Category: Management Notes

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

Sources of finance for business are equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, euro issue, venture funding etc. These sources of funds are used in different situations. They are classified based on time period, ownership and control, and their source of generation. It is ideal to evaluate each source of capital before opting for it.

Sources of capital are the most explorable area especially for the entrepreneurs who are about to start a new business. It is perhaps the toughest part of all the efforts. There are various capital sources, we can classify on the basis of different parameters.

Having known that there are many alternatives to finance or capital, a company can choose from. Choosing the right source and the right mix of finance is a key challenge for every finance manager. The process of selecting the right source of finance involves in-depth analysis of each and every source of fund. For analyzing and comparing the sources, it needs the understanding of all the characteristics of the financing sources. There are many characteristics on the basis of which sources of finance are classified.

1. According to Time Period

Sources of financing a business are classified based on the time period for which the money is required. The time period is commonly classified into following three:

(i) Long-Term Sources of Finance

Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or maybe more depending on other factors. Capital expenditures in fixed assets like plant and machinery, land and building etc of a business are funded using long-term sources of finance. Part of working capital which permanently stays with the business is also financed with long-term sources of funds. Long-term financing sources can be in form of any of them:

• Share Capital or Equity Shares
• Preference Capital or Preference Shares
• Retained Earnings or Internal Accruals
• Debenture / Bonds
• Term Loans from Financial Institutes, Government, and Commercial Banks
• Venture Funding
• Asset Securitization
• International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR etc.

(ii) Medium Term Sources of Finance

Medium term financing means financing for a period of 3 to 5 years and is used generally for two reasons. One, when long-term capital is not available for the time being and second when deferred revenue expenditures like advertisements are made which are to be written off over a period of 3 to 5 years. Medium term financing sources can in the form of one of them:

• Preference Capital or Preference Shares
• Debenture / Bonds
• Medium Term Loans from
• Financial Institutes
• Government, and
• Commercial Banks
• Lease Finance
• Hire Purchase Finance

(iii) Short Term Sources of Finance

Short term financing means financing for a period of less than 1 year. The need for short-term finance arises to finance the current assets of a business like an inventory of raw material and finished goods, debtors, minimum cash and bank balance etc. Short-term financing is also named as working capital financing. Short term finances are available in the form of:

• Trade Credit
• Short Term Loans like Working Capital Loans from Commercial Banks
• Fixed Deposits for a period of 1 year or less
• Advances received from customers
• Creditors
• Payables
• Factoring Services
• Bill Discounting etc.

2. According to ownership and Control

Sources of finances are classified based on ownership and control over the business. These two parameters are an important consideration while selecting a source of funds for the business. Whenever we bring in capital, there are two types of costs – one is the interest and another is sharing ownership and control. Some entrepreneurs may not like to dilute their ownership rights in the business and others may believe in sharing the risk.

(i) Owned Capital

Owned capital also refers to equity capital. It is sourced from promoters of the company or from the general public by issuing new equity shares. Promoters start the business by bringing in the required capital for a startup. Following are the sources of Owned Capital

• Equity Capital
• Preference Capital
• Retained Earnings
• Convertible Debentures
• Venture Fund or Private Equity

Further, when the business grows and internal accruals like profits of the company are not enough to satisfy financing requirements, the promoters have a choice of selecting ownership capital or non-ownership capital. This decision is up to the promoters. Still, to discuss, certain advantages of equity capital are as follows

It is a long-term capital which means it stays permanently with the business.

There is no burden of paying interest or installments like borrowed capital. So, the risk of bankruptcy also reduces. Businesses in infancy stages prefer equity capital for this reason.

(ii) Borrowed Capital

Borrowed or debt capital is the capital arranged from outside sources. These sources of debt financing include the following:

• Financial institutions,
• Commercial banks or
• The general public in case of debentures

In this type of capital, the borrower has a charge on the assets of the business which means the company will pay the borrower by selling the assets in case of liquidation. Another feature of borrowed capital is regular payment of fixed interest and repayment of capital. Certain advantages of borrowing capital are as follows:

• There is no dilution in ownership and control of the business.
• The cost of borrowed funds is low since it is a deductible expense for taxation purpose which ends up saving on taxes for the company.
• It gives the business a leverage benefit.

3. According to Source of Generation

Based on the source of generation, the following are the internal and external sources of finance:

(i) Internal Sources

The internal source of capital is the capital which is generated internally by the business. These are as follows:

• Retained profits
• Reduction or controlling of working capital
• Sale of assets etc.

