Course No.

FTB- 301, 2(1+1)

Course Title: Project preparation and Management

Porter’s Five Forces analysis

Porter’s Five Forces analysis is a framework that helps analyzing the level of competition within
a certain industry. It is especially useful when starting a new business or when entering a new
industry sector. According to this framework, competitiveness does not only come from
competitors. Rather, the state of competition in an industry depends on five basic forces: threat
of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute
products or services, and existing industry rivalry. The collective strength of these forces
determines the profit potential of an industry and thus its attractiveness. If the five forces are
intense (e.g. airline industry), almost no company in the industry earns attractive returns on
investments. If the forces are mild however (e.g. soft drink industry), there is room for higher
returns. Each force will be elaborated on below with the aid of examples from the airline
industry to illustrate the usage.

Threat of new entrants

New entrants in an industry bring new capacity and the desire to gain market share. The
seriousness of the threat depends on the barriers to enter a certain industry. The higher these
barriers to entry, the smaller the threat for existing players. Examples of barriers to entry are the
need for economies of scale, high customer loyalty for existing brands, large capital
requirements (e.g. large investments in marketing or R&D), the need for cumulative experience,
government policies, and limited access to distribution channels.

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Bargaining power of suppliers
This force analyzes how much power and control a company’s supplier (also known as the
market of inputs) has over the potential to raise its prices or to reduce the quality of purchased
goods or services, which in turn would lower an industry’s profitability potential. The
concentration of suppliers and the availability of substitute suppliers are important factors in
determining supplier power. The fewer there are the more power they have. Businesses are in a
better position when there are a multitude of suppliers. Sources of supplier power also include
the switching costs of companies in the industry, the presence of available substitutes, the
strength of their distribution channels and the uniqueness or level of differentiation in the product
or service the supplier is delivering.
Bargaining power of suppliers
This force analyzes how much power and control a company’s supplier (also known as the
market of inputs) has over the potential to raise its prices or to reduce the quality of purchased
goods or services, which in turn would lower an industry’s profitability potential. The
concentration of suppliers and the availability of substitute suppliers are important factors in
determining supplier power. The fewer there are the more power they have. Businesses are in a
better position when there are a multitude of suppliers. Sources of supplier power also include
the switching costs of companies in the industry, the presence of available substitutes, the
strength of their distribution channels and the uniqueness or level of differentiation in the product
or service the supplier is delivering.
Bargaining power of buyers
The bargaining power of buyers is also described as the market of outputs. This force analyzes to
what extent the customers are able to put the company under pressure, which also affects the
customer’s sensitivity to price changes. The customers have a lot of power when there aren’t
many of them and when the customers have many alternatives to buy from. Moreover, it should
be easy for them to switch from one company to another. Buying power is low however when
customers purchase products in small amounts, act independently and when the seller’s product
is very different from any of its competitors. The internet has allowed customers to become more
informed and therefore more empowered. Customers can easily compare prices online, get
information about a wide variety of products and get access to offers from other companies
instantly. Companies can take measures to reduce buyer power by for example implementing
loyalty programs or by differentiating their products and services.

Rivalry among existing competitors

This last force of the Porter’s Five Forces examines how intense the current competition is in the
marketplace, which is determined by the number of existing competitors and what each
competitor is capable of doing. Rivalry is high when there are a lot of competitors that are
roughly equal in size and power, when the industry is growing slowly and when consumers can
easily switch to a competitors offering for little cost. A good indicator of competitive rivalry is
the concentration ratio of an industry. The lower this ration, the more intense rivalry will
probably be. When rivalry is high, competitors are likely to actively engage in advertising and
price wars, which can hurt a business’s bottom line. In addition, rivalry will be more intense
when barriers to exit are high, forcing companies to remain in the industry even though profit
margins are declining. These barriers to exit can for example be long-term loan agreements and
high fixed costs.

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 Full list of Porter’s Five Forces factors:

Threat of new entrants

▪ Economies of scale
▪ Product differentiation
▪ Brand identity/loyalty
▪ Access to distribution channels
▪ Capital requirements
▪ Access to latest technology
▪ Access to necessary inputs
▪ Absolute cost advantages
▪ Experience and learning effects
▪ Government policies
▪ Switching costs
▪ Expected retaliation from existing players

Bargaining power of suppliers

▪ Number of suppliers
▪ Size of suppliers
▪ Supplier concentration
▪ Availability of substitutes for the supplier’s products
▪ Uniqueness of supplier’s products or services (differentiation)
▪ Switching cost for supplier’s products
▪ Supplier’s threat of forward integration
▪ Industry threat of backward integration
▪ Supplier’s contribution to quality or service of the industry products
▪ Importance of volume to supplier
▪ Total industry cost contributed by suppliers
▪ Importance of the industry to supplier’s profit

Bargaining power of buyers

▪ Buyer volume (number of customers)

▪ Size of each buyer’s order
▪ Buyer concentration
▪ Buyer’s ability to substitute
▪ Buyer’s switching costs
▪ Buyer’s information availability
▪ Buyer’s threat of backward integration
▪ Industry threat of forward integration
▪ Price sensitivity

Threat of substitute products or services

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▪ Number of substitute products available
▪ Buyer’s propensity to substitute
▪ Relative price performance of substitutes
▪ Perceived level of product differentiation
▪ Switching costs
▪ Substitute producer’s profitability & aggressiveness

Rivalry among existing competitors

▪ Number of competitors
▪ Diversity of competitors
▪ Industry concentration and balance
▪ Industry growth
▪ Industry life cycle
▪ Quality differences
▪ Product differentiation
▪ Brand identity/loyalty
▪ Switching costs
▪ Intermittent overcapacity
▪ Informational complexity
▪ Barriers to exit

Ratio analysis
• Ratio analysis consists of the calculation of ratios from financial statements and is a
foundation of financial analysis.
• A financial ratio or accounting ratio shows the relative magnitude of selected numerical
values taken from those financial statements.
• The numbers contained in financial statements need to be put into context so that investors
can better understand different aspects of the company’s operations. Ratio analysis is one
method an investor can use to gain that understanding.

Key Terms

• Liquidity: Availability of cash over short term: ability to service short-term debt.
• Ratio: A number representing a comparison between two things.
• Ratio analysis: the use of quantitative techniques on values taken from an enterprise’s
financial statements
• Shareholder: One who owns shares of stock?

Types of Ratios

There are actually two ways in which financial ratios can be classified. There is the classical
approach, where ratios are classified on the basis of the accounting statement from where they are

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 obtained. The other is a more functional classification, based on the uses of the ratios and the
purpose for which they are calculated.

