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Impact of Risk Handling Measures

Risk management is the identification, evaluation, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities.

Risks can come from various sources including uncertainty in international markets, threats from project failures (at any phase in design, development, production, or sustaining of life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters, deliberate attack from an adversary, or events of uncertain or unpredictable root-cause. There are two types of events i.e. negative events can be classified as risks while positive events are classified as opportunities. Risk management standards have been developed by various institutions, including the Project Management Institute, the National Institute of Standards and Technology, actuarial societies, and ISO standards. Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety.

Strategies to manage threats (uncertainties with negative consequences) typically include avoiding the threat, reducing the negative effect or probability of the threat, transferring all or part of the threat to another party, and even retaining some or all of the potential or actual consequences of a particular threat. The opposite of these strategies can be used to respond to opportunities (uncertain future states with benefits).

Certain risk management standards have been criticized for having no measurable improvement on risk, whereas the confidence in estimates and decisions seems to increase.

A successful risk management program helps an organization consider the full range of risks it faces. Risk management also examines the relationship between risks and the cascading impact they could have on an organization’s strategic goals.

This holistic approach to managing risk is sometimes described as enterprise risk management because of its emphasis on anticipating and understanding risk across an organization. In addition to a focus on internal and external threats, enterprise risk management (ERM) emphasizes the importance of managing positive risk. Positive risks are opportunities that could increase business value or, conversely, damage an organization if not taken. Indeed, the aim of any risk management program is not to eliminate all risk but to preserve and add to enterprise value by making smart risk decisions.

“We don’t manage risks so we can have no risk. We manage risks so we know which risks are worth taking, which ones will get us to our goal, which ones have enough of a payout to even take them,” said Forrester Research senior analyst Alla Valente, a specialist in governance, risk and compliance.

Thus, a risk management program should be intertwined with organizational strategy. To link them, risk management leaders must first define the organization’s risk appetite i.e., the amount of risk it is willing to accept to realize its objectives.

The formidable task is to then determine “Which risks fit within the organization’s risk appetite and which require additional controls and actions before they are acceptable,” explained Notre Dame University Senior Director of IT Mike Chapple in his article on risk appetite vs. risk tolerance. Some risks will be accepted with no further action necessary. Others will be mitigated, shared with or transferred to another party, or avoided altogether.

Every organization faces the risk of unexpected, harmful events that can cost it money or cause it to close. Risks untaken can also spell trouble, as the companies disrupted by born-digital powerhouses, such as Amazon and Netflix, will attest. This guide to risk management provides a comprehensive overview of the key concepts, requirements, tools, trends and debates driving this dynamic field. Throughout, hyperlinks connect to other TechTarget articles that deliver in-depth information on the topics covered here, so readers should be sure to click on them to learn more.

Risk response plan

Risk response planning combines our efforts thus far into a viable risk response for each threat and opportunity we’ve identified as falling within the range of our risk tolerance threshold. Risk response planning increases the probability and/or impact of opportunities identified within the predetermined tolerance range of our risk register, and reduces the probability and/or impact of any threats.

There are four mitigation strategies to consider when developing a Risk Response Plan for both threats and opportunities.

Response to threats:

• Avoid: change plans
• Mitigate: reduce the probability and/or impact of the threat on the project
• Transfer: assign the risk to someone else
• Accept: do nothing

Response to opportunities:

• Exploit: make the opportunity more likely
• Enhance: increase the value of the opportunity to the project
• Share: partner with someone who can capture the opportunity
• Accept: do nothing

Risk monitoring

The last step is risk monitoring. The project manager monitors the risk register, executing on response plans, as well as documenting subsequent threats and opportunities as they become known throughout the project life cycle.

Risk planning is like any other project planning process, and is never really done until the project itself is complete; therefore, a project manager’s risk monitoring is finished only when the project is complete.

Work break Down Structure

A work-breakdown structure (WBS) in project management and systems engineering is a deliverable-oriented breakdown of a project into smaller components. A work breakdown structure is a key project deliverable that organizes the team’s work into manageable sections. The Project Management Body of Knowledge (PMBOK 5) defines the work-breakdown structure as a “hierarchical decomposition of the total scope of work to be carried out by the project team to accomplish the project objectives and create the required deliverables.”

A work-breakdown structure element may be a product, data, service, or any combination of these. A WBS also provides the necessary framework for detailed cost estimation and control while providing guidance for schedule development and control.

Breaking work into smaller tasks is a common productivity technique used to make the work more manageable and approachable. For projects, the Work Breakdown Structure (WBS) is the tool that utilizes this technique and is one of the most important project management documents. It singlehandedly integrates scope, cost and schedule baselines ensuring that project plans are in alignment.

The Project Management Institute (PMI) Project Management Book of Knowledge (PMBOK) defines the Work Breakdown Structure as a “deliverable oriented hierarchical decomposition of the work to be executed by the project team.” There are two types of WBS:

1) Deliverable-Based

2) Phase-Based.

The most common and preferred approach is the Deliverable-Based approach. The main difference between the two approaches are the Elements identified in the first Level of the WBS.

How to Make a Work Breakdown Structure

A good Work Breakdown Structure is created using an iterative process by following these steps and meeting these guidelines:

Gather critical project documents.

Identify content containing project deliverables, such as the Project Charter, Scope Statement and Project Management Plan (PMP) subsidiary plans.

• Identify Key Team Members
• Identify the appropriate project team members.
• Analyze the documents and identify the deliverables.

Define Level 1 Elements

Define the Level 1 Elements. Level 1 Elements are summary deliverable descriptions that must capture 100% of the project scope.

Verify 100% of scope is captured. This requirement is commonly referred to as the 100% Rule.

