UNIT-4

What is project planning?

Project Planning Is A Discipline Addressing How To Complete A Project In A
Certain Timeframe, Usually With Defined Stages And Designated Resources.
One View Of Project Planning Divides The Activity Into These Steps:

 Setting Measurable Objectives

 Identifying Deliverables
 Scheduling
 Planning Tasks

Why is project planning important?

Project Planning Is Important At Every Phase Of A Project. It Lays Out

The Basics Of A Project, Including The Following:
 Scope
 Objectives
 Goals
 Schedule
 Facilitate Communication And Provide A Central Source Of Information
For Project Personnel;
 Help The Project Sponsor And Other Key Stakeholders Know What Is
Required;
 Identify Who Will Perform Certain Tasks, And When And How Those
Tasks Will Happen;
 Facilitate Project Management And Control As The Project Progresses;
 Enable Effective Monitoring And Control Of A Project;
 Manage Project Risk; And
 Generate Feedback Useful For The Next Project Planning Phase.

1
What are the components of a project plan?
The three major parts of a project plan are the scope, budget and timeline.
They involve the following aspects:

 Scope. The scope determines what a project team will and will not do. It
takes the team's vision, what stakeholders want and the customer's
requirements and then determines what's possible. As part of defining the
project scope, the project manager must set performance goals.
 Budget. Project managers look at what manpower and other resources
will be required to meet the project goals to estimate the project's cost.
 Timeline. This reveals the length of time expected to complete each phase
of the project and includes a schedule of milestones that will be met.

How do you create a project plan?

Project planning includes the following 10 steps:

2
1. Define stakeholders. Stakeholders include anyone with an interest in the
project. They can include the customer or end user, members of the
project team, other people in the organization the project will affect and
outside organizations or individuals with an interest.
2. Define roles. Each stakeholder's role should be clearly defined. Some
people will fill multiple roles, however.
3. Introduce stakeholders. Hold a meeting to bring stakeholders together
and unify the vision behind the project. The topics covered should include
scope, goals, budget, schedule and roles.
4. Set goals. Take what is gleaned from the meeting and refine it into a
project plan. It should include goals and deliverables that define what the
product or service will result in.
5. Prioritize tasks. List tasks necessary to meet goals and prioritize them
based on importance and interdependencies. A Gantt chart can be helpful
for mapping project dependencies.
6. Create a schedule. Establish a timeline that considers the resources
needed for all the tasks.
7. Assess risks. Identify project risks and develop strategies for mitigating
them.
8. Communicate. Share the plan with all stakeholders and provide
communications updates in the format and frequency stakeholders
expect.
9. Reassess. As milestones are met, revisit the project plan and revise any
areas that are not meeting expectations.
10.Final evaluation. Once the project is completed, performance should be
evaluated to learn from the experience and identify areas to improve.

3
What are the 5 phases of a project?
Projects typically pass through five phases. The project lifecycle includes the
following:

 Initiation defines project goals and objectives. It also is when feasibility is

considered, along with how to measure project objectives.
 Planning sets out the project scope. It establishes what tasks need to get
done and who will do them.
 Execution is when the deliverables are created. This is the longest phase of
a project. During execution, the plan is set into motion and augmented, if
necessary.
 Monitoring and management occur during the execution phase and may
be considered part of the same step. This phase ensures that the project is
going according to plan.
 Closing and review is the final Contracts are closed out and the final
deliverables are given to the client. Successes and failures are evaluated.

4
What are some project planning tools and software?
Project planning and project management software facilitate the project
planning process. The best tools support collaboration among stakeholders,
have intuitive user interfaces and provide built-in time tracking and invoicing.

Some project planning software tools include the following:

 Asana offers different project views to suit a team's preferences.

 ClickUp comes with several Agile-based features, including a custom
automation builder that lets users create reusable task templates.
 Freedcamp lets users organize their projects using a Gantt chart or Kanban
 Hive has a template creation tool in the task management feature that
speeds up task creation.
 Scoro is a combination of tools and includes customer relationship
management
 Trello provides Kanban features, budget management, resource
management and progress tracking features.
 Wrike integrates with tools like Jira, Slack and Dropbox.

Finance Functions
 The finance function refers to practices and activities directed to
manage business finances. The functions are oriented toward acquiring
and managing financial resources to generate profit. The financial
5
 resources and information optimized by these functions contribute to
the productivity of other business functions, planning, and decision-
making activities.