The internal source of funds has the same characteristics of owned capital. The best part of the internal sourcing of capital is that the business grows by itself and does not depend on outside parties. Disadvantages of both equity capital and debt capital are not present in this form of financing. Neither ownership dilutes nor does fixed obligation/bankruptcy risk arise.

(ii) External Sources

An external source of finance is the capital generated from outside the business. Apart from the internal sources of funds, all the sources are external sources of capital.

Deciding the right source of funds is a crucial business decision taken by top-level finance managers. The wrong source of capital increases the cost of funds which in turn would have a direct impact on the feasibility of project under concern. Improper match of the type of capital with business requirements may go against the smooth functioning of the business. For instance, if fixed assets, which derive benefits after 2 years, are financed through short-term finances will create cash flow mismatch after one year and the manager will again have to look for finances and pay the fee for raising capital again.

A common way to differentiate between business organizational structures is between ongoing operational work versus capital projects.  Operational work maintains an existing sales channel, whereas projects are one-time, unique expenditures with a defined budget, beginning and end dates, and they accomplish a specific goal.

There are four types of organizational structures, each of which has their own unique set of influences on the management of the organization’s projects:

1. Functional
2. Project
3. Matrix
4. Composite

Functional

Most organizations are divided along functional lines, that is, each “division” is organized by work type, such as engineering, production, or sales.

In the functional organizational structure, projects are initiated and executed by the divisional managers, who assume the project manager duties in addition to their regular, functional, roles.  They are often given secondary titles such as “Coordinator of Project X.”

In this structure, project managers usually don’t have alot of authority to obtain resources or to manage schedules and budgets.  They must obtain approvals to utilize resources from other departments, which can be a complex undertaking.  This is because the functional organization is designed to focus on the provision of the divisional services rather than project deliverables.

Project-Oriented

On the other end of the scale is the project-oriented organization.  These companies do most of their work on a project basis and are therefore structured around projects.  This includes construction contractors, architectural firms, and consultants.

Project managers are usually full time in the role, and for small projects they might manage several projects at once.

In this structure project managers usually have a great deal of independence and authority.  They are able to draw on resources with little required approval.

In fact, most of these types of organizations have some form of functional divisions which are placeholders for resources that can be utilized by all projects.  They are usually called “departments.”

For example, at an engineering firm the geotechnical department is available as an expert resource to all projects within the firm.

Matrix

Although the project-oriented and functional structures are at opposite ends of the spectrum, it is possible to be located somewhere in between (a hybrid).  In fact, most organizations are along some level of the spectrum, utilizing a structure that gives project managers a bit more authority without losing focus on the provision of functional services.

In the typical matrix structure, a project manager is assigned from within one of the functional departments in either a part time or full-time capacity.  They are assigned project team members from various departments, who are released from their departmental duties (at least partially).  Thus, a high priority can be placed on the project while maintaining the functional division services.

However, the project manager and team members are still paid by their respective functional departments, thus the final accountability for the project still lies at the functional level.  For example, if one of the department managers thinks that they have contributed more than their fair share, the project will stall quickly.

From a theoretical point of view, there are two more adjustments that can be made.  A weak matrix retains the management of the project in the hands of the functional managers instead of the project team, like this:

On the other side, a strong matrix is still a functional organizational structure, but has a completely separate project management arm. All of the project roles are still fulfilled within the functional departments, but the project manager is on the same level as the functional managers.

This project management arm often takes the form of a Project Management Office, or PMO.

In spite of its name, the terms strong and weak matrix are not meant to imply a level of desirability to the organization.  The names have been coined by the project management industry which has studied the role of projects within organizations, and hence they correspond to strength or weakness in achieving project success.  But if that comes at the expense of poorer delivery of functional services, the organization’s goals are not necessarily being achieved.  Hence, the correct project organizational structure is one which achieves the organization’s goals, and this can fall anywhere along the project/functional spectrum according to the specific needs of the organization and/or project.

Composite

Functional organizations and project-oriented organizations are at opposite ends of the spectrum and matrix organizations fall somewhere in between.  But it is possible to utilize both structures at the same time.  Therefore, there is a fourth option that requires mention, the composite structure.

This occurs when a project structure and a functional structure both report to a central executive.

For example, a state government department of transportation has a maintenance division which seeks to maintain the level of service of the state’s roads and bridges, and a capital projects division which builds new roads and bridges.  The maintenance division and the capital projects division are located side by side, reporting to the executive.  This is a composite organizational structure (A matrix structure would require new construction to occur within one of the maintenance departments – the project manager would report to a functional manager rather than the executive).