Decompose (Breakdown) Elements

Begin the process of breaking the Level 1 deliverables into unique lower-Level deliverables. This “breaking down” technique is called Decomposition.

Continue breaking down the work until the work covered in each Element is managed by a single individual or organization. Ensure that all Elements are mutually exclusive.

Ask the question, would any additional decomposition make the project more manageable? If the answer is “no”, the WBS is done.

Create Wbs Dictionary

Define the content of the WBS Dictionary. The WBS Dictionary is a narrative description of the work covered in each Element in the WBS. The lowest Level Elements in the WBS are called Work Packages.

Create the WBS Dictionary descriptions at the Work Package Level with detail enough to ensure that 100% of the project scope is covered. The descriptions should include information such as, boundaries, milestones, risks, owner, costs, etc.

Create Gantt Chart Schedule

Decompose the Work Packages to activities as appropriate.

Export or enter the Work Breakdown Structure into a Gantt chart for further scheduling and project tracking.

Several startup valuation methods are available for use by financial analysts. Startups, in the most general sense, are new business ventures started up by an entrepreneur. They usually tend to focus on developing unique ideas or technologies and introducing them into the market in the form of a new product or service.

Business valuation is never straightforward for any company. For startups with little or no revenue or profits and less-than-certain futures, the job of assigning a valuation is particularly tricky. For mature, publicly listed businesses with steady revenues and earnings, normally it’s a matter of valuing them as a multiple of their earnings before interest, taxes, depreciation, and amortization (EBITDA) or based on other industry-specific multiples. But it’s a lot harder to value a new venture that’s not publicly listed and may be years away from sales.

Asset Based

This approach focuses on the fair market value (FMV), or the net asset value (NAV) of the company. calculated the total assets less the total liabilities to figure out the cost of re-creating the company. There is little room left to decide which of the assets or liabilities of the company has to be included in the company valuation and how exactly we measure the worth of each.

Other than this, there are two other methods of valuation that are used. The market approach, which looks at what similar businesses in the market are worth, and the earnings approach, which estimates the total amount of money that they business might produce in the future.

The actual value in the asset-based approach to calculate the company valuation could be much higher than the sum of all the recorded assets of the business. Let us take for instance the balance sheet of the company. The balance sheet may not always have all the significant assets like the company’s methods of conducting business and internally developed products.

This happens as only the records which the owner has paid for appear on the company’s balance sheet. So, if there are other assets of the business, they are not recorded in the balance sheet. Other than this, some companies may have special products or services that make them unique. Putting a price on these for selling the business can be difficult.

Adjusted Net Asset Method

The adjusted net asset method can be used when a company has been generating losses, is not operating or the company only holds investments or real estate. This is one of the methods of valuation that is utilized for getting the estimated value of the business.

To get the fair market value, we would have to get the difference between the fair market value of the total assets and the total liabilities of the company. Let us understand how it is done.

Finding the Fair Market Value of Assets

The asset-based method of valuation starts by preparing a financial image of the business from the information that we have on the balance sheet. The current asset value would be different compared to the acquisition costs. Even though the balance sheet has all the assets and liabilities listed on it at historical cost, correctly utilizing this approach is based entirely on recasting those costs and obtaining the current value.

Earnings Based

This is another common method of valuation and is based on the idea that the actual value of a business lies in the ability to produce revenue in the future. There are a lot of methods of valuation under the earning value approach, but the most common one is capitalizing past earnings.

Capitalization of earnings is determined by calculating the NPV (Net present value) of the expected future cash flows or profits. The estimate here is found by taking the future earnings of the company and dividing them by a cap rate (capitalization rate).

In short, this is an income-valuation approach that lets us know the value of a company by analyzing the annual rate of return, the current cash flow and the expected value of the business.

This approach of the capitalization of earnings, being one of the conventional methods of valuation, helps investors figure out the possible risks and return of acquiring a company.

As soon as all the variables are known, the calculation of the capitalization rate is obtained with a simple formula. The formula is operating income divided by the purchase price. At first, the thing to be determined is the annual gross income of the investment.

After this, the operating expenses has to be subtracted to find out the total operating income. Then this value is divided by the investment’s/property’s purchase cost to find out the capitalization rate.

Disadvantages of Capitalization of Earnings Method

There isn’t one perfect method to determine a company’s value, which is why assessing a company’s future earnings has some drawbacks. At first, the method used to predict the future earnings might give an inaccurate figure, which would eventually result in less than expected generated profits.

In addition to this, exceptional circumstances can occur that eventually compromises the earnings, and affect the valuation of the investment. Further, a business that has just entered the market might lack adequate information for finding out an accurate valuation of the company.

The buyer has to know all about the desired ROI and the acceptable risks, as the capitalization rate has to be reflected in the risk tolerance, market characteristics of the buyer, and the expected growth factor of the business. For instance, if a buyer is not aware of the targeted rate, he might pass on a more suitable investment or overpay for an investment.

Discounted Cash flow Models

For most startups especially those that have yet to start generating earnings the bulk of the value rests on future potential. Discounted cash flow analysis then represents an important valuation approach. DCF involves forecasting how much cash flow the company will produce in the future and then, using an expected rate of investment return, calculating how much that cash flow is worth. A higher discount rate is typically applied to startups, as there is a high risk that the company will inevitably fail to generate sustainable cash flows.

The trouble with DCF is the quality of the DCF depends on the analyst’s ability to forecast future market conditions and make good assumptions about long-term growth rates. In many cases, projecting sales and earnings beyond a few years becomes a guessing game. Moreover, the value that DCF models generate is highly sensitive to the expected rate of return used for discounting cash flows. So, DCF needs to be used with much care.

Risk management is the practice of identifying, evaluating, and preventing or mitigating risks to a project that have the potential to impact the desired outcomes. Project managers are typically responsible for overseeing the risk management process throughout the duration of a given project.