[A] Traditional Classification

Traditional Classification has three types of ratios, namely

i. Profit and Loss Ratios

ii. Balance Sheet Ratios

iii. Composite Ratios

1] Profit and Loss Ratios

When both figures are derived from the statement of Profit and Loss A/c we will call it a Profit and
Loss Ratio. It can also be known as Income Statement Ratio or Revenue Statement Ratio. One such
example is the Gross Profit ratio, which is the ratio of Gross Profit to Sales or Revenue. As you will
notice, both these amounts will be derived from the Profit and Loss A/c. Other examples include
Operating ratio, Net Profit ratio, Stock Turnover Ratio etc.

2] Balance Sheet Ratios

Just as above, if both the variables are obtained from the balance sheets, it is known as a balance
sheet ratio. When such a ratio expresses the relation between two accounts of the balance sheet, we
also call them financial ratios (other than accounting ratios).

Take for example Current ratio that compares current assets to current liabilities, both derived from
the balance sheet. Other examples include Quick Ratio, Capital Gearing Ratio, Debt-Equity ratio
etc.

3] Composite Ratios

A composite ratio or combined ratio compares two variables from two different accounts. One is
taken from the Profit and Loss A/c and the other from the Balance Sheet. For example the ratio of
Return on Capital Employed. The profit (return) figure will be obtained from the Income Statement
and the Capital Employed is seen in the Balance Sheet. A few other examples are Debtors Turnover
Ratio, Creditors Turnover ratio, Earnings Per Share etc.

[B] Functional Classification

Then we move onto the functional classification. These help us group the ratios according to the
functions they perform in our understanding and analysis of financial statements. This is a more

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accurate and useful classification of ratios, and hence more commonly used as well. The types of
ratios according to the functional classification are

• Liquidity Ratio

• Leverage Ratios

• Activity Ratios

• Profitability Ratios

• Coverage Ratios

1] Liquidity Ratios

A firm needs to keep some level of liquidity, so stakeholders can be paid when they are due. All
assets of the firm cannot be tied up; a firm must look after its short-term liquidity. These ratios help
determine such liquidity, so the firm may rectify any problems. The two main liquidity ratios are
Current ratio and Quick Ratio (or liquid ratio).

2] Leverage Ratios

These ratios determine the company’s ability to pay off its long-term debt. So they show the
relationship between the owner’s fund and the debt of the company. They actually show the long-
term solvency of a firm; whether it has enough assets to pay of all its stakeholders, as well as all
debt on the Balance Sheet. This is why they are also called Solvency ratios. Some examples are
Debt Ratio, Debt-Equity Ratio, Capital Gearing ratio etc.

3] Activity Ratios

Activity ratios help measure the efficiency of the organization. They help quantify the effectiveness
of the utilization of the resources that a company has. They show the relationship between sales and
assets of the company. These types of ratios are alternatively known as performance ratios or
turnover ratios. Some ratios like Stock Turnover, Debtors turnover, Stock to Working Capital ratio
etc measure the performance of a company.

4] Profita1bility Ratios

These ratios analyze the profits earned by an entity. They compare the profits
to revenue or funds employed or assets of an entity. These ratios reflect on the entity’s ability to
earn reasonable returns with respect to the capital employed. They even check the soundness of the
investment policies and decisions. Examples will include Operating Profit ratio, Gross Profit Ratio,
Return on Equity Ratio etc.

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5] Coverage Ratios

Shows the equation between profit in hand and the claims of outside stakeholders. These are
stakeholders that are required by the law to be paid, even in case of liquidation. So these types of
ratios ensure that there is enough to cover these payments to such outsiders. Some examples of
coverage ratios are Dividend Payout Ratio, Debt Service ratio etc.

Value chain analysis

Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to
recognize, which activities are the most valuable (i.e. are the source of cost or differentiation
advantage) to the firm and which ones could be improved to provide competitive advantage. In
other words, by looking into internal activities, the analysis reveals where a firm’s competitive
advantages or disadvantages are. The firm that competes through differentiation advantage will
try to perform its activities better than competitors would do. If it competes through cost
advantage, it will try to perform internal activities at lower costs than competitors would do.
When a company is capable of producing goods at lower costs than the market price or to
provide superior products, it earns profits.

M. Porter introduced the generic value chain model in 1985. Value chain represents all the
internal activities a firm engages in to produce goods and services. VC is formed of primary
activities that add value to the final product directly and support activities that add value
indirectly.

Although, primary activities add value directly to the production process, they are not necessarily
more important than support activities. Nowadays, competitive advantage mainly derives from
technological improvements or innovations in business models or processes. Therefore, such
support activities as ‘information systems’, ‘R&D’ or ‘general management’ are usually the most
important source of differentiation advantage. On the other hand, primary activities are usually
the source of cost advantage, where costs can be easily identified for each activity and properly
managed.

Firm’s VC is a part of a larger industry's VC. The more activities a company undertakes
compared to industry's VC, the more vertically integrated it is. Below you can find an industry's
value chain and its relation to a firm level VC.

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Financial Analysis

Financial analysis includes as costs all payments that reduce the monetary resources of the
project, and considers as benefits (or revenues) all receipts that increase the project's
financial resources

The Role of Financial Analysis

Financial analysis provides a practical means of assessing the profitability of
investments and their likely financial impact on potential investors including farmers, lenders,

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profit-oriented enterprises like processing industries and marketing agencies, whether these are
in the public or private sectors. It forms an integral part of project design because technical,
economic, financial, commercial, social and institutional aspects are all interrelated. Although
the requirements for and the basic principles of financial analysis do not vary between different
sectors, there are some distinct problems in agriculture, which deserve special treatment. These
relate mainly to: (i) short-term fluctuations in prices of agricultural commodities more than the
prices of non-farm products; and (ii) the long-run tendency for farm incomes to fall below
urban incomes. Farm crops, which are mostly seasonal, are subject to variability in output and
prices (and hence incomes) because of many factors completely beyond farmers' control -
weather, pests and diseases. In addition, primary commodities are more unstable than
secondary ones, since they are less able to make the supply adjustments in the short run. The
volume of production of tree crops like rubber, cocoa or tea is not much influenced in the short
run by price. New planting can produce increased output only after several years, while once
the tree is planted, it will go on yielding and it will be worth picking it so long as the price does
not fall below the cost of collection and transport to the market. Accordingly if demand
changes, there is little responsiveness on the supply side. These special problems of agriculture
have implications for the stability of the farmer's income and his ability to invest. These
problems are explored in the later chapters of this paper. For projects which do not generate
revenue, such as education or research projects, financial analysis is concerned mainly with the
sources and ascertaining the adequacy of funds for starting and maintaining the activity.