Most organizations lean one way or the other rather than using both structures, because of the drastically different management styles necessary to perform each of the roles well.

Two major kinds of problem related to the Project Environment are:

• Personnel performance problems
• Personnel policy problems

Ø personnel performance is difficult for many individuals in the project environment because it represents a change in the way of doing business.

Ø Individuals, regardless of how competent they are, find it difficult to adapt continually to a changing situation in which they report to multiple managers.

Ø The employee wants only to be recognised as an achiever and really ndoes not care if the project is a success or failure. Even if the project is a failure he can always go back to his functional area.

Ø Another problem lies in the project- functional interface.(reporting to two bosses).If both the bosses are in total agreement about the work to be accomplished then performance at the interface may not hamper the performance .But if conflicting directions are received ,then the individual at the interface ,regardless of his capabilities and experience, may let his performance suffer because of his compromising position

Ø In TEAM formulation for project, not much time available for all 4 phases of teaming (forming, storming, norming &performing). So team should be chosen carefully for highly cohesive &stable team.

Ø Functional organisations are normally governed by unit manning documents that specify grade and salary for the employees. Project offices on the other hand, have no such regulations because, by definition, projects are different from each other and therefore, require different structures.

▪    In fact, opportunities to grow are faster in PM (project mgt0

▪    projects recognise the individual accomplishment

Ø Project management is successful only if the project manager and his team are totally dedicated to the successful completion of the project. this requires that each team member of the project team and office to have a good understanding of the fundamental project requirements, which include:

▪    Customer Liaison

▪    Project Direction

▪    Project Planning

▪    Project control

▪    Project Evaluation

▪    Project Reporting

Ø Since the above requirements cannot be fulfilled by single individuals, members of the project office, as well as functional representatives must work together as a ream. This team work concept is vital to the success of a project.

Ø Ultimately, the person with the greatest influence during the staffing phase is the PROJECT MANAGER. The personal attributes and abilities of project managers will either attract or detr highly desirable individuals. Project managers must like trouble. They must be capable of evaluating risk and uncertainty.

Basic characteristics of a project manager are:

▪    Ability evaluate risk and uncertainty

▪    Willingness to take trouble.

▪    Honesty and integrity

▪    Understanding of personnel problems

▪    Understanding  of project technology

▪    Business management competence

ñ management principles

ñ communications

▪    Alertness and quickness

▪    Versatility

▪    Energy and toughness

▪    Decision making ability

Ø Project managers must exhibit both honesty and integrity with their subordinates as well as line personnel, thus fostering an atmosphere of trust. impossible promises must be avoided. they usually follow “open door “policies for project as well as line personnel.

Ø  Project managers must have both business management and technical expertise. they must understand the technical implications of a problem, since they are ultimately responsible for. They may have a staff of professionals to assist them.

Ø  Because a project has a relatively short time duration, decision making must be rapid and effective. Managers must be alert and quick in their ability to perceive “red flags “that can eventually lead to serious problems

Ø  project managers must demonstrate their versatility and toughness in order to keep subordinates dedicated to goal accomplishment.

Ø  Executives must realise that the project manager’s objectives during staffing are to:

▪    Acquire the best available assets and try to improve them

▪    Provide a good working environment for all personnel

▪    make sure that all resources are applied effectively and efficiently so that all constrains are met, if possible.

Ø As project management began to grow and mature, the project manager was converted from a technical manager to a business manager. The primary skills needed to be an effective project manager in the next century will be:

▪    knowledge of the business

▪    risk management

▪    integration skills

Ø Very critical sill among the above skills is risk management, however to perform risk management effectively, a sound knowledge of the business is required.

Network Analysis

The network analysis is a method used to analyse, control and monitoring of business processes and workflows. Contrary to the work breakdown structure, a network diagram also considers the chronological order of activities, milestones and tasks, their durations and dependencies and visualizes them graphically or as a table, e.g. in a Gantt chart.

The network analysis enables project managers to take various factors into account when creating a project plan:

• Dependencies between activities
• Buffer times between activities
• Earliest and latest start and end dates
• Duration of activities
• Critical Path

Steps in Network Analysis

1. Network Design Requirements |Identifying Customer Design Requirements: As a network designer you need following steps to identify customer requirements:

Identify network applications and services that the organization wants to run in it network. Define the organizational goals. Define the possible organizational constraints and limitations, these limitations may be related to cost. Define the technical goals Define the possible technical constraints.