Project risk management is the process of identifying, analyzing and responding to any risk that arises over the life cycle of a project to help the project remain on track and meet its goal. Risk management isn’t reactive only; it should be part of the planning process to figure out risk that might happen in the project and how to control that risk if it in fact occurs.

A risk is anything that could potentially impact your project’s timeline, performance or budget. Risks are potentialities, and in a project management context, if they become realities, they then become classified as “issues” that must be addressed. So risk management, then, is the process of identifying, categorizing, prioritizing and planning for risks before they become issues.

Risk management can mean different things on different types of projects. On large-scale projects, risk management strategies might include extensive detailed planning for each risk to ensure mitigation strategies are in place if issues arise. For smaller projects, risk management might mean a simple, prioritized list of high, medium and low priority risks.

To effectively manage risk, project managers must have a clear understanding of their objectives so they can identify any possible barriers that could impact the team’s ability to produce results.

Types of Project Risk

Beyond the basics of what “risk” means, project managers should also know the different types of risks they may encounter. Depending on the project type, the factors that should be considered will differ.

There are several types of risks that occur frequently, regardless of the specifics of the project. These common types of risk include:

• Cost: The risk of events that impact the budget, especially those that cause the project to be completed over budget. Errors in cost estimation commonly generate risk in addition to external factors.
• Schedule: The risk of unplanned scheduling conflicts, such as events that cause the project to be delayed. Scope creep is a common reason for scheduling issues and project delays.
• Performance: The risk of events that cause the project to produce results that are inconsistent with the project specifications.

Risk Management Process

Risk owners require several skills to manage project risk well, which include:

• Communication: Having the ability to communicate well with stakeholders, so that everyone understands the role they play in reducing the impact of risk.
• Strategic thinking: Being strategic and having the ability to problem solve and come up with solutions for the project risks identified.
• An understanding of the organisation: Knowing the businesses’ strategic direction, goals and risk appetite.
• Planning: Ensuring that the risk management plan is being actioned throughout the project lifecycle.
• Resourcefulness: Being quick to act under pressure to ensure that the project risks are addressed as soon as possible.

Risk Analysis & Identification

Identify and assess the potential risks

When it comes to identifying and assessing the potential risks related to the project, consider how a risk could occur, what the impact would be and what you can do to reduce the probability and impact (if you can) of the project risk. Understanding how much control you have over the risk is key. For some risks, you may have very little control over them. Keep in mind that along with identifying risk events, as mentioned above you should also list any project risks that can be identified as opportunities or uncertainty related to the project. Risk events and opportunities are often easier to identify as they have clear impacts, whereas uncertainty can be harder to measure as the result of a risk is unknown and is difficult to measure.

Assign a risk owner

Whether it is a dedicated risk manager, or a member of the project team, every project will need a risk owner assigned to keep track of risks throughout the project lifecycle. The risk owner is the key person who manages the risk management strategy. This doesn’t mean that the risk owner must address every risk that could impact the project, however, instead they have the responsibility of assigning ownership to team members and stakeholders, as well as updating and keeping track of the risk management plan. If you’re the risk owner, it’s key to make sure that every member of the team is aware of their role in reducing and mitigating project risk.

Draw on subject matter experts

As part of your risk management strategy in project management it is essential to touch base with subject matter experts, such as contractors and senior stakeholders. Receiving input from others will help ensure you have crossed off all the potential project risks, as you may find that others have insights into risks you may not have discovered on your own. They can also provide advice on effective strategies they have implemented in previous projects, that you could integrate into your risk management plan. Also see if your organisation has risk registers from past projects completed available to review and any lessons learned reports.

Determine the probability of a project risk occurring

Once you have a list of the possible risks, the next step in your project risk assessment is ranking the risks by assigning probability. That way you will know which risks are more likely to occur and which would have the largest impact on your project. The risks that you measure that will have the highest impact, should be addressed first. There are many different formulas for measuring risk, however one of the popular ways is assigning a number to the risk.

Consider the action you will take

Once you have all the project risks ranked according to the probability of the risk occurring, the next step will be planning out the actions you will take. With some risks you may be able to eliminate them entirely, however others may need to follow a mitigation strategy.

Include risk Management in your post project review

Just as one project comes to an end, you may find yourself handed your next project, leaving little time for a post project review. However, the greatest learnings can come from analyzing how your project went, including the risk management. So, when the project comes to an end, take the time to evaluate what went well on the project, what could have been handled better and the learnings you can you take with you to your next project.

Managing Risk throughout the Organization

Building a risk management protocol into your organization’s culture by creating a consistent set of standard tools and templates, with training, can reduce overhead over time. That way, each time you start a new project, it won’t be like having to reinvent the wheel.

Things such as your organization’s records and history are an archive of knowledge that can help you learn from that experience when approaching risk in a new project. Also, by adopting the attitudes and values of your organization to become more aware of risk, your organization can develop a better sense of the nature of uncertainty as a core business issue. With improved governance comes better planning, strategy, policy and decisions.

A cost-benefit analysis is a systematic process that businesses use to analyze which decisions to make and which to forgo. The cost-benefit analyst sums the potential rewards expected from a situation or action and then subtracts the total costs associated with taking that action. Some consultants or analysts also build models to assign a dollar value on intangible items, such as the benefits and costs associated with living in a certain town.

Before building a new plant or taking on a new project, prudent managers conduct a cost-benefit analysis to evaluate all the potential costs and revenues that a company might generate from the project. The outcome of the analysis will determine whether the project is financially feasible or if the company should pursue another project.