Purposes of Financial Analysis

Financial analysis is essentially undertaken for the following purposes:

• to determine the financial viability of a project or an enterprise;

• to assess the adequacy of a financing plan for a new project or a

continuing business;

• to advise on methods of improving the vfabi1ity of a project or enterprise

including the appropriateness of tariffs, prices and cost
recovery generally, and, on the financial arrangements, conditions or
covenants which are required to support a loan; and
( d) to plan and control project/ enterprise operations.

Capital structure ratios are very important to analyze the financial statements of any company for
the following reasons:

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 ▪ Same Business Can Yield Different Returns

Investors understand that the way a business is funded can have a lot of impact on the
returns it provides. Although the total return provided will always be the same, the way
those returns are distributed amongst investors will vary. It is for this reason that
investors pay careful attention to these ratios as they help them understand the
consequences of the best and worst possible scenarios.

▪ Combination That Reduces Total Cost of Capital

A firm is a legal entity that has nothing when it first begins operations. It acquires capital
in the form of debt and equity on different terms. Debt has fixed returns but sure
repayments. Equity on the other hand has uncertain returns but the probability of returns
that far exceed those of debt-holders. There is a cost attached to both debt and equity and
the purpose of an ideal capital structure is to minimize the total cost.

▪ Nature of Capital Employed Can Magnify Returns

The specific combination of debt and equity employed is capable of magnifying returns
(both gains and losses) for equity investors. Therefore they have a special interest in
ensuring that the capital structure and leverage position of the firm is in control.

▪ Solvency of the Firm

An incorrect capital structure can mean ruin of an otherwise healthy firm. This is
because, if the firm is funded by too much debt, it has a lot of interest bills to pay.
Therefore in a lean period, the firm is likely to default on its interest obligations. The
worst part is that if the firm defaults a few times, debt holders have the right to seek legal
counsel and start liquidating the firm. In such a scenario, an otherwise healthy firm may
have to sell its assets at throw away prices. Thus an ideal capital structure is one that
provides enough cushions to shareholders so that they can leverage the debt-holders
funds but it should also provide surety to debt holders of the return of their principal and
interest. Since capital structure ratios reveal these facts, analyst pay careful attention to
them.

▪ Liquidation of the Firm

Capital structure ratios help investors analyze what would happen to their investments in
the worst possible scenario. In case of liquidation senior debt holders have the first claim,
then junior debt holders and then in the end equity holders get paid if there is anything
left. Investors can gauge what they are likely to recover if the organization went bust
immediately.

Capital Structure Ratios Analysis

The capital structure ratios are classified into two categories

• Leverage Ratios – Long term solvency position of the firm – Principal repayment

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• Coverage Ratios – Fixed commitment charge solvency of the firm – Dividend coverage and
Interest coverage

Under the capital structure ratios, the composition of the capital structure is analysed only in the
angle of long term solvency of the firm

Debt to Equity Ratio - Meaning, Assumptions and Interpretation

The debt to equity ratio is the most important of all capital adequacy ratios. It is seen by
investors and analysts worldwide as the true measure of riskiness of the firm. This ratio is often
quoted in the financials of the company as well as in discussions pertaining to the financial
health of the company in TV shows newspapers etc.

Formula

Debt to Equity Ratio = Total Debt / Total Equity

The total equity includes retained earnings which have been listed on the balance sheet

There is subjectivity with regards to treatment of preference shares. Some companies add them
to debt while others add them to equity based on the relative features of the preference shares
issued. However, usually the quantum of preference shares in not big enough to make a
difference.

Meaning

The debt to equity ratio tells the shareholders as well as debt holders the relative amounts they
are contributing to the capital. It needs to be understood that it is a part to part comparison and
not a part to whole comparison.

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Formula

Debt Ratio = Total Debt / Total Capital

The debt ratio is a part to whole comparison as compared to debt to equity ratio which is a part to
part comparison. Another major difference between the debt to equity ratio and the debt ratio is
the fact that debt to equity ratio uses only long term debt while debt ratio uses total debt.

Total debt means current liabilities are also included in the calculation and so is the debt due for
maturity in the coming year.

Meaning

The debt ratio tells the investment community the amount of funds that have been contributed by
creditors instead of the shareholders. The creditors of the firm accept a lower rate of return for
fixed secure payments whereas shareholders prefer the uncertainty and risk for higher payments.
If too much capital of the company is being contributed by the creditors it means that debt
holders are taking on all of the risk and they start demanding higher rates of interest to
compensate them for the same.

Formula

Equity to Fixed Assets Ratio = Equity / Total Fixed Assets

▪ Equity includes the retained earnings

▪ Total Fixed assets excludes intangible assets of the firm

Meaning

The “equity to fixed assets” ratio shows analysts the relative exposure of shareholders and debt
holders to the fixed assets of the firm. Thus, if the “equity to fixed assets” ratio is 0.9, this means
that shareholders have financed 90% of the fixed assets of the company. The remaining 10% as
well as current assets and investments have all been financed by debt holders.

The proprietary ratio is not amongst the commonly used ratios. Very few analysts prescribe its
usage. This is because in reality it is the inverse of debt ratio. A higher debt ratio would imply a
lower proprietary ratio and vice versa. Hence this ratio does not reveal any new information.

Formula

Proprietary Ratio = Total Equity / Debt + Equity

Meaning

The proprietary ratio is the inverse of debt ratio. It is a part to whole comparison. The proprietary
ratio measures the amount of funds that investors have contributed towards the capital of a firm
in relation to the total capital that is required by the firm to conduct operations.

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The interest coverage ratio is a number that has a lot of importance for the creditors of the firm.
This number tells them how safe their investments are and how likely they are to get back
principal and interest on time.

Formula

Interest Coverage Ratio = EBIT / Interest

Meaning

The interest coverage ratio tells investors how many rupees they have made in profit, per rupee
of interest that they owe to their shareholders. Thus if the interest coverage ratio is 3, then the
firm has 3 rupees in profit for every 1 rupee in interest obligations. Thus profits will have to fall
by more than 66% for the firm to register a loss.

Degree of Financial Leverage Ratio

A high debt equity ratio makes the company financed by debt more than by equity.
Therefore there are fixed interest payments involved. Hence when the going is good, the
company makes a handsome return as a small percentage of change in EBIT creates a
large percentage change in earnings per share. However the inverse of this is also true. Just
like financial leverage helps to magnify profits, it also magnifies losses when EBIT fall
down. Analysts want to quantify exactly how much variability does debt funding create in
the operations of a particular company and have created a measure called “Degree of
Financial Leverage” which we will study in detail.

