of sound financial management. While aiming at sound working capital management, certain factors must always be kept in mind.

They are:

(a) Nature of business,

(b) Size of business,

(c) Terms of purchase and sale,

(d) Turnover of inventories,

(e) Process of manufacture,

(f) Importance of labour,

(g) Proportion of raw material to total costs,

(h) Cash re­quirements,

(i) Seasonal variations,

(j) Banking connections,

(k) Growth and expansion.

In gross sense working capital means the total of current assets and in net sense it is the difference between current assets and current liabilities.

Through working capital management, the finance man­ager tries to manage the current assets, current liabilities and to evaluate the interrelationship that exists between them, i.e. it involves the relationship between a firm’s short-term assets and short-term liabilities.

The aim of working capital management is to deploy such amount of current assets and current liabilities so as to maximize short-term liquidity. The management of working capital involves managing invento­ries, accounts receivable and payable as also cash.

The two steps involved in the working capital management are as follows:

(i) Forecasting the amount of working capital; and

(ii) Determining the sources of working capital.

Apart from the two mentioned above the following two additional important aspects should be kept in mind while managing working capital:

(a) Inclusion of Profit:

There is a lot of controversy regarding inclusion of profit in working capital requirement forecast. There are two views. The first view suggests that profit should be included in the working capital. The second view suggests that it should not be included. Inclusion or exclusion of profit depends primarily on the managerial policy adopted by the firm.

From the first view, if working capital is calculated on the basis of actual cash outflow then profit should not be included in calculating working capital because financing of profit is not required.

From the second view, where balance sheet approach is adopted for calculating working capital, profit element is not ignored as this should be included in the amount of debtors.

(b) Exclusion of Depreciation:

Depreciation does not involve any actual cash outflow, so it should not be included in the estimation of working capital.

When building a three-statement model, it becomes necessary to get into the habit of projecting income statement line items. Being able to project the main line items of the income statement should become second nature. Each specific line item will have drivers that impact their future values. In fact, if a specific financial model you are using is similar to another company that you need to model, you may even be able to copy the model directly, and simply replace the historical values.

Main Line Items to Forecast

The following are the main accounts that need to be covered when projecting income statement line items:

• Sales Revenue
• Cost of Goods Sold (or Gross Revenue)
• Total or Specific General Expenses (SG&A)
• Depreciation Expense
• Interest Expense
• Tax Expense

By including all of the above (and more if necessary), you can arrive at net income, or bottom line of the income statement.

Sales Revenue

Projecting income statement line items naturally begins with the top of the income statement. This is the sales revenue. All subsequent line items will usually be based on the sales revenue value.

Sales revenue can be forecasted in several different ways. Firstly, you can model sales revenue as a simple growth rate from previous years. This means that any subsequent year is the past year’s sales revenue multiplied by one plus the growth rate.

Secondly, you can model sales revenue as a factor of GDP or some other macroeconomic peg/metric. This means that revenue for each year will depend on a regression formula based on historic sales revenue and the input of that year’s GDP.

Finally, you can model sales revenue as a simple dollar value. This method of forecasting is the least dynamic, and usually the least accurate. However, it is available when quick and dirty sales revenue forecasts are needed.

Cost of Goods Sold (or Gross Profit)

The next step is to forecast Cost of Goods Sold. By doing so, we can subtract COGS from revenue to find Gross Profit. Alternatively, Gross Profit can be forecast, and then we can mathematically find Cost of Goods Sold.

Regardless of which line item we choose to forecast, the method is simple. Most of the time, the simple percentage of sales revenue method will suffice. We take past figures of Cost of Goods Sold (or gross profit) over sales revenue and use these percentages to predict future percentages.

Alternatively, a more robust model may model out specific cost of goods items. These may be split into raw material, work in progress, finished goods, labor costs, direct material costs, or some other line items depending on business operations. These can be forecast as percentages of sales revenue, as well, or using whole dollar values.

Selling, General, and Administrative Expenses

A simple and clean model will elect to forecast the total Selling, General and Administrative (SG&A) expense as one line item. This is easily done with the percentage of sales method. However, a more robust model may want to break out SG&A into individual components, which is a more involved method. This is because each individual line item will have different drivers.

For example, rent expense will generally be fixed every month, so a fixed dollar value will be more appropriate than a percentage of sales revenue. However, advertising expenses may be correlated with sales revenue, so in this case, the percentage of sales may be more accurate. There may also be “one-off” line expenses that do not appear every month and will require specific judgment. We discuss this more in our article on financial statement normalization.

There are also two line expenses that sometimes appear under SG&A that need specific forecasting work. These are depreciation expense and interest expense.

Depreciation Expense

Depreciation expense ties the gradual usage of machinery and PP&E to their benefit of generating revenue. Because the economic benefit (revenue) of using PP&E lasts more than one accounting period, the matching principle dictates that their expense must also be accrued over more than one accounting period.

We forecast depreciation expense through the use of a depreciation schedule. This shows us the opening balances of PP&E, any new capital expenditures, and the closing balance of PP&E. Through historic balances and CapEx, we can find historic depreciation expense. These values can then be used to predict future depreciation expense and capital expenditures.

Depreciation expense can be forecasted in the schedule using a percentage of the opening balance or any of the depreciation accounting methods. If we know the company’s depreciation policy, then we can directly apply straight-line, units-of-production, or accelerated depreciation to find the proper expense values.

Interest Expense

Interest expense is found through using the debt schedule. This schedule outlines each individual piece of debt on their own schedule, and sometimes makes a summary schedule that totals all balances and interest expense.

Interest expense is found by multiplying the opening balance in each period with the interest rate. This interest expense is then added back to the opening balance and is then reduced by any principal repayments to find the closing balance.

Tax Expense

Finally, we arrive at the last line item to find tax expense. Tax expense is found as a percentage of earnings before tax (EBT). This percentage is known as the effective tax rate or cash tax rate. EBT must be found by subtracting all the previous expense line items from sales revenue. After multiplying EBT with the historical effective tax rate, we are able to forecast future tax expense. 

Putting it all together

After projecting income statement line items, the income statement is found as follows:

• Sales revenue
• Less cost of goods sold
• Gross profit
• Less SG&A
• EBITDA
• Less Depreciation Expense
• EBIT or Operating Income
• Less Interest Expense
• EBT
• Less Tax Expense
• Net Income