In many models, a cost-benefit analysis will also factor the opportunity cost into the decision-making process. Opportunity costs are alternative benefits that could have been realized when choosing one alternative over another. In other words, the opportunity cost is the forgone or missed opportunity as a result of a choice or decision. Factoring in opportunity costs allows project managers to weigh the benefits from alternative courses of action and not merely the current path or choice being considered in the cost-benefit analysis.

By considering all options and the potential missed opportunities, the cost-benefit analysis is more thorough and allows for better decision-making.

The Cost-Benefit Analysis Process

A cost-benefit analysis should begin with compiling a comprehensive list of all the costs and benefits associated with the project or decision.

The costs involved in a CBA might include the following:

• Direct costs would be direct labor involved in manufacturing, inventory, raw materials, manufacturing expenses.
• Indirect costs might include electricity, overhead costs from management, rent, utilities.
• Intangible costs of a decision, such as the impact on customers, employees, or delivery times.
• Opportunity costs such as alternative investments, or buying a plant versus building one.
• Cost of potential risks such as regulatory risks, competition, and environmental impacts.

Advantages:

• Higher revenue and sales from increased production or new product.
• Intangible benefits, such as improved employee safety and morale, as well as customer satisfaction due to enhanced product offerings or faster delivery.
• Competitive advantage or market share gained as a result of the decision.

An analyst or project manager should apply a monetary measurement to all of the items on the cost-benefit list, taking special care not to underestimate costs or overestimate benefits. A conservative approach with a conscious effort to avoid any subjective tendencies when calculating estimates is best suited when assigning a value to both costs and benefits for a cost-benefit analysis.

Finally, the results of the aggregate costs and benefits should be compared quantitatively to determine if the benefits outweigh the costs. If so, then the rational decision is to go forward with the project. If not, the business should review the project to see if it can make adjustments to either increase benefits or decrease costs to make the project viable. Otherwise, the company should likely avoid the project.

The Purpose of Cost-Benefit Analysis

The purpose of cost-benefit analysis in project management is to have a systemic approach to figure out the pluses and minuses of various paths through a project, including transactions, tasks, business requirements and investments. The cost-benefit analysis gives you options, and it offers the best approach to achieve your goal while saving on investment.

There are two main purposes in using CBA:

• To determine if the project business case is sound, justifiable and feasible by figuring out if its benefits outweigh costs.
• To offer a baseline for comparing projects by determining which project’s benefits are greater than its costs.

Limitations of the Cost-Benefit Analysis

For projects that involve small- to mid-level capital expenditures and are short to intermediate in terms of time to completion, an in-depth cost-benefit analysis may be sufficient enough to make a well-informed, rational decision. For very large projects with a long-term time horizon, a cost-benefit analysis might fail to account for important financial concerns such as inflation, interest rates, varying cash flows, and the present value of money.

Alternative capital budgeting analysis methods, including net present value (NPV), could be more appropriate for these situations. The concept of present value states that an amount of money or cash in the present day is worth more than receiving the amount in the future since today’s money could be invested and earn income.

One of the benefits of using the net present value for deciding on a project is that it uses an alternative rate of return that could be earned if the project had never been done. That return is discounted from the results. In other words, the project needs to earn at least more than the rate of return that could be earned elsewhere or the discount rate.

However, with any type of model used in performing a cost-benefit analysis, there are a significant number of forecasts built into the models. The forecasts used in any CBA might include future revenue or sales, alternative rates of return, expected costs, and expected future cash flows. If one or two of the forecasts are off, the CBA results would likely be thrown into question, thus highlighting the limitations in performing a cost-benefit analysis.

Efficient Investment Analysis

Investment analysis is a broad term for many different methods of evaluating investments, industry sectors, and economic trends. It can include charting past returns to predict future performance, selecting the type of investment that best suits an investor’s needs, or evaluating individual securities such as stocks and bonds to determine their risks, yield potential, or price movements. Investment analysis is key to a sound portfolio management strategy.

The aim of investment analysis is to determine how an investment is likely to perform and how suitable it is for a particular investor. Key factors in investment analysis include the appropriate entry price, the expected time horizon for holding an investment, and the role the investment will play in the portfolio as a whole.

In conducting an investment analysis of a mutual fund, for example, an investor looks at how the fund performed over time compared to its benchmark and to its main competitors. Peer fund comparison includes investigating the differences in performance, expense ratios, management stability, sector weighting, investment style, and asset allocation.

Determining Financial Needs for Projects

Add up costs

One-time costs may include such items as legal and professional costs for incorporating or registering your business; starting inventory; licence and permit fees; office supplies and equipment; long-term assets, such as machinery, a vehicle or real estate; consulting services; and website design.

Recurring expenses will include such items as salaries, rent or lease payments, raw materials, marketing costs, office and plant overhead, financing costs, maintenance and professional fees.

Once you’ve determined your initial and follow-on expenses, you will need to estimate how much money you will have at your disposal.

Calculate your financial resources

Estimate how much starting capital you will have and the amount of revenue you’ll be able to generate each month during the start-up period. To calculate the latter, research your potential market and industry averages to come up with realistic numbers.

Now, plug your estimated financial resources and your estimated expenses into a set of financial projections for your business. A quick examination of your projections will show if you’ll have a financial shortfall.

When you have educated yourself on what entails in the market, it’s time to determine what you will be spending on. Starting a business comes with a lot of expenses. Some of these are one- time costs and others may be recurring expenses. Examples of one-time costs include:

• Cost of registering and licensing your business. Getting the appropriate and legal backing is essential for the long-term of the business.
• Cost of Equipment. These are the machinery that will produce a bulk of your services.
• Office supplies
• Vehicle for transportation
• Office/Production Space

On the other hand, recurring expenses will include:

• Maintenance fees that will ensure your machine framework is functioning properly.
• Salaries for your workers. Whether you start with two employees or twenty, you need to have resources to pay them when due.
• Lease payments. If you lose your production space, your business suffers a great deal. It is extremely necessary to do all you can to maintain that space.
• Marketing costs are also recurring expenses. You will need to consistently get your product into the market by advertising through various means. You may use marketers or media.
• Cost of basic materials that you would be using should also be put into consideration.