2. Describe the Existing Network-Characterizing the existing network is second step of the network design methodology. In this step, you need to identify a network’s existing infrastructure and services that are currently running. You can use the different tools to analyse existing network traffic, and tools for auditing and monitoring network traffic.
3. Designing the Network Topology and Solutions The best approach to design the network topology is the structure approach which allows you to develop the optimal solution with lower cost with fulfilling all requirements of customer like capacity, flexibility, functionality, performance, scalability and availability You can start the network designing process with information that you extract through:

Existing information and documentation Network audit Traffic analysis

4. Plan the network implementation In documentation you should have the step-by-step procedure of each aspect of modular network and have the complete detail for implementation of each step. Documentation must have rollback plan for each step, if something goes wrong you can back to previous step and after modification you can re-implement that step again
5. Construct a prototype network A prototype network is a subset of the full design, tested in an isolated environment. The prototype does not connect to the existing network. The benefit of using a prototype is that it allows testing of the network design before it is deployed before affecting a production network. When implementing a new technology such as IPsec, you might want to implement a prototype test before deploying it to the operational network.
6. Fully Document the Design Documenting the project is the best practice and has a number of advantages and future benefits.
7. Implement the Design In implementation phase network engineer implement the network’s designer design. In this phase network engineer implement the documented steps, network diagram into real network.
8. Verify, monitor and modify as needed Once your network is fully implemented then your job to run and operate the network properly, you have to monitor the network devices, traffic and other security aspects. You can make the modification if you find something wrong with network operation during monitoring of network. Also, if you need to add some more services and feature you can add these services too.

Determination of critical path

The Critical Path is the longest path of scheduled activities that must be met in order to execute a project.  This is important for Program Managers (PM) to know since any problems that occur on the critical path can prevent a project from moving forward and be delayed.  Earned Value Management (EVM) analysis focuses on the critical path and near critical paths to identify cost and schedule risks. Other schedule paths might have slack time in them to avoid delaying the entire project unlike the critical path. There might be multiple critical paths on a project.

The Critical Path is determined when analyze a projects schedule or network logic diagram and uses the Critical Path Method (CPM).  The CPM provides a graphical view of the project, predicts the time required for the project, and shows which activities are critical to maintain the schedule.

The seven (7) steps in the CPM are:

1. List of all activities required to complete the project (see Work Breakdown Structure (WBS)),
2. Determine the sequence of activities
3. Draw a network diagram
4. Determine the time that each activity will take to completion
5. Determine the dependencies between the activities
6. Determine the critical path
7. Update the network diagram as the project progresses

The CPM calculates the longest path of planned activities to the end of the project, and the earliest and latest that each activity can start and finish without making the project longer. This process determines which activities are “critical” (i.e., on the longest path) and which have “total float” (i.e., can be delayed without making the project longer).

The CPM is a project modeling technique developed in the late 1950s by Morgan R. Walker of DuPont and James E. Kelley, Jr. of Remington Rand.

When Project Managers plan implementations, they often do not adequately anticipate failure despite the risks associated with any project. Rather, they plan for the best case scenarios driven by the budget, deliverables, sponsor expectations and deadlines. And despite their best efforts at project management, failure rates remain high.

Project implementations can fail for a number of reasons ranging from unrealistic expectations, poor methodology, poor requirements, inadequate resources, poor project management, untrained teams, unrealistic budgets, to poor communication and more. With such a long list of factors that can lead to failure, the chances of project implementation success seem low. Those chances can be improved by adopting these 5 best practices. These will help establish a clear understanding of expectations among all the stakeholders—be they business, sponsor, project team, to vendor partners and end users.

1. Business and organizational issues need to be identified and analysed with clarity and without emotion. This process needs to be continued throughout the implementation process. There should be no barriers either between the business & development team or with third-party vendors. All stakeholder interests should be aligned with the common goal of project success.
2. Don’t set overly aggressive or optimistic schedules. Project Managers often set overly optimistic deployment dates despite the realities and limitations of the actual project. For example, even when the design phase seeps into the development phase, the timeline doesn’t. Project progress must be monitored throughout the implementation. Discussions regarding key project dates should start early in the project’s life cycle to avoid downstream impacts.
3. If continuous monitoring & control is not done, what appears “green” may turn out to be “red”. Real time monitoring and analysis of the project implementation’s progress can help identify the risk triggers early on and indicate endangered work packages. Indicators should not only display the past phase performance but should also indicate readiness for upcoming project tasks and activities. A project’s indicators and metrics should not only be markers of the past but also indicators of the future.
4. Critical to maintaining control of the project, a Project Manager needs to set and manage the expectations of the project. Overly optimistic deployment dates, less than required resources, and more than possible deliverables should be a strict no-no. Similarly, there should be no scope for any “gold-plating”. Project Managers should set realistic expectations up-front and keep expectations current in the minds of all the stakeholders so that they don’t lose sight of the final product while going through the project life cycle.
5. Audits and assessments conducted by an external auditor add value to the project implementation and protect it against failure. Such audits provide objective oversight and the solutions needed to overcome inherent roadblocks. It also helps alleviate your doubts & misgivings. These audits should be conducted by an implementation expert who has managed similar projects successfully and can easily identify indicators that can point to any errors and help develop possible solutions.