Types of Finance Functions

 There are different classifications for finance functions, and it varies
with organization types.

 The finance department functions like bookkeeping, budgeting,

forecasting, and management of taxes, and the finance manager
functions like financial report preparations contribute to the overall
financial wellbeing of an entity.

 Let’s look into some of the popular classifications.

Investment decision
 The investment decision function revolves around capital budgeting
decisions.

 Capital budgeting in an organization involves the analysis of investment

opportunities, specifically long-term projects, and associated cash
flows, to determine the profit potential.

 They revolve around making a sound investment that must ripe

sufficient and sometimes maximum returns for the business in the long
run. Hence these decisions are challenging and complex.

6
  Payback Period, Net Present Value (NPV) Method, Internal Rate of
Return (IRR), and Profitability Index (PI) are the popular methods to
carry out capital budgeting.

Financing decision
 Expertise in forming financing decisions leads to optimized capital
structure, enhanced performance, and growth. Financing functions deal
with acquiring capital (like when and how) for the various functioning
of the entity, like whether to use equity capital or debt to finance
business events. The debt and equity mix of an entity are called its
capital structure. The financing decisions always focus on maintaining
good capital structure ratios.

Dividend decision
 Companies share profits with their shareholders in the form of
dividends.
 There are different types of shares, shareholder’s dividends, and
dividend policies. Furthermore, a company’s dividend policy influences
the company’s market value and stock prices.
 Hence dividend decision, including the division of net income between
dividends and retained earnings, is an important function.

Liquidity decision
 Liquidity decision generally revolves around working capital decisions
and management.

 Therefore, the priority is managing current assets to follow the going

concern concept. The lack of liquidity results in issues like financial crisis
and insolvencies.

 At the same time, a lot of liquidity can also lead to more danger.
Hence, it is important to have the right mix of current assets and
current liabilities.

7
What Is Cost of Capital?
 Cost of capital is a calculation of the minimum return that would be
necessary in order to justify undertaking a capital budgeting project,
such as building a new factory. It is an evaluation of whether a
projected decision can be justified by its cost.

 Many companies use a combination of debt and equity to finance

business expansion. For such companies, the overall cost of capital is
derived from the weighted average cost of all capital sources. This is
known as the weighted average cost of capital (WACC).

KEY TAKEAWAYS
 Cost of capital represents the return a company needs to achieve in
order to justify the cost of a capital project, such as purchasing new
equipment or constructing a new building.

 Cost of capital encompasses the cost of both equity and debt,

weighted according to the company's preferred or existing capital
structure. This is known as the weighted average cost of capital
(WACC).

 A company's investment decisions for new projects should always

generate a return that exceeds the firm's cost of the capital used to
finance the project. Otherwise, the project will not generate a return
for investors.

Understanding Cost of Capital

 The concept of the cost of capital is key information used to determine

a project's hurdle rate.

 A company embarking on a major project must know how much

money the project will have to generate in order to offset the cost of
undertaking it and then continue to generate profits for the company.
The company may consider the capital cost using debt—levered cost of
8
 capital. Alternatively, they may review the project costs without
debt—unlevered.
 Cost of capital, from the perspective of an investor, is an assessment of
the return that can be expected from the acquisition of stock shares or
any other investment.

 This is an estimate and might include best- and worst-case scenarios.

An investor might look at the volatility (beta) of a company's financial
results to determine whether a stock's cost is justified by its potential
return.

Weighted Average Cost of Capital (WACC)

 A firm's cost of capital is typically calculated using the weighted
average cost of capital formula that considers the cost of both debt
and equity capital.
 Each category of the firm's capital is weighted proportionately to arrive
at a blended rate, and the formula considers every type of debt and
equity on the company's balance sheet,
including common and preferred stock, bonds, and other forms of
debt.

The Cost of Debt

 The cost of capital becomes a factor in deciding which financing track

to follow: debt, equity, or a combination of the two.

 Early-stage companies rarely have sizable assets to pledge

as collateral for loans, so equity financing becomes the default mode
of funding. Less-established companies with limited operating histories
will pay a higher cost for capital than older companies with solid track
records.

9
  The cost of debt is merely the interest rate paid by the company on its
debt. However, since interest expense is tax-deductible, the debt is
calculated on an after-tax basis as follows:

 Cost of debt=Interest expenseTotal debt×(1−𝑇)where:Interest expense

=Int. paid on the firm’s current debt𝑇=The company’s marginal tax rate
Cost of debt=Total debtInterest expense
×(1−T)where:Interest expense=Int. paid on the firm’s current debtT=Th
e company’s marginal tax rate

 The cost of debt can also be estimated by adding a credit spread to the
risk-free rate and multiplying the result by (1 - T).