Project financing: Advantages:

1. Non-Recourse: The typical project financing involves a loan to enable the sponsor to construct a project where the loan is completely ‘non-recourse’ to the sponsor, i.e., the sponsor has no obligation to make payments on the project loan if revenues generated by the project is insufficient to cover the principal and interest payments on the loan. In order to minimize the risks associated with a non-recourse loan, a lender typically will require indirect credit supports in the form of guarantees, warranties and other covenants from the sponsor, its affiliates and third parties involved with the project.
2. Maximise Leverage: In a project financing, the sponsor typically seeks to finance the cost of development and construction of the project on a highly leveraged basis. Frequently, such costs are financed using 80 to 100 percent debt. High leverage in a non-recourse project financing permits a sponsor to put less in funds at risk, permits a sponsor to finance the project without diluting its equity investment in the project and, in certain circumstances, also may permit reductions in the cost of capital by substituting lower-cost, tax-deductible interest for higher-cost, taxable returns on equity.
3. Off-Balance-Sheet Treatment: Depending upon the structure of project financing, the project sponsor may not be required to report any of the project debt on its balance sheet because such debt is non-recourse to the sponsor. Off-balance-sheet treatment can have the added practical benefit of helping the sponsor comply with covenants and restrictions relating to borrowing funds contained in other indentures and credit agreements to which the sponsor is a party.
4. Maximize tax benefit: Project financings should be structured to maximize tax benefits and to assure that all possible tax benefits are used by the sponsor or transferred, to the extent permissible, to another party through a partnership, lease or other vehicle.

Impact of Leveraging on Cost of Finance

Taking on debt, as an individual or a company, will always bring about a heightened level of risk due to the fact that income must be used to pay back the debt even if earnings or cash flows go down. From a company’s perspective, the use of financial leverage can positively or sometimes negatively impact its return on equity as a consequence of the increased level of risk.

Impact on Return on Equity

Return on equity is the rate of return on the shareholders “Equity of a company’s common stock owners. It measures a firm’s efficiency at generating profits from every unit of shareholders’ equity. Return on equity shows how well a company uses investment funds to generate earnings growth. It can be calculated using the following equation:

ROE = Net Income (After Tax) / Shareholder Equity

Leverage, Risk, and Misconceptions

The most obvious risk of leverage is that it multiplies losses. Due to financial leverage’s effect on solvency, a company that borrows too much money might face bankruptcy during a business downturn, while a less-levered company may avoid bankruptcy due to higher liquidity. There is a popular prejudice against leverage rooted in the observation of people who borrow a lot of money for personal consumption, for example, heavy use of credit cards. However, in finance the general practice is to borrow money to buy an asset with a higher return than the interest on the debt. Instead of spending money it doesn’t have, a company actually creates value. On the other hand, when debt is taken on for personal use there is no value being created, i.e., no leveraging.

There is also a misconception that companies enter a higher level of financial leverage out of desperation, referred to as involuntary leverage. While involuntary leverage is certainly not a good thing, it is typically caused by eroding equity value as opposed to the addition of more debt. Therefore, it is typically a symptom of the problem, not the cause.

Combining Operating and Financial Leverage

Operating and financial leverage can be combined into an overall measure called “Total leverage.” Total leverage can be used to measure the total risk of a company and can be defined as the percentage change in stockholder earnings for a given change in sales. In other words, total leverage measures the sensitivity of earnings to changes in the level of a company’s sales.

Methods For Finding Total Leverage

Total leverage can be determined by a couple of different methods. If the percentage change in earnings and the percentage change in sales are both known, a company can simply divide the percentage change in earnings by the percentage change in sales. Earnings can be measured in terms of EBIT, earnings before interest and taxes, or EPS, earnings per share. While EBIT can be determined by referencing a company’s income statement, we can determine earnings per share by dividing the company’s net income by it’s average price of common shares.

TL = {(Revenue – Variable Costs) / Operating income} * Operating Income / Net Income

A feasibility study is an assessment of the practicality of a proposed project or system. A feasibility study aims to objectively and rationally uncover the strengths and weaknesses of an existing business or proposed venture, opportunities and threats present in the natural environment, the resources required to carry through, and ultimately the prospects for success. In its simplest terms, the two criteria to judge feasibility are cost required and value to be attained.

A well-designed feasibility study should provide a historical background of the business or project, a description of the product or service, accounting statements, details of the operations and management, marketing research and policies, financial data, legal requirements and tax obligations. Generally, feasibility studies precede technical development and project implementation. A feasibility study evaluates the project’s potential for success; therefore, perceived objectivity is an important factor in the credibility of the study for potential investors and lending institutions. It must therefore be conducted with an objective, unbiased approach to provide information upon which decisions can be based.

Benefits of a Feasibility Study

There are several benefits to feasibility studies, including helping project managers discern the pros and cons of undertaking a project before investing a significant amount of time and capital into it. Feasibility studies can also provide a company’s management team with crucial information that could prevent them from entering into a risky business venture.

Feasibility studies also help companies with new business development, including determining how it will operate, potential obstacles, competition, market analysis, and the amount and source of financing needed to grow the business. Feasibility studies aim for marketing strategies that could help convince investors and banks that investing in a particular project or business is a wise choice.

TELOS is an acronym in project management used to define five areas of feasibility that determine whether a project should run or not.