Employing these best practices will empower a Project Manager to go beyond regular project management barriers and provides them the processes they need to ensure project success. It helps them identify and resolve the strategic, tactical and intangible issues, and manage the human resources before issues become insurmountable. And best of all, it provides clarity and assurance that the project is on the right track.

Project control

The project management monitoring and controlling starts as soon as a project begins. Monitoring and controlling project work is the process of tracking, reviewing, and regulating the progress in order to meet the performance objectives. It is the fourth process group in Project Management. From the perspective of Knowledge Management Area, this involves the management tasks, such as tracking, reviewing, and reporting the progress of a project. Moreover, this process is majorly concerned with:

• Measuring the actual performance against the planned performance
• Assessing performance to determine whether or not any corrective or preventive actions are indicated, the status is reported and/or appropriate risk response plans are being executed.
• Maintaining an accurate, timely information base concerned with the project output and its associated documentation till project completion.
• Providing information to support status reporting, progress measurement and forecasting.
• Providing forecasts to update current cost and current schedule information.
• Monitoring implementation of approved changes as they occur.

Step 1: Take action to control the project

Necessary steps, control points, and actions are taken to monitor and control the project. These actions provide if the project is deviating from the planned baseline.

Step 2: Measure Performance

You should measure the performance in order to check whether the project is going well. For instance, cost performance of the project will give an indication whether the planned budget will be sufficient to complete the project. Schedule performance of the project will give an indication whether the planned schedule and dates can be reached.

Step 3: Determine variances and if they warrant a change request

If there is a lot of variance from the baseline, for instance, if it is expected that the project duration will exceed the planned duration by 20%, then regarding actions must be taken to meet the project targets.

Step 4: Influence the factors that cause changes

Changes are inevitable in a project. But, preventive actions can be taken to influence the factors that cause changes. For instance, a detailed scope and requirement clarification with the customer will reduce the changes that will be coming from the customer.

Step 5: Request changes

If there is a deviation from the planned values, then a change can be requested to meet the planned values again.

Step 6: Perform integrated change control

Changes in a project must be implemented in an integrated manner. Because a small change in one aspect of the project might impact the overall project. Performing an integrated change control evaluates the changes and its impacts on the project. Then, a proper change implementation is planned to minimize the risk of changes.

Step 7: Approve or reject changes

Project monitoring and controlling process may approve or reject changes. Changes are evaluated by the change control board and if this board rejects the change, it won’t be implemented. If a change is approved, project plan revisions must be done and change should be implemented properly.

Step 8: Inform stakeholders of approved changes

If the decision of the change control board is approving a change. This must be communicated to the stakeholders. Because, the previous plan, scope, and targets have a change. So the stakeholders must be notified about this change.

Step 9: Manage configuration

The configuration of a project describes the meaningful and properly working combination of different modules or parts. In order to ensure healthy project progression, the configuration is managed.

Step 10: Create forecasts

Project monitoring and controlling process group activities create forecasts. What will be the budget of the project on completion? What will be the end date of the project if the project performs as it performed till now? These types of forecasts help to see how far the project is from its targets.

Step 11: Gain acceptance from customer

Once the project deliverables are completed, they are presented to the customer. If the deliverables meet the requirements agreed with the customer, in the beginning, the customer accepts the project and closing phase is triggered.

Step 12: Perform quality control

Quality control activities check the quality attributes of the delivered outputs. For instance, the product of a project might meet the budget and schedule targets. But the quality requirements might not meet the customers’ expectations. In this case, the project will be considered as failed as well. Therefore, performing a quality control is important.

Step 13: Report on project performance

Since forecasting and project performance is measured during monitoring and controlling, project performance reports are sent to relevant stakeholders during this phase as well.

Step 14: Perform risk audits

Risks may affect a project drastically. Therefore, each anticipated risk must be documented, and risk response strategies for each risk must be planned in case a risk occurs.