Formula

Degree of Financial Leverage = % Change in EPS / % Change in EPS

There is a reasonable assumption about the absence of any changes in accounting policy
which would make the EPS and EBIT figures incomparable from the previous years.

Profitability ratios
Profitability ratios are the financial ratios which talk about the profitability of a business with
respect to its sales or investments. Since the ratios measure the efficiency of operations of a
business with the help of profits, they are called profitability ratios. They are quite useful tools to
understand the efficiencies/inefficiencies of a business and thereby assist management and
owners to take corrective actions.

PURPOSE AND IMPORTANCE

A business (unless a non-government organization) starts with a motto of making a profit and
thus one of the most commonly used financial ratios is the profitability ratios. Management and
investors calculate these ratios often and they are always present in the annual reports of the
company. Since every business wants to generate profit and the investors also want returns on
their investments, it is mandatory to showcase how the company is working and generating
profit. Thus, profitability ratios analysis is an important evaluation criterion for companies.

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Profitability ratios are the tools for financial analysis which communicate about the final goal of
a business. For all the profit-oriented businesses, the final goal is none other than the
profits. Profits are the lifeblood of any business without which a business cannot remain a going
concern. Since the profitability ratios deal with the profits, they are as important as the profits.
The purpose of calculating the profitability ratios is to measure the operating efficiency of a
business and returns which the business generates. The different stakeholders of a business are
interested in the profitability ratios for different purposes. The stakeholders of a business include
owners, management, creditors, lenders etc.
TYPES OF PROFITABILITY RATIOS
Profitability ratios are a bunch of financial metrics which measures the profit generated by the
company and its performance over a period of time. The profit of the company which is assessed
by these ratios can be simply defined or explained as the amount of revenue left after deducting
all the expenses and losses which incurred in the similar time period to generate that revenue.

Ultimately, these ratios are nothing but a simple comparison of various levels of profits with
either SALES or INVESTMENT. So, these ratios can be further classified as Margin Ratios
(Sales based Ratios) and Return Ratios (Investment based Ratios). There are different ratios
under this profitability ratio category which are as below.

MARGIN RATIOS
There are broadly 3 margin ratios, gross profit margin, net profit margin and operating profit
margin.
GROSS PROFIT MARGIN
This is the ratio which is used to understand how much cost incurred to manufacture a product. It
also helps in understanding the efficiency of the company and how is it using its resources to
produce the product and then make a profit by passing the cost incurred to the consumers of the
product. Read Gross Profit Margin for an enhanced coverage of this ratio.

NET PROFIT MARGIN

It is the most common profitability ratio which is used to measure the profit after deducting all
the expenses, losses, provisions for bad debt. It measures how much you are making out of every
penny you spent on the business. For example, if you have a net profit margin of 10% then on
every 1 rupee that you have invested in the business you earn 10 paise. For an in-depth
understanding of this ratio, visit Net Profit Margin.
OPERATING PROFIT MARGIN
RETURN ON ASSETS (ROA)
It is the profitability ratio which is used to evaluate the company’s level of efficiency in
employing its assets to generate profit. The assets of the company if not used optimally will not
be able to make the desired amount of profit and the return will also be lower. Detailed post here
at Return on Assets.
RETURN ON EQUITY (ROE)
Every equity investor looks for this ratio before investing in any company as it gives the insight
into the company’s profit-generating ability to the investors. The potential, as well as existing
investors, keep a check on this ratio as it measures the return on the investment made in shares of
the company. In general, the higher the ratio, more favorable it is for the investors to invest in the
company. Read exclusively about Return on Equity here.

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 RETURN ON CAPITAL EMPLOYED (ROCE)
This is a third ratio which covers the equity as well as debt part too. In place of equity capital,
total capital employed is used as the denominator to calculate this ratio. Read a detailed write up
about Return on Capital Employed here.
FORMULA
1. Gross Profit Margin = (Gross profit / Net Sales )*100
2. Net Profit Margin = (Net Profit / Net Sales)*100
3. Operating Profit Margin = (Operating Profit / Net Sales)*100
4. Expense Ratio = Expenses (Ex. Sales and Distribution) / Net Sales
5. Return on Asset = ( Net Income / Assets)*100
6. Return on Equity = (Net Income / Shareholder’s Equity Investment)*100
7. Return on Capital Employed = Net Income / Capital Employed

Cash flow and Funds flow

Definition: Cash Flow Analysis is the evaluation of a company’s cash inflows and outflows
from operations, financing activities, and investing activities. In other words, this is an
examination of how the company is generating its money, where it is coming from, and what it
means about the value of the overall company.

Cash Flow Analysis is a technique used by investors and businesses to determine the value of
overall companies as well as the individual branches of large companies by looking at how much
excess cash they produce. They typically use the Statement of Cash Flows, a document that
shows the actual cash that came in and out of the business during a certain period from investing
activities, financing activities, and operational activities, as well as a few other reports

Sample 1. Cash flow budget (by quarter of the year)

2nd
Cash inflow 1st Quarter Quarter 3rd Quarter 4th Quarter

Beginning cash balance $5,000

Sale of crop products $50,000

Sale of livestock products 25,000

Government payments $10,000

Total inflow $30,000 $50,000 $10,000

Cash expenditures

Seed $10,000

Fertilizer $20,000

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 Feed 10,000

Processing $10,000

Marketing $5,000

Capital purchases 10,000

Interest 5,000

Debt payments 10,000

Total expenditures $20,000 $30,000 $25,000 $5,000

Quarterly net cash flow $10,000 $20,000 -$25,000 $5,000

Cumulative net cash flow $10,000 $30,000 $5,000 $10,000

This may involve shifting the timing of certain transactions. It may also determine when
money will be borrowed. If borrowing is involved, it will also determine the amount of cash
that needs to be borrowed. Periods of excess cash can also be identified. This information
can be used to direct excess cash into interest bearing assets where additional revenue can
be generated or to scheduled loan payments.
Fund Flow Analysis
The notion of funds is described by several accountants in different way. The term funds have
different meaning according to interpretation of accountants and accounting approaches. Flow of
fund means inward and outward movement of funds of an enterprise. Basically, funds denote to
working capital and flow means movement and changes. In this regard, flow of funds
encompasses movement in working capital items such as current assets and current liabilities.
Fund flow analysis is the analysis of flow of fund from current asset to fixed asset or current
asset to long term liabilities or vice-versa.
Fund refers to working capital

Funds flow statement is an assertion of sources and uses of funds. It describes changes in net
working capital between two balance sheet dates. Funds flow statement is prepared in three
stages that include schedule of changing in working capital, calculation of funds from operations
and statement of fund flow. Net inflows generate surplus cash for fund managers to spend which
tend to create demand for stocks and bonds in their preferred sector. On the contrary, net
outflows decrease excess cash for fund managers that results in lower demand for stocks and
bonds. Consequently, investors can use fund flow information to decide where capital is being