• T – Technical: Is the project technically possible?
• E – Economic: Can the project be afforded? Will it increase profit?
• L – Legal: Is the project legal?
• O- Operational: How will the current operations support the change?
• S – Scheduling: Can the project be done in time?

Importance of Project Feasibility

The importance of a feasibility study is based on organizational desire to “get it right” before committing resources, time, or budget. A feasibility study might uncover new ideas that could completely change a project’s scope. It’s best to make these determinations in advance, rather than to jump in and to learn that the project won’t work. Conducting a feasibility study is always beneficial to the project as it gives you and other stakeholders a clear picture of the proposed project.

Benefits of conducting a feasibility study:

• Improves project teams’ focus
• Identifies new opportunities
• Provides valuable information for a “go/no-go” decision
• Narrows the business alternatives
• Identifies a valid reason to undertake the project
• Enhances the success rate by evaluating multiple parameters
• Aids decision-making on the project
• Identifies reasons not to proceed

Apart from the approaches to feasibility study listed above, some projects also require other constraints to be analyzed:

• Internal Project Constraints: Technical, Technology, Budget, Resource, etc.
• Internal Corporate Constraints: Financial, Marketing, Export, etc.
• External Constraints: Logistics, Environment, Laws, and Regulations, etc

Features of a feasibility study for a good project

A project feasibility study evaluates the following topics in project management:

• Time: How long do you think it’ll take to finish?
• Risk: What are the dangers of finishing this project? Based on the predicted rewards, is the risk worth the company’s money and time?
• Legality: Is the company well-equipped to complete the project in terms of technical resources?
• Budget: Is the organisation financially capable of completing the project, and does the cost-benefit analysis justify proceeding?
• Operational Feasibility: Is the project addressing the organization’s needs in its intended scope by resolving issues and/or capturing opportunities?
• Technical capability: Is the company well-equipped to complete the project in terms of technical resources?

Scope of Project Feasibility

Need Analysis

The realization of the need of the project is indicated in this head. This identified need may influence the company itself, another company, the government or public. The need is confirmed and evaluated by conducting preliminary study. A proposal is then developed that specify that how the need may be satisfied.

Process Work

The preliminary analysis performed to ascertain what will be needed to fulfil the need is included in the process work. The consultant who is an expert in the project area may perform the work. System models or prototypes are mostly involved in the preliminary study. The general characteristics of the process can be illustrated by using artist’s conception and scaled down models for technology oriented projects. The forecasting of the result before the starting of the actual project can be carried out by the simulation of the proposed system.

Engineering and Design

A thorough technical study of the proposed project is involved in this. Written quotations are got from subcontractors and suppliers as required. The capabilities of the technology are evaluated as required. If required, the product design must be performed at this time.

Cost Estimate

The estimation of project cost to an acceptable level of accuracy is included in this category. At this level of a project plan, levels of around -5% to +15% are common. Cost estimation includes both the initial & operating costs. Cost estimate document should also contain estimates of capital investment and of recurring and non-recurring costs. The sensitivity of the project plan to the estimated cost values is also viewed by conducting sensitivity analysis on the estimated cost values.

Financial Analysis

The analysis of the cash flow profile of the project is included in financial analysis. This analysis should contain sources of capital, rates of return, payback periods, inflation, breakeven points, sensitivity and residual values. It is important analysis in which it is ascertained that either the funds are available or not and also when the funds will be provided to the project. The economic and financial feasibility of the project is supported with the help of the project cash flow profile.

Project Impacts

The assessment of the impact of the proposed project is provided by this portion of feasibility study. Social, environmental, cultural, economic and political impacts may be some of the factors that how public views the project. The value added capacity of the project must also be evaluated. On the basis of the cost of the raw material used in manufacturing product and the price of the product, a value added tax can be evaluated. The tax so gathered can be considered as a contribution to government pockets.

Conclusions and Recommendations

The entire outcome of the project feasibility analysis should be covered in the ending portion of the project feasibility analysis. This may reflect the rejection or endorsement of the project. This portion of feasibility report must contain the recommendations on what should be done.

Technical aspects relate to the production or generation of the project output in the form of goods and services from the projects inputs. Technical analysis represents study of the project to evaluate technical and engineering aspects when a project is being examined and formulated. It is a continuous process in the project appraisal system which determines the prerequisites for meaningful commissioning of the project.

Purpose of Technical Analysis

• In order to find out the most suitable and optimal structure of the project in terms of technology, location etc.
• The primary purpose of conducting technical analysis is to find out the technical feasibility of the project. It’s done to know whether all the inputs required to set up the project are available or not.
• Deciding from all available alternatives which will be the best option for the organisation.

Use of Various Informational Tools for Analyzing

Choice of Technology/Manufacturing Process:

Firstly the component associated with technical analysis is the choice of technology or the choice of the manufacturing process. The several factors which influence the choice of technology are:

• Plant Capacity: Also known as the production capacity is the number of units that can be produced in a specific also period of time.
• Principal Inputs: These inputs used to make final products and constitute at least 10% of the cost of material.
• Investment Outlay and production costs: Investment outlay is the cost incurred to acquire an asset or execute a strategy similarly production cost are the business costs involved in the production process.
• Use by other units: The technology adopted should prove to be successful earlier by other existing units.
• Ease of adoption and modernization must be an important factor while making a choice for technology.

Technical Arrangements:

This aims to make arrangements to obtain the technical know-how needed to conduct the proposed production process.

• Price of the technology in terms of infrastructure and licensing fee.
• Suitable modes of payment available must be available.
• Collaboration time of the agreement.
• Benefits from research and development services.
• Process and Performance guarantees of the technology.