Step 15: Manage reserves

Reserves are planned to accommodate costs of risks and unexpected situations in projects. For instance, if the project budget is 100,000 USD, a 10% reserve can be planned to accommodate impacts of risks. Or, if the project duration is 12 months, an additional 2 months can be planned as a buffer to overcome any kind of risks that might occur during the project. These reserves are managed in monitoring and controlling phase.

Step 16: Administer procurements

Tools, equipment or resources can be outsourced from a supplier during a project. Administration of these purchases, outsourcing, and leasing activities are done during monitoring and control phase of a project.

If a successful monitoring and controlling process can be implemented, the whole project has a better chance to be a success. So, the outcomes of closing process group activities will be as planned in the planning phase.

Control charts

In project implementation or project execution, we put it all together. Project planning is complete, as detailed as possible, yet providing enough flexibility for necessary changes. In a customer-contractor relationship, the contract is signed, based on the right decisions about the contract structures, and including clauses for change and claim management.

Now we apply all the tools we prepared in order to keep ourselves in control of the project. As project managers and sub-project managers we have to make sure that we, together with all our team members,

• Take action, in-line with the plan and / or contract
• Record and document all the work, work results, special events, decisions about changes, implementation of changes, etc.
• Analyze, communicate, report, and document status and results of action, in-line with the plan and / or contract
• Take decision if and what kind of change we need, in case any result (or action) is not as required
• Implement agreed changes, in-line with the plan and / or contract.

The most powerful platform for this comparison in order to analyze, communicate, and decide work progress, problems, and necessary changes are project meetings in which we apply the planned project controlling tools.

• Kick-off meetings
• Regular status meetings
• Special status meetings
• Risk analysis workshops (as part of our risk management strategy)
• Problem solving workshops
• Project management review meetings

The level of prosperity and quality of living standards in an economy. Economic welfare can be measured through a variety of factors such as GDP and other indicators which reflect welfare of the population (such as literacy, number of doctors, levels of pollution e.t.c)

Economic welfare is a general concept which doesn’t lend to easy definition. Basically, it refers to how well people are doing. Economic welfare is usually measured in terms of real income/real GDP. An increase in real output and real incomes suggests people are better off and therefore there is an increase in economic welfare.

However, economic welfare will be concerned with more than just levels of income. For example, people’s living standards are also influenced by factors such as levels of health care, and environmental factors, such as congestion and pollution. These quality of life factors are important in determining economic welfare.

Factors influencing economic welfare

1. Real income: influencing potential consumption
2. Employment prospects: unemployment significant cost
3. Job satisfaction: satisfaction at work as important as income and wage
4. Housing: High income but unaffordable housing diminishes economic welfare. Good, cheap housing essential to economic welfare
5. Education: opportunities to study through lifetime, influence welfare
6. Life expectancy and quality of life: access to healthcare, also are lifestyles healthy, e.g. levels of obesity/smoking rates
7. Happiness levels: normative judgements on whether people are happy.
8. Environment: economic growth can cause increased pollution, which damages health and living standards.
9. Leisure time: high wages due to working very long hours diminishes economic welfare. Leisure has economic value.

Economic Welfare and Utility

Economics is concerned with ideas of utility. Utility represents the satisfaction/happiness of a consumer. For example, if you are willing to pay £10 for a CD, then presumably you get a utility of at least £10 worth from the good.

Welfare Economics

This is a branch of economics devoted to determining the optimal allocation of resources in society. It is concerned with allocative efficiency and social efficiency.

Measure of economic welfare (MEW)

This was developed in 1972 as an alternative to GDP. It was developed by William Nordhaus and James Tobin. (Nordhaus, WD and Tobin, J (1972) Is Growth Obsolete?

It adjusts the measure of total national output, to include only items that help improve economic well-being.

In addition to GNP the MEW includes:

• The value of leisure time enjoyed by citizens.
• Value of unpaid work
• Economic output in the underground economy (not measured by official GDP statistics)

The MEW also excludes factors which reduce economic welfare, such as

• Environmental damage

It is also known as net economic welfare (NEW) (Samuelson and Nordhaus, 1992).

Index of Human Development Index HDI

A related concept is that of Human development index (HDI)

This is a measure which seeks to look at the available choices that people have. It is a composite indicator comprised of 3 basic factors affecting living standards – income, life expectancy and education. The three components are:

1. Real GDI per Capita, adjusted for the local cost of living (PPP)
2. Life expectancy
3. Education – levels of literacy

The highest human development is given a value of 1. Low levels of Human development are given a value close to 0.

Well-being index

This is a measure of economic well-being and life satisfaction, created by the ONS. It looks at health, relationships, education and skills, what we do, where we live, our finances and the environment. It includes positive data but also includes surveys and questionnaires – it also uses quite a new methodology and is experimental in terms of economic data.