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invested in terms of asset class or geography. The funds flow statement is helpful in numerous
ways such as it is helpful in knowing the sources and uses of funds, suggests the ways in which
working capital position can be improved, can be used in planning a sound dividend policy and
beneficial in forecasting the flow of funds and in projecting the working capital requirements. It
indicates various methods by which funds are obtained during a particular period and the ways in
which these funds are employed. In simple words, it is a statement of sources and application of
funds. A statement of sources and application of funds is a technical device designed to analyse
the changes in the financial condition of a business enterprise between two dates.
Fund flows can offer shareholders with huge information about where capital is being committed
around the world. In fund flow, there is all possible information of financial resources which
have become available during an accounting period and in the manner these resources are
utilized. The statement analyses the changes between opening and closing balance sheet of the
period. The flow of fund in company may be conceived as a continuous process. For every use of
funds, there must be an offsetting source. In general, the assets of the firm represent the net uses
of funds, its liabilities and net worth represent net sources.
various sources and use of funds:

To summarize, Fund flow statement is considered as an important tool for financial analysis and
control. Fund flow analysis serves as a valuable aid to financial manager or creditor in evaluating
the use of funds by firm and in explaining how these uses are financed. Future flow can also be
evaluated through projected fund statement. This offers the finance manager an efficient method
to assess the growth of firm, its resulting financial needs and the best way to finance these needs.
Sl.No Cash flow statements Funds flow statements
1. Shows causes for changes in cash Shows causes of changes in net working
capital
2. Starts with opening and closing balances There are no opening or closing balances
of cash
3. Deals only with cash Deals with all components of working
capital.
4. Useful for short-term financing Useful for long-term financing

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 5. Based on cash basis of accounting Based on accrual basis of accounting
6. Improvement in cash flow can be taken Sound fund position may not necessarily
as an indicators of improved working mean sound cash position.
capital position.

Break even point

Meaning of Break-Even Point:

Break-even point represents that volume of production where total costs equal to total sales

revenue resulting into a no-profit no-loss situation.

If output of any product falls below that point there is loss; and if output exceeds that point there

is profit.

Thus, it is the minimum point of production where total costs are recovered. Therefore, at break-

even point.

Sales Revenue – Total Cost

or, Sales – Variable Cost = Contribution = Fixed Cost

It can be concluded that at break-even point the contribution earned just covers the fixed cost

and, at levels below the point, contribution earned is not sufficient to match the fixed cost and, at

levels above the point, contribution earned more than recovers the fixed cost.

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P is the break-even point in the break-even chart where OS and CT—being the sales line and

total cost line—intersects. Loss results in the left side of P, i.e., before the break-even point is

reached, and, beyond P, profit starts to generate. Break-even point has a wide use in the field of

marginal costing and helps to decide the product mix, fixation of selling price, steps to be taken

in long-term planning etc.

Break-even point can be ascertained by using the following formula:

Break-even point - Assumptions:

(i) All costs can be separated into fixed and variable components,

(ii) Fixed costs will remain constant at all volumes of output,

(iii) Variable costs will fluctuate in direct proportion to volume of output,

(iv) Selling price will remain constant,

(v) Product-mix will remain unchanged,

(vi) The number of units of sales will coincide with the units produced so that there is no opening

or closing stock,

(vii) Productivity per worker will remain unchanged,

(viii) There will be no change in the general price level.

Uses of Break-Even Analysis:

(i) It helps in the determination of selling price which will give the desired profits.

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(ii) It helps in the fixation of sales volume to cover a given return on capital employed.

(iii) It helps in forecasting costs and profit as a result of change in volume.

(iv) It gives suggestions for shift in sales mix.

(v) It helps in making inter-firm comparison of profitability.

(vi) It helps in determination of costs and revenue at various levels of output.

(vii) It is an aid in management decision-making (e.g., make or buy, introducing a product etc.),

forecasting, long-term planning and maintaining profitability.

(viii) It reveals business strength and profit earning capacity of a concern without much difficulty

and effort.

Limitations of Break-Even Analysis:

1. Break-even analysis is based on the assumption that all costs and expenses can be clearly

separated into fixed and variable components. In practice, however, it may not be possible to

achieve a clear-cut division of costs into fixed and variable types.

2. It assumes that fixed costs remain constant at all levels of activity. It should be noted that fixed

costs tend to vary beyond a certain level of activity.

3. It assumes that variable costs vary proportionately with the volume of output. In practice, they

move, no doubt, in sympathy with volume of output, but not necessarily in direct proportions..

4. The assumption that selling price remains unchanged gives a straight revenue line which may

not be true. Selling price of a product depends upon certain factors like market demand and

supply, competition etc., so it, too, hardly remains constant.

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5. The assumption that only one product is produced or that product mix will remain unchanged

is difficult to find in practice.

6. Apportionment of fixed cost over a variety of products poses a problem.

7. It assumes that the business conditions may not change which is not true.

8. It assumes that production and sales quantities are equal and there will be no change in

opening and closing stock of finished product, these do not hold good in practice.

9. The break-even analysis does not take into consideration the amount of capital employed in

the business. In fact, capital employed is an important determinant of the profitability of a

concern.

Risks are commonly assumed to be the same as uncertainty in the area of risk management.
Although there is a big difference between risk and uncertainty, many professionals often think
that they are the same.

Risk

A risk is an unplanned event that may affect one or some of your project objectives if it occurs.
The risk is positive if it affects your project positively, and it is negative if it affects the project
negatively.

There are separate risk response strategies for negatives and positives.

The objective of a negative risk response strategy is to minimize their impact or probability,
while the objective of a positive risk response strategy is to maximize the chance or impact.
You might also hear two more risk terms: known and unknown. Known risks are identified
during the identify risks process and unknown risks are those you couldn’t identify.

A contingency plan is made for known risks, and you will use the contingency reserve to manage
them. On the other hand, unknown risks are managed through a workaround using
the management reserve.
Uncertainty

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Uncertainty is a lack of complete certainty. In uncertainty, the outcome of any event is entirely
unknown, and it cannot be measured or guessed; you don’t have any background information on
the event.

Uncertainty is not an unknown risk.

In uncertainty, you completely lack the background information of an event, even though it has
been identified. In the case of an unknown risk, although you have the background information,
you missed it during the identify risks process.