Raw Material: In short it is the basic material which upon processing is converted into the final product. It is basically of four types:

• Agricultural products: Field crops, fruits, vegetables, rice, wheat etc.
• Mineral products: Industrial rocks, minerals, clays, sand, gravel, talc, ceramics, paints etc.
• Live Stock and forest products: Farm animals, sheep, horses, goats, pigs, dyes, wood, paper, rubber etc.
• Marine Products: Fish, corals, bacteria, sponges, seashells, crabs etc.

Product Mix

It is also known as product assortment is the total range of products offered by the company. Market requirements guide the choice of product mix.

While planning the production facilities some flexibility in product mix should be thought in accordance with the technical aspects.

It is an important area in technical analysis. It must aim to satisfy a broad range of customers and to do so it must be compatible with other available resources.

Plant Capacity:

Plant capacity also known as the production capacity is the number of units that can be produced in a specific period of time or can be called the maximum output rate of production.

FNC (feasible normal capacity): The capacity achievable under normal working conditions and on the other hand NMC (Nominal maximum capacity- capacity achievable technically or the installed capacity

Following factors have bearing on the plant capacity decision:

• Technological requirement
• Input constraints
• Investment cost
• Product Mix
• Latest Developments
• Ease of absorption
• Auxiliary Materials & Factory Supplies
• Processed Industrial Materials & Components
• Period of collaboration & Assistance provided
• The continuing benefit of R&D work being done
• Market conditions
• Resources of the firm
• Government Policy

Factors influencing the Choice of site location:

• Proximity to the source of raw materials: so the location must be close to the area from which raw material is to be acquired.
• Proximity to markets: for instance, the markets in which the product will sell must be close to the production site and flow of goods must be smooth.
• Availability of infrastructure: infrastructure must be available and suitable in order to conduct operations at that location.
• Government policies: above all the government restrictions must be minimum.
• Other factors: for example the climatic conditions, general living conditions, ancillary units, pollution.

Advancement in the Era of E- Commerce in Project Management

Ecommerce projects are one of the most challenging of all kinds of software projects, owning to the nature of the project itself. With integrated and inter-organisational nature, ecommerce projects have a faster development cycle time and a pressing need for an effective strategy at every phase of the project to deal with the problems.

• Package Selection: The hardest challenge of picking the right software vendor and the package solution from a plethora of options.
• Business Intelligence: Techniques and procedures to obtain the required information about the company’ s competitors, customers, their requirements and all the other internal business processess.
• Customer Relationship Management: The ability to learn how to treat each customer and his requirement as an important individual.
• Process Improvement: Aligining the organization’s operations with its strategic objectives with a goal to improve products and services.
• Human-Resource Management: Hiring and managing the skilled people and do the best to avoid any kinds conflict & project obstacles.

Tactics:

Set clear trackable goals with compelling metrics

Though almost every e-commerce project will have the ultimate goal of selling more products, it’s unfortunately common for a business to forget entirely about setting specific goals.

A bad project manager might decide that it’s worth carrying out some influencer marketing, then simply assume that it was worth it if the influencer in question gets a lot of hits for the relevant content.

Monitor and track the use of time

E-commerce businesses often rely on remote working and flexible hours because they’re ideally suited to them, and they’re great for productivity. That said, they’re somewhat harder for monitoring.

This is a problem because time is a precious resource, and it’s hard to manage a team effectively when you don’t know where time is being wasted.

Think of virtual assistants. Do you know how they’re using the time you’ve paid for? This is what Timeneye was designed to help with. Get everyone in your business operating on the same page and tracking their time in the same way. You can then look through the time logs to determine exactly where time is being lost through inefficiency, and start making changes.

Choose the right e-commerce business tools

Because so much of an online business takes place through digital systems (and even in the cloud), it’s mission-critical that you base your company on the right foundations.

Choose well, and you can scale your business smoothly, keep your team ticking along, and cut down on wasted costs through automation.

Ideally, every e-commerce business would run on a simple and scalable CMS like Shopify, allowing the hosting to scale with massive growth. It would use tools like Timeneye to track time, and use a project management tool like Basecamp to keep all relevant files and notes in one location.

Never stop iterating and testing

You plan a project, implement it, achieve the goal (or goals), and move on. That’s how most people would operate in most instances, but ecommerce is a different beast. There, very few projects are ever truly finished. Instead, they’re iterated. You plan some website updates, get them drafted, run them as A/B variants to see how they perform, then go right back to planning. Optimizely has some great options for product teams.

Why? Because there’s no such thing as a perfect store, or a perfect product listing, or a perfect checkout service. There’s always something that could improve. Couple in the aforementioned variability of e-commerce tactics, and you have all the reason you’d ever need to keep going with the improvements and never stop.

Use a scaling budget to account for change

Creating a small business budget is a mandatory part of running and growing a sustainable business, because you’ll always need to be investing and reinvesting in your business.

One problem that comes up a lot with e-commerce is that a budget that seemed right to begin with can become a problem it can suddenly become too little, or even too much.

This is down to two things: old methods becoming more or less effective (such as SEO tactics losing potency after Google algorithm changes), and sales fluctuating massively. If you happen upon a hit product, you might suddenly have an opportunity to make a lot of money from it, but only if you can budget for it.

Market Feasibility

Market feasibility must not be mixed up with economic feasibility. The potential influence of market demand, competitive activities, and available market share should be considered in the market feasibility analysis. During the start-up, ramp-up, and commercial start-up phases of the project, possible competitive activities (local, regional, national and international) should be analyzed for early contingency funding and impacts on the operating costs.

• Type of industry
• Prevailing market
• Future market growth
• Competitors and potential customers
• Projection of sales

Technical Feasibility

The engineering feasibility of the project is viewed in the technical feasibility. Certain important engineering aspects are covered which are necessary for the designing of the project like civil, structural, and other relevant aspects. The technical capability of the projected technologies and the capabilities of the personnel to be employed in the project are considered.