The Cost of Equity

 The cost of equity is more complicated since the rate of return
demanded by equity investors is not as clearly defined as it is by
lenders. The cost of equity is approximated by the capital asset pricing
model as follows:

:𝐶𝐴𝑃𝑀(Cost of equity)=𝑅𝑓+𝛽(𝑅𝑚−𝑅𝑓)where:𝑅𝑓=risk-
free rate of return𝑅𝑚=market rate of returnCAPM(Cost of equity)=Rf+β(Rm
−Rf)where:Rf=risk-free rate of returnRm=market rate of return

 Beta is used in the CAPM formula to estimate risk, and the formula
would require a public company's own stock beta. For private
companies, a beta is estimated based on the average beta among a
group of similar public companies. Analysts may refine this beta by
calculating it on an after-tax basis. The assumption is that a private
firm's beta will become the same as the industry average beta.

Cost of Debt + Cost of Equity = Overall Cost of Capital

 The firm’s overall cost of capital is based on the weighted average of
these costs.
 For example, consider an enterprise with a capital structure consisting
of 70% equity and 30% debt; its cost of equity is 10% and the after-tax
cost of debt is 7%.
 Therefore, its WACC would be:

(0.7×10%)+(0.3×7%)=9.1%(0.7×10%)+(0.3×7%)=9.1%
10
  This is the cost of capital that would be used to discount future cash
flows from potential projects and other opportunities to estimate
their net present value (NPV) and ability to generate value.

 Companies strive to attain the optimal financing mix based on the cost
of capital for various funding sources. Debt financing is more tax-
efficient than equity financing since interest expenses are tax-
deductible and dividends on common shares are paid with after-tax
dollars. However, too much debt can result in dangerously
high leverage levels, forcing the company to pay higher interest rates
to offset the higher default risk.1

What Are Capital Expenditures (CapEx)?

 Capital expenditures (CapEx) are funds used by a company to acquire,
upgrade, and maintain physical assets such as property, plants,
buildings, technology, or equipment.
 CapEx is often used to undertake new projects or investments by a
company.
 Making capital expenditures on fixed assets can include repairing a
roof (if the useful life of the roof is extended), purchasing a piece of
equipment, or building a new factory.
 This type of financial outlay is made by companies to increase the
scope of their operations or add some future economic benefit to the
operation.

Types of CapEx
Many different types of assets can attribute long-term value to a company.
Therefore, several types of purchases may be considered CapEx.

 Buildings may be used for office space, manufacturing of goods,

storage of inventory, or other purposes.
 Land may be used for further development. Accounting treatment may
be different for land specifically held as a speculative long-term
investment.
 Equipment and machinery may be used to manufacture goods and
convert raw materials into final products for sale.
 Computers or servers may be used to support a company's operational
aspects, including the logistics, reporting, and communication of

11
 operations. Software may also be treated as CapEx in certain
circumstances.
 Furniture may be used to furnish an office building to make the space
usable by staff and customers.
 Vehicles may be used to transport goods, pick up clients, or used by
staff for business purposes.
 Patents may hold long-term value should the right to own an idea
come to fruition through product development.

MEANING OF PUBLIC ENTERPRISES

 As state earlier, the business units owned, managed and controlled by

the central, state or local government are termed as public sector
enterprises or public enterprises. These are also known as public sector
undertakings.
 A pubic sector enterprise may be defined as any commercial or
industrial undertaking owned and managed by the government with a
view to maximise social welfare and uphold the public interest. Public
enterprises consist of nationalised private sector enterprises, such as,
banks, Life Insurance Corporation of India and the new enterprises set
up by the government such as Hindustan Machine Tools (HMT), Gas
Authority of India (GAIL), State Trading Corporation (STC) etc.

DIFFERENCE BETWEEN PRIVATE AND PUBLIC

SECTOR ENTERPRISES

12
What is Cash Flow?
 Cash Flow (CF) is the increase or decrease in the amount of money a
business, institution, or individual has.
 In finance, the term is used to describe the amount of cash (currency)
that is generated or consumed in a given time period. There are many
types of CF, with various important uses for running a business and
performing financial analysis.