According to classicists, there will always be full employment in a free enterprise capitalist economy because of the operation of Say’s Law and wage-price flexibility. This classical theory came under severe attack during the Great Depression years of 1930s at the hands of J. M. Keynes.

He rejected the notion of full employment and instead suggested full employment as a special case and not a general case. Full employment is a temporary phenomenon, an astrological coincidence! He claimed his theory to be ‘general’, i.e., applicable at any point of time. That is why he christened his epoch-making book: The General Theory of Employment, Interest and Money (1936). Thus, Keynes’ theory is “general”.

In this book, he not only criticized the classical macroeconomics, but also presented a ‘new’ theory of income and employment. He is often described by economists as a revolutionary one in the sense that it was Keynes who salvaged the capitalist economy from destruction in the 1930s. Critics, however, label him as a ‘conservative revolutionary’.

Keynes’ theory of employment is a demand-deficient theory.

This means that Keynes visualized employment/unemploy­ment from the demand side of the model. His theory is thus known as demand-oriented approach. According to Keynes, the volume of employment in a country depends on the level of effective demand of the people for goods and services. Unemployment is attributed to the deficiency of effective demand.

It is to be kept in mind that Keynes’ theory is a short run theory when population, labour force, technology, etc., do not change. Once Keynes remarked that since “in the long run we are all dead”, it is of no use to present a long run theory. In view of this, one can argue that the volume of employment depends on the level of national income/output.

Higher (lower) the level of national output, higher (lower) is the volume of employment. Thus, Keynesian theory of employment determination is also the theory of income determination. In this section, we intend to determine the level of employment in terms of the principle of ‘effective demand’.

(a) Meaning of Effective Demand:

Keynes’ theory of employment is based on the principle of effective demand. In other words, level of employment in a capitalist economy depends on the level of effective demand. Thus, unemployment is attributed to the deficiency of effective demand and to cure it requires the increasing of the level of effective demand.

By ‘effective’ demand, Keynes meant the total demand for goods and services in an economy at various levels of employment. Total demand for goods and services by the people is the sum total of all demand meant for consumption and investment. In other words, the sum of consumption expenditures and investment expenditures constitute effective demand in a two-sector economy.

In order to meet such demand, people are employed to produce all kinds of goods, both consumption goods and investment goods. However, to complete our discussion on effective demand we need another component of effective demand—the component of government expenditure. Thus, effective demand may be defined as the total of all expenditures, i.e.,

C + I + G

Where, C, I and G stand for consumption, investment, and government expenditures.

Here we ignore government expenditure as a component of effective demand. According to Keynes, the level of employment is determined by effective demand which, in turn, is determined by aggregate demand function or aggregate demand price and aggregate supply function or aggregate supply price.

In Keynes’ words:

“The value of D (Aggregate Demand) at the point of Aggregate Demand function, where it is intersected by the Aggregate Supply function, will be called the effective demand.”

1. Aggregate Supply (AS):

Employers hire and purchase various inputs and raw materials to produce goods. Thus, production involves cost. If sales revenue from the sale of output produced exceed cost of production at a given level of employment and output, the entrepreneur would be induced to employ more labour and other inputs to produce more.

At any given level of employment of labour, aggregate supply price is the total amount of money that all entrepreneurs in an economy expect to receive from the sale of output produced by given number of labourers employed. For each particular level of employment, there is an aggregate supply price.

Here, by ‘price’ we mean the amount of money received from the sale of output, i.e., sales proceeds. Thus, aggregate supply prices refer to the proceeds from the sale of output at each level of employment and there are different aggregate supply prices for different levels of employment. If this information is expressed in a tabular form, we obtain “aggregate supply price schedule” or aggregate supply function.

The aggregate supply function is a schedule of the minimum amounts of proceeds required to induce varying quantities of employment. Simply, it shows various aggregate supply prices at different levels of employment. Plotting this information graphically, we obtain aggregate supply curve.

According to Keynes, aggregate supply function is an increasing function of the level of employment. Aggregate supply (AS) curve slopes upward from left to the right because volume of employment increases with the increase in sale proceeds.

But there is a limit to increase output level. This is called full employment level of output beyond which output cannot be increased. It is because of full employment that AS curve becomes vertical or perfectly inelastic. This means that the level of employment cannot exceed full employment (N_f) even by increasing aggregate supply price. This is shown in Fig. 10.4.