In certain examples especially when projects are in third world countries, technology transfer between cultures and geographical areas should be analyzed. By doing so productivity gain (or loss) and other implications are understood due to the differences in fuel availability, geography, topography, infrastructure support, and other problems.

Financial Feasibility

Financial feasibility must be differentiated from economic feasibility. The ability of the project management to raise sufficient funds required to implement the proposed project is included in the financial feasibility. Additional investors and other sources of funds are considered by the project proponents for their projects in many cases.

In such situations feasibility, sources, soundness, and applications of these project funds may be a hindrance. Other aspects of financial feasibility should also be viewed, if appropriate, like creditworthiness, loan availability, equity, and loan schedule. The implications of land purchase, leases, and other estates inland are also reviewed in the financial feasibility analysis.

• Initial investment
• Resources to procure capital: Banks, investors, venture capitalists
• Return on investment

Economic Viability

Economic feasibility refers to the feasibility of the considered project to produce economic benefits. A benefit-cost analysis is needed. Furthermore, the economic feasibility of a project can also be evaluated by breakeven analysis. In order to facilitate the consistent basis for the evaluation, the tangible and intangible facets of a project must be translated into economic terms. Economic feasibility is critical even when the project is non-profit in nature.

This evaluation typically includes a cost-benefit analysis of the project, which aids firms in determining the project’s viability, cost, and benefits before spending financial resources. It also acts as an objective project review, boosting project credibility by assisting decision-makers in identifying the proposed project’s beneficial economic benefits to the organisation.

Safety Feasibility Study

Another important aspect that must be considered in project planning is safety feasibility. Safety feasibility involves the analysis of the project in order to ascertain its capacity to implement & operate safely with the least unfavorable effects on the environment. Mostly in complex projects, environmental impact assessment is not properly addressed.

Political Feasibility Study

The directions for the proposed project are mostly dictated by political considerations. This is certainly correct for large projects with potential visibility that may have important political implications and government inputs. For example, regardless of the merit of the project, the political necessity may be a source of assistance for a project.

Operational Feasibility

This evaluation entails conducting research to evaluate whether and to what extent the organization’s needs can be addressed by completing the project. Operational feasibility studies also look at how a project plan meets the requirements specified during the system development requirements analysis phase.

Cultural Feasibility Study

The compatibility of the proposed project with the cultural environment of the project is included in the cultural feasibility. Planned operations should be integrated with the local cultural beliefs and practices in labor-intensive projects. For example, what a person is willing to perform or not perform is influenced by his religious beliefs.

Social Feasibility Study

The effect that a proposed project may have on the social system in the project environment is addressed in the social feasibility. It may happen that a particular category of employees may be short or not available as a result of ambient social structure.

Project initiation is the first phase of the project management life cycle and in this stage, companies decide if the project is needed and how beneficial it will be for them. The two metrics that are used to judge a proposed project and determine the expectations from it are the business case and feasibility study.

The term “Project initiation” comes from a five-phase model created by the Project Management Institute (PMI). PMI outlines this model in their Guide to the Project Management Body of Knowledge, also known as the PMBOK® Guide.

Important

• Take major decisions that establish the direction and resource requirements, like the project charter and selecting the project stakeholders, are made during this phase. The stakeholders arrive at a clear objective to ensure everyone stays on the same page in terms of how the project should proceed.
• There will be multiple checks during and after project execution to prevent miscommunication and to ensure the project stays on track throughout its course. However, precious time and resources might get wasted which is undesirable.
• Effective project management requires you to maximize benefits and minimize costs while delivering ‘value’ to the customer. Having a clear project objective helps you achieve all this.

 The model divides a project’s lifecycle into these five stages:

• Project initiation: Broadly define your project and secure buy-in.
• Project planning: Create detailed goals and a project roadmap.
• Project execution: Launch your project using information from the first two steps.
• Project performance: Measure effectiveness using key performance indicators (KPIs).
• Project closure: Debrief with stakeholders.

Steps:

Creating a business case

The business case is an important document that explains how the project’s goals align with the company’s long-term plans. This document explains why should the company spend its technical, financial, and human resources on the specific project.

An ideal business case does not talk about any technical details of the project and focuses solely on the business aspects. It is made to convince the upper management to approve the project and answer their concerns related to possible financial and business-related risks.

Conducting a feasibility study

After the approval of the business case, the next step is to determine the likelihood of the project’s success after considering all the factors. This study identifies the high-level project constraints and assumptions of the project and decides whether the project is worth it or not.

Establishing a project charter

The project charter is perhaps the most comprehensive and important part of the project initiation process. It answers the 3 Ws to identify the scope/objective, team members, and the possible timeframe of the project.

The charter is, in some ways, the first document of the project that identifies the necessary details like the goals and the constraints of the project. It also identifies the project scope and lists the required resources for the completion of the project.

Identifying stakeholders and making a stakeholder register

Communication and negotiations are a huge part of effective project management and a large part of a project manager’s time is usually spent dealing with project stakeholders.

It’s the responsibility of the project manager to ensure the means and frequency of communication in project management with project stakeholders according to their influence and interest in the project. A common practice is to maintain a stakeholder register or a stakeholder map to decide the frequency and means of communication for each stakeholder according to their influence and interest in the project.

Assembling the team and establishing a project office

No project can be started without a project team. Assembling a working project team and assigning them roles and responsibilities is a vital part of the project initiation phase. Assigning roles and responsibilities early on also increases the overall accountability of the entire team and can help you as a manager in the later phases of the project life cycle.

Final review

After performing everything, it’s a good practice to review the entire project initiation stage to ensure you missed nothing. In later stages, you’ll continue reviewing your work as monitoring and controlling is one of the five phases of the project management life cycle.