Types of Cash Flow

 There are several types of Cash Flow, so it’s important to have a solid
understanding of what each of them is. When someone refers to CF,
they could mean any of the types listed below, so be sure to clarify
which cash flow term is being used.

Types of cash flow include:

1. Cash from Operating Activities – Cash that is generated by a company’s
core business activities – does not include CF from investing. This is
found on the company’s Statement of Cash Flows (the first section).
2. Free Cash Flow to Equity (FCFE) – FCFE represents the cash that’s
available after reinvestment back into the business (capital
expenditures). Read more about FCFE.
3. Free Cash Flow to the Firm (FCFF) – This is a measure that assumes a
company has no leverage (debt). It is used in financial modeling and
valuation. Read more about FCFF.
4. Net Change in Cash – The change in the amount of cash flow from one
accounting period to the next. This is found at the bottom of the Cash
Flow Statement.

Cash Flow vs Income

 Investors and business operators care deeply about CF because it’s the
lifeblood of a company.
 You may be wondering, “How is CF different from what’s reported on a
company’s income statement?” Income and profit are based
on accrual accounting principles, which smooths-out expenditures and
matches revenues to the timing of when products/services are
delivered. Due to revenue recognition policies and the matching
13
 principle, a company’s net income, or net earnings, can actually be
materially different from its Cash Flow.
 Companies pay close attention to their CF and seek to manage it as
carefully as possible. Professionals working in finance, accounting,
and financial planning & analysis (FP&A) functions at a company spend
significant time evaluating the flow of funds in the business and
identifying potential problems.

Meaning of Capital Expenditure:

 Capital use is brought about when a business runs through
cash, utilises a loan or collateral, or assumes debt or obligation
to purchase another resource or to increase the value of a
current resource with the assumption of getting benefits for
longer than a solitary fiscal year. Set forth plainly, it addresses
investment in the business.

 Instances of capital costs incorporate the acquisition of fixed

resources, like business equipment and new buildings. They
likewise incorporate upgrades to existing offices and the

14
 securing of intangible resources, like licenses and different
types of innovation.

 Capital expenditure or costs are recorded as resources or

assets on an organisation’s balance sheet rather than as costs
or expenses in the income statement. The resource or assets is
then devalued or depreciated over the complete existence of
the resource, with a period deterioration cost charged to the
organisation’s income statement, ordinarily month to month.
Amassed devaluation or accumulated depreciation is recorded
on the organisation’s balance sheet as the summation of all
deterioration costs, and it decreases the worth of the resource
over the existence of that resource.

Meaning of Operating Expenditure:

 Operating expenses or operating costs are any expenses caused
throughout the customary business activities and are a lot more
obvious theoretically than capital costs since they are essential for
everyday tasks. All operating costs are recorded on an organisation’s
income statement as costs in the period when they were brought
about. These include Insurance, Property Taxes, Utilities, Licensing
Fees, Marketing Costs, Cost of Goods Sold, Research and Development,
Salaries, Administration Expenses, and Travelling Expenses.

 On the off chance that machinery and equipment are rented rather
than bought, it is ordinarily viewed as an operating expense or cost.
General fixes, maintenance and repairs, and support of existing fixed
resources, for example, structures and gear, are additionally viewed as
working costs except if the upgrades will expand the helpful existence
of the resource.

 An organisation might have to make a decision of incurring capital

expenses or operating expenses throughout the life of the business. For
instance, assuming it needs more extra room to house its information
and data, it can either put resources into new data storage gadgets as a
capital cost or rent space in a server centre as an operational cost.

15
Difference between Capital Expenditure and Operating Expenditure
CAPITAL EXPENDITURE OPERATING EXPENDITURE

Accounting Treatment

Can’t be completely deducted in the Operating expenses or working costs

period when they were caused. Tangible are completely deducted in the
resources are devalued, and intangible bookkeeping period during which they
resources are amortised over a long were caused.
period of time.

Involvement in Procurement

Buying seldom starts to lead the pack, yet Ordinary things are welcomed
it just aids the acquisition of the thing. The consistently, and the minimum stock
arrangement cycle likewise takes levels are kept. It additionally doesn’t
significantly longer. bring about any repair costs or
maintenance costs.

Investment Purposes

Costs incurred for buying the income- Costs related to the activity and support
producing property. or maintenance and operation of an
income-producing property.

Also Known as

Capital expense, capital expenditure. Operating expenditure, revenue

expenditure, and operating expense.