Sensitivity analysis is the study of how the uncertainty in the output of a mathematical model or
system (numerical or otherwise) can be divided and allocated to different sources of uncertainty
in its inputs.[1][2] A related practice is uncertainty analysis, which has a greater focus
on uncertainty quantification and propagation of uncertainty; ideally, uncertainty and sensitivity
analysis should be run in tandem.
The process of recalculating outcomes under alternative assumptions to determine the impact of
a variable under sensitivity analysis can be useful for a range of purposes,[3] including:

• Testing the robustness of the results of a model or system in the presence of uncertainty.
• Increased understanding of the relationships between input and output variables in a system
or model.
• Uncertainty reduction, through the identification of model inputs that cause significant
uncertainty in the output and should therefore be the focus of attention in order to increase
robustness (perhaps by further research).
• Searching for errors in the model (by encountering unexpected relationships between inputs
and outputs).
• Model simplification – fixing model inputs that have no effect on the output, or identifying
and removing redundant parts of the model structure.
• Enhancing communication from modelers to decision makers (e.g. by making
recommendations more credible, understandable, compelling or persuasive).
• Finding regions in the space of input factors for which the model output is either maximum
or minimum or meets some optimum criterion (see optimization and Monte Carlo filtering).
• In case of calibrating models with large number of parameters, a primary sensitivity test can
ease the calibration stage by focusing on the sensitive parameters. Not knowing the
sensitivity of parameters can result in time being uselessly spent on non-sensitive ones.[4]
• To seek to identify important connections between observations, model inputs, and
predictions or forecasts, leading to the development of better models

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SOCIAL COST-BENEFIT ANALYSIS
INTRODUCTION
The term “social costs” refers to all those harmful consequences and damages which the

community on the whole sustains as a result of productive processes and for which private

entrepreneurs are not held responsible. The definition of the concept is comprehensive

enough to include even certain “social opportunity costs”, avoidable wastes and social

inefficiencies of various kinds. Implicit in such an appraisal is the assumption that the

principal objective of investment decision-making is to maximize the net present value of

monetary flow or some variant of it.

The social cost-benefit analysis is a tool for evaluating the value of money, particularly of

public investments in many economies. It aids in making decisions with respect to the

various aspects of a project and the design programs of closely interrelated projects. Cost

benefit analysis has become important among economists and consultants in recent years.

NEED FOR COST-BENEFIT ANALYSIS

The essence of the theory of social cost-benefit analysis is that it does not accept that the

actual receipts of a project adequately measure social benefits and actual expenditures

measure social costs. The reason is that actual prices may be an inadequate indicator of

economic benefits and costs. For example, in developing countries like India, the prices of

necessities are set low, despite their economic importance, while the prices of less essential

goods are set high (through a system of taxes and duties). As a result, some projects which

appear very profitable when their outputs and inputs are valued at actual prices are, in fact,

unattractive from the viewpoint of the national economy, while other apparently unprofitable

projects have high economic returns. But the theory accepts that actual receipts and
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 expenditures can be suitably adjusted so that the difference between them, closely analogous

to ordinary profit, will properly reflect the social gain.

In Social-Cost Benefit Analysis (SCBA) the focus is on social costs and benefits of a project.

These often tend to differ from the costs incurred in monetary terms and benefits earned in

monetary terms by the project. The principal reasons for discrepancy are:

• Market imperfections: Market prices, which form the basis for computing the monetary costs

and benefits from the point of view of project sponsor, reflect social values only under

conditions of perfect competition, which are rarely, if ever, realized by developing countries.

When imperfections obtain, market prices do not reflect social values.

The common market imperfections found in developing countries are: (i) rationing, (ii)

prescription of minimum wage rates, and (iii) foreign exchange regulation. Rationing of a

commodity means control over its price and distribution. The price paid by a consumer under

rationing is often significantly less than the price that would prevail in a competitive market.

When minimum wage00

rates are prescribed, the wages paid to labour are usually more than what the wages would be in

a competitive labour market free from such wage legislations. The official rate of foreign

exchange in most of the developing countries, which exercise close regulation over foreign

exchange, is typically less than the rate that would prevail in the absence of foreign exchange

regulation. This is why foreign exchange usually commands premium in unofficial transactions.

• Externalities: A project may have beneficial external effects. For example, it may create

certain infrastructural facilities like roads which benefit the neighboring areas. Such benefits are

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 considered in SCBA, though they are ignored in assessing the monetary benefits to the project

sponsors because they do not receive any monetary compensation from those who enjoy this

external benefit created by the project. Likewise, a project may have a harmful external effect

like environmental pollution. In SCBA, the cost of such environmental pollution is relevant,

though the project sponsors do not incur any monetary costs.

It may be emphasized that externalities are relevant in SCBA because in such analysis all costs

and benefits, irrespective to whom they accrue and whether they are paid for or not, are relevant.

• Taxes and subsidies: From the private point of view, taxes are definite monetary costs and

subsidies are definite monetary gains. From the social point of view, however, taxes and

subsidies are generally regarded as transfer payments and hence considered irrelevant.

• Concern for savings: Unconcerned about how its benefits are divided between consumption

and savings, a private firm does not put differential valuation on savings and consumption.

From a social point of view, however, the division of benefits between consumption and

savings (which leads to investment) is relevant particularly in capital-scarce developing

countries. A rupee of benefits saved is deemed more valuable than a rupee of benefits

consumed. The concern of society for savings and investment is duly reflected in SCBA

wherein a higher valuation is placed on savings and lower valuation is put on consumption.

• Concern for redistribution: A private firm does not bother how its benefits are distributed
across various groups in the society. The society, however, is concerned about the
distribution of benefits across different groups. A rupee of benefit going to a poor section is
considered more valuable than a rupee of benefit going to an affluent section.

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•Merit wants: Goals and preferences not expressed in the market place, but believed by policy

makers to be in the larger social interest, may be referred to as merit wants. For example, the

government may prefer to promote adult education or a balanced nutrition programme for school-

going children even though these are not sought by consumers in the market place. While merit

wants are not relevant from the private point of view, they are important from the social point of

view.

PROCEDURE OF SCBA
The objective of social cost-benefit analysis is, in its widest sense, to secure and achieve the

value of money in economic life by simply evaluating the costs and benefits of alternative

economic choices and selecting an alternative which offers the largest net benefit, i.e. the

highest margin of benefit over cost.

Very broadly, social-cost benefit analysis involves the following steps:

• Estimates of costs and benefits which will accrue to the project-implementing body.

• Estimates of costs and benefits which will accrue to individual members of society as

consumers or as suppliers of factor input.

• Estimates of costs and benefits which will accrue to the community.

• Estimates of costs and benefits which will accrue to the National Exchequer.

• Discounting the costs and benefits which accrue over a period of time to determine

the feasibility of the project.