2. Aggregate Demand (AD):

Aggregate demand or aggregate demand price is the amount of money or price which all entrepreneurs expect to receive from the sale of output produced by a given number of men employed. Or it refers to the expected revenue from the sale of output at a particular level of employment.

Each level of employment is associated with a particular aggregate supply price and there are different aggregate demand prices for different levels of employment. Like the aggregate supply schedule, aggregate demand schedule shows the aggregate demand price for each possible level of employment.

Plotting the aggregate demand schedule we obtain aggregate demand curve as there is a positive relation between the level of employment and aggregate demand price i.e., expected sales receipts. This is shown in Fig. 10.4. It rises from left to right.

(b) Equilibrium Level of Employment —the Point of Effective Demand:

We have studied separately aggregate demand and aggregate supply as the two determinants of effective demand. Now we will describe how equilibrium level of employment is determined in an economy by using the concept of effective demand.

The level of employment in an economy is determined at that point where the aggregate supply price equals the aggregate demand price. In other words, the intersection of the aggregate supply function with the aggregate demand function determines the volume of income and employment in an economy.

It is thus clear that so long as expected sales receipts of the entrepreneur (i.e., aggregate demand schedule) exceed costs (i.e., aggregate supply schedule), the level of employment should be increasing and the process will continue until expected receipts equal costs or aggregate demand curve intersects aggregate supply curve.

Note that the AS curve starts from the origin. If aggregate receipts (i.e., GNP) are zero, entrepreneurs would not hire workers. Likewise, AD curve also starts from the origin. The equilibrium level of employment is determined by the intersection of the AS and AD curves.

This is the point of effective demand—point E in Fig. 10.4. Corresponding to this point, ON_e workers are employed. At the ON₁ level of employment, expected receipts exceed necessary costs by the amount RC. Entrepreneurs will now go on hiring more labour till ON_e level of employment is reached.

At this level of employment, entrepreneurs’ expectations of profits are maximized. Employment beyond ON_e is unprofitable because costs exceed revenue. Thus, actual employment (ON_e) falls short of full employment (ON_f). Keynesian system shows two kinds of equilibria—actual employment equilibrium determined by AD and AS curves and underemployment equilibrium.

Keynes made little emphasis to the aggregate supply function since its determinants (such as technology, supply or availability of raw materials, etc.,) do not change in the short run. Keynes was examining the possibility of unemployment in a capitalistic economy against the backdrop of the Great Depression of 1930s.

After diagnosing the problem, Keynes recommended policy prescription so as to create more employment in the economy. Indeed, for curing unemployment problem, he did not subscribe to the classical ideas— the supply-oriented policies.

Keynes attached great importance to demand-stimulating policies to cure unemployment. In other words, Keynes paid emphasis on the aggregate demand function. That is why Keynes’ theory is known as a ‘theory of aggregate demand’.

Fig. 10.4 shows the situation of equilibrium at less than full employment level. Actual equilibrium, ON_e, is short of fill employment equilibrium, ON_e. Thus, the distance ON_f – ON_e measures unemployment. This is called involuntary unemployment— a situation at which people are willing to work but do not find jobs. This unemploy­ment, according to Keynes, is due to deficiency of aggregate demand.

This unemployment can be removed by stimulating aggregate demand. Aggregate demand is the sum total of consumption and investment demand or expenditures in the economy. By raising consumption expen­diture, level of employment can be raised. But there is a limit to consumption expenditure. So what is needed is the raising of (private) investment demand.

Anyway, increase in consumption demand and investment demand will raise the level of employment in the economy. The point of effective demand has been changed in Fig. 10.4 because of the shifting of AD curve from AD to AD₁. New effective demand is now given by E₁. Corresponding to this point, equilibrium level of employment is ON_f—the level of full employment.

Thus, in Keynes’ theory, unemployment is due to the deficiency of effective demand. Only by stimulating effective demand can a higher level of employment be achieved. However, Keynes goes on arguing that equilibrium level of employment will not necessarily be at full employment.

A capitalist economy will always experience underemployment equilibrium—an equili­brium situation less than full employment. Full employment, according to Keynes, can never be achieved. In Keynes’ scheme of things, both consumption and investment cannot be raised enough to employ more work force.

Therefore, he recommends government to come forward and take appropriate action to cure unemployment problem. This means that aggregate demand is now the sum total of all consumption, investment and government expenditures.

It is because of the multiplier effect of both private investment expenditure and government expenditure that there will be larger income, output and employment.

But, equilibrium in the economy will be established at less than full employment situation because of:

(i) Wage rigidity

(ii) Interest inelasticity of investment

(iii) Liquidity trap