Examples

Purchasing equipment and machinery, Maintenance, and repair of machinery,

procuring intellectual property and utilities, rent, and wages
innovation resources like trademarks,
patents.

16
What are Financial Controls?
 Financial controls are the procedures, policies, and means by which
an organization monitors and controls the direction, allocation, and
usage of its financial resources. Financial controls are at the very core
of resource management and operational efficiency in any organization.

Required Processes
 The implementation of effective financial control policies should be
done after a thorough analysis of the existing policies and future
outlook of a company. In addition, it is important to ensure the
following four processes are completed before implementing
financial control in a business:

1. Detecting overlaps and anomalies

Financial budgets, financial reports, profit & loss statements, balance sheets,
etc., present the overall performance and/or operational picture of a
business. Hence, while formulating financial control policies, it is very
important to detect any overlaps and/or anomalies arising out of the data
available. It helps in detecting any existing loopholes in the current
management framework and eliminating them.

2. Timely updating

Financial control is the essence of resource management and, hence, the

overall operational efficiency and profitability of a business. Timely updates of
all available data are very important. In addition, updating all management
practices and policies concerning the existing financial control methods is also
equally important.

3. Analyzing all possible operational scenarios

Before implementing a fixed financial control strategy in an organization, it is

important to thoroughly evaluate all possible operational scenarios. Viewing
the policies from the perspectives of different operational scenarios – such as
profitability, expenditures, safety, and scale of production or volume – can
provide the necessary information. Also, it helps establish an effective
financial control policy that covers all operational aspects of the organization.

17
4. Forecasting and making projections

While implementing a financial control policy, forecasting and making

projections are very important steps. They provide an insight into the future
goals and objectives of the business. In addition, they can help establish a
financial control policy in accordance with the business objectives and act as a
catalyst in achieving such goals.

Importance of Financial Controls

1. Cash flow maintenance

Efficient financial control measures contribute significantly to the cash flow

maintenance of an organization. When an effective control mechanism is in
place, the overall cash inflows and outflows are monitored and planned,
which results in efficient operations.

2. Resource management

The financial resources of an organization are at the very core of any

organization’s operational efficiency. Financial resources make available all
other resources needed for operating a business. Hence, financial resource
management is crucial in order to manage all other resources. Effective
financial control measures hence are crucial to ensure resource management
in an organization.

3. Operational efficiency

An effective financial control mechanism ensures overall operational

efficiency in an organization.

4. Profitability

Ensuring an organization’s overall operational efficiency leads to the smooth

functioning of every organizational department. It, in turn, increases
productivity, which comes with a direct, positive relationship
with profitability. Hence, establishing effective financial control measures
ensures the improved profitability of any business.

5. Fraud prevention

Financial control serves as a preventative measure against fraudulent

activities in an organization. It can help prevent any undesirable activities

18
such as employee fraud, online theft, and many others by monitoring the
inflow and outflow of financial resources.

Examples of Financial Controls

1. Overall financial management and implementation

 Placing certain qualification restrictions and employing only certified,

qualified financial managers and staff working with the formulation and
implementation of financial management policies
 Establishing an efficient, direct chain of communication among the
accounting staff, financial managers, and senior-level managers,
including the CFO
 Periodic training sessions and information sessions among accounting
staff, etc. to ensure being updated with the changing laws and evolving
business environment concerning business finance
 Periodic, thorough financial analysis and evaluation of financial ratios
and statements wherever fluctuations are significant
 Delegation of financial duties in a segregated and hierarchical fashion in
order to establish a chain of operation and efficiency via specialization
2. Cash inflows

 Stringent credit reporting policy for all customers before entering into a
creditor-debtor relationship with them
 Periodic reconciliation of bank statements to the general ledger in
addition to annual reporting for more efficient financial control
 Establishing a periodic review policy with all existing customers that the
business establishes a creditor-debtor relationship with. It ensures the
ongoing creditworthiness of customers and eliminates the probability
of bad debts
 Support files and backups for all financial data in a separate secured
database with access only permitted to senior management staff
3. Cash outflows

 Automatic/subscription payments to be monitored and requiring

proper authorization in order to control extravagant business
expenditure
 Maintaining a vendor database with detailed purchase records with
restricted access in order to monitor cash outflow efficiently
 Periodic reconciliation of bank statements to the general ledger

19
 Clear and precise expense reimbursement policy to be maintained,
including detailed expense reports and receipt verifications in order to
curb extravagant business expenses and employee fraud

20