Here again, the non-quantifiable benefits are stated only in descriptive terms. These strategies

will work towards the appropriate calculation of the profitability ratio. While this is the

general approach to project formulation, implementation and evaluation, the same may be

modified to suit the circumstances.

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MAIN FEATURES OF SOCIAL COST-BENEFIT ANALYSIS
Prest and Turvey defined cost-benefit analysis as “a practical way of assessing the

desirability of projects, where it is important to take a long view in the sense (looking at

repercussions in the future as well as the near future and a wide view in the sense of allowing

side-effects of many decisions relating to industries, regions etc.), i.e., it implies the

enumeration and evaluation of all the relevant cost and benefits”. This definition focuses

attention on the main features of cost-benefit analysis. It covers five distinct issues:

• Assessing the desirability of projects in the public, as opposed to the private sector.
• Identification of costs and benefits.
• Measurement of costs and benefits.
• The effect of (risk and uncertainty) time in investment appraisal.
• Presentation of results– the investment criterion.

LIMITATION OF SOCIAL COST-BENEFIT ANALYSIS

The nature of social benefits and costs are such that there cannot be any standard method or

technique applicable to all types of investment projects. A bridge, a road, a housing colony,

or an industrial project will each require a different approach while identifying and

measuring its social benefits and costs. For one thing, the nature of inputs and outputs of

projects involving very large investment— and their impact on the ecology and people of the

particular region and the country as a whole are bound to differ from case to case.

At another level too, the problems of qualification and measurement of social costs and

benefits are formidable. This is because many of these costs and benefits are intangible and

their evaluation in terms of money is bound to be subjective. Even with honesty of purpose,

assessment of social good and social evil is likely to be tainted by the analyst’s own ideas

and subjective preferences and the resulting decision may not serve the socio-economic goals

which might have been initially formulated.

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 Moreover, a successful application of the techniques of analysis depends upon the accuracy

and reliability of forecasts. Even when evaluation of social costs and benefits has been

completed for one project, it may be difficult to judge whether any other project would yield

better results from the social point of view. If all possible alternative investments are sought

to be socially assessed, the costs would be prohibitive.

However, the limitations of analysis should not deter one from applying the techniques so far

evolved. The element of subjectivity can be reduced by cross-checks. Even economic

assessments suffer from certain drawbacks due to distortions in the price-mechanism caused

by imperfections in the labour market, government controls, tariffs and quotas, and price

inflation. Finally, while the limitations should not be ignored, it would be a folly to disregard

the gains of social evaluation of investments.

NETWORK TECHNIQUES FOR PROJECT MANAGEMENT

INTRODUCTION

Projects are successful if they are completed on time, within budget, and to performance
requirements. Management of any project involves planning, coordination and control of
a number of interrelated activities with limited resources, namely men, machines, money
and time. Furthermore, it becomes necessary to incorporate any change from the initial
plan as they occur, and immediately know the effects of the change. Therefore the
managers are compelled to look for and depend on a dynamic planning and schedule
system which will not only produce the best possible initial plan and schedule, but will
also sufficiently dynamic to react instantaneously to change in the original plan and
schedule. The question of such a dynamic system/ technique led to the development of
network analysis. It provides a framework which :

• defines the job to be done,

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 • integrates them in a logical time sequence and finally,

• affords a system of dynamic control over the progress of the plan. Network
analysis is a generic name for a number of associated project planning and control
procedures that are all based on the concept of network. PERT, an acronym for Program
Evaluation and Review Technique and CPM, an acronym for Critical Path Method are
the two widely used techniques of project management that were developed,
independently and simultaneously, during the 1950s. The network analysis underlying
PERT and CPM helps to support the three phases of effective project management.

Planning

• identify the distinct activities,

• determine their durations and interdependencies,

• construct a network diagram,

• determine minimum overall project duration (using the network diagram), and
• identify the tasks critical (i.e. essential) to this minimum duration.

Scheduling

• construct schedule (‘time chart’),

• schedule contains start and finish times for each activity, and

• evaluate cost-time trade-offs (evaluate effects of putting extra money, people

or machines in a particular task in order to shorten project duration).
Controlling

• monitor/control project by use of network diagram,

• follow progress of the various activities ; and

• make adjustment where appropriate.

PERT/CPM : BACKGROUND and DEVELOPMENT

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PERT and CPM- both techniques use similar network models and methods are have the
same general purpose. They were developed during the late 1950s. PERT was originally
developed by the U S Navy’s Special Product Office in cooperation with the consulting
firm of Booz, Allen and Hamilton. It was developed as a network flow chart to facilitate
the planning and scheduling of the Polaris Fleet Ballistic Missile Project, a massive
project with about 250 contractors and about 9000 sub contractors and its application is
credited with saving two years from the original of five years required to complete the
project. Designed to handle risk and uncertainty, PERT is eminently suitable for research
and development and programmes, aerospace projects, and other projects involving new
technology. In such projects the time required for completing various jobs or activities
can be highly variable. Hence the orientation of PERT is ‘probabilistic’. CPM, is akin to
PERT. It was developed (Independently) in 1956-57 by the Du Pont Company in the US
to solve scheduling problems in industrial settings. CPM is primarily concerned with the
trade-off between cost and time. It has been applied mostly to projects that employ fairly
stable technology and are relatively risk free. Hence its orientation is ‘deterministic’.

As both PERT and CPM approaches to Project Management use similar network models
and methods, the term PERT and CPM are sometimes used interchangeably or
collectively as PERT-CPM methods. The differences between those tools come from how
they treat the activity time. PERT treats activity time as a random variable whereas CPM
requires a single deterministic time value for each activity. Another difference is that
PERT focuses exclusively on the time variable whereas CPM includes the analysis of the
time/Cost trade-off.

The PERT/CPM is capable of giving answers to the following questions to the project
manager :

• when will the project be finished ?

• when is each individual part of the scheduled to start and finish ?

• of the numerous jobs in the project, which one must be timed to avoid being
late ?

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 • is it possible to shift resources to critical jobs of the project from other non-
critical jobs of the project without affecting the overall completion time of the
project ?

• among all the jobs in the project, where should management concentrate its

efforts at one time ?

Methodologically, PERT/CPM were developed from traditional GANTT Charts used for
scheduling and reviewing the progress of activities. Developed by Harry Gantt in 1916,
these charts give a time line for each activity. They are used for planning, scheduling and
then recording progress against these schedules.

Basically there are two basic types of Gantt Charts : Load Charts and Project Planning
Charts.

Load Charts : This type of chart is useful for manufacturing projects during peak or
heavy load periods. The format of the Gantt Load Chart is very similar to the Gantt
Project Planning Chart, but, Load Chart, uses time as well as departments, machines or
employees that have been scheduled.

Project Planning Chart

It addresses the time of individual work elements giving a time line for each activity of a
project. This type of chart is the predecessor of the PERT. As it can be seen in the Figure,
it is really easy to understand the graph, but in developing it you need to take

into consideration certain precedence relationship between the different activities of the
project. On the chart, everyone is able to see when each activity start and finishes but
there is no possibility to determine when each activity may start or if we can start a
particular activity before finishing the immediate predecessor activity. Therefore, we
need somehow know the precedence relationship between activities. This is the main
reason for using the PERT/CPM tools instead of using exclusively Gantt Charts. Widely
diverse kind of projects can be analyzed by the techniques of PERT/CPM. In fact they are
suitable for any situation where :

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 • the project consists of well-defined collection of activities or tasks.

• the activities can be started and terminated independently of each other, even
if the resources employed on the various activities are not independent.

• the activities are ordered so that they can be performed in a technological

sequence. Thus precedence relationships exist which preclude the start of
certain activities until other are completed. For instance, road leveling

cannot start unless the roadbed is laid.

We now proceed to discuss the techniques to provide answers to the types of questions
stated earlier. The initial step in each of these is to portray the given project graphically
by means of network, which provide the basic tool for analysis.

DEVELOPMENT OF PROJECT NETWORK

Basic to network analysis is the networks diagram. Both the methods of PERT and CPM
graphic representation of a project that it is called “Project Network” or “Project
Diagram” or “CPM Diagram”, and it is used to portray graphically the interrelationships
of the elements of a project and to show the order in which the activities must be
performed. A simple network chart for a ‘Seminar Planning Project’ is shown in Figure
as an example.

Fig. Project Network

In order to represent a project network, two basic elements are used :

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A circle called “node”, represents an event. An event describes a checkpoint. It does not
symbolize the performance of work, bit it represents the point in time in which the event
is accomplished.

An arrow, called “arc”, represents an activity-a recognizable part of the project involving
mental or physical work and requiring time and resources for its completion. The network
will try to reflect all the relationships between the activities.

Since activities are the basic building blocks of a network diagram, it is necessary to
enumerate all the activities of the project. For this purpose, it is helpful to break the
project in several steps. The number of steps, of course, would depend on the magnitude
and complexity of the project. For industrial projects generally a two-step procedure
would suffice. In the first step, the major parts of the project are identified and in the
second step the activities of each major part are delineated. Activities should be so
defined that they are distinct, reasonably homogeneous tasks for which time and
resources requirement can be estimated.

Once the activities are enumerated it is necessary to define for each activity, the
activities, which precede it, the activities which follow it, and the activities which can
take place concurrently. Given this information, the network diagram, showing the
logical relationship between activities and events may be developed following either the
forward method or the backward method.

The forward method begins with the initial events, marking the beginning of the project,
and proceeds forward till the end event is reached. The backward method begins with the
end event and works backwards till the beginning event is reached.

Rules for constructing a project network :

Three simple rules govern the construction of a project network :

• Each activity must be represented by only one directed arc or arrow.

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 • No two activities can begin and end on the same two nodes circle. A situation
like the one shown in the following figure is not permissible.

• There should be no loops in the network. A situation like the one shown in the
figure given below is not permissible.

Another element to represent a project network is a “dummy activity”.

Tasks that must be completed in sequence but that don’t require resources or completion
time are considered to have event dependency. These are represented by dotted lines with
arrows and are called dummy activities. To explain it, we will consider the following
example :

ACTIVITY IMMEDIATEPREDECESSOR

A .........................
B .........................
C A, B
D B

The temptation is to represent these relationships as :

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But then we have broken the second earlier mentioned. To show that activities A and B
precede C, whereas activity B precedes activity D, we use a dummy activity as shown in
the following figure.

A dummy activity may also be used to represent a constraint necessary to show the
proper relationship between activities. As shown in the following figure, activities A and
B must be completed before activity C can be start, only activity B must be completed
before activity D can start.

To construct a project network, first of all, we need a list of activities, showing the
precedence relationships between the different activities involved is shown in Table as an
example.

Table 1. Activities of the Project ‘Launching a New Product’

ACTIVITY NAME IMMEDIATE DURATION

PREDECESSOR (months)

A Market analysis ................... 1

B Product Design A 3

C Manufacturing study A 1

D Select best product design B, C 1

E Detailed marketing plans D 1

F Manufacturing process D 3

G Detailed project design D 3

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 H Test prototype G 1

I Finalize product design F, H 1,5

J Order components I 1

K Order production equipment I 3

L Install production equipment K 2

Fig.1. shows the network with the Earliest Start time, Earliest Finish time, Latest Start
time and Latest Finish time of the activities (these will be discussed later in the lesson).

Because each activity must have a unique pair of starting and ending nodes, we must use
a dummy activity to draw the first four activities, as shown in the figure. Constructing a
project network is a trial-and-error process. It usually takes two or three attempts to
produce a neatly constructed network.

Differences Between Risk and Uncertainty

The following are a few differences between risk and uncertainty:

• In risk you can predict the possibility of a future outcome, while in uncertainty you
cannot.
• Risks can be managed while uncertainty is uncontrollable.
• Risks can be measured and quantified while uncertainty cannot.
• We can assign a probability to risks events, while with uncertainty, We can’t.

Statement of Work Definition

A Statement of Work is a document used in project and contract management. It covers the
working agreement between two parties: the client, buyer, or government entity, and the agency,
vendor, or contractor. An SOW typically includes:

• Scope of work
• Project objectives
• Schedule
• Tasks
• Deliverables
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 • Payment of the project
• Expected outcomes
• Certain terms, conditions and requirements

Purpose of the Statement of Work

An SOW is used when contractors or collaborators outside your organization are working on a
project with your internal project team. It can also inform vendors or contractors who are bidding
on your project. An SOW is often used in conjunction with other related documents, including:

Request for Proposal (RFP): Organizations use this document to procure goods and/or
services from vendors or contractors.

Master Services Agreement (MSA): This is a detailed contract that outlines two parties’ terms
and responsibilities.

Since a well-written SOW outlines tasks and deliverables of a vendor or contractor, it can
provide a good foundation for writing a RFP or MSA down the road. However, the SOW should
only be written after terms and guidelines have been decided upon, and should adhere to the
correct format and use clear language detailing specific tasks, deliverables, and/or services the
contractor is responsible for. This will help avoid conflicts when negotiating the contract.

Statements of Work are typically used when the work can be described according to specific
directions or instructions, and when the requirements, tasks, and conditions are easily understood
by both parties. An effective SOW should also provide information on performance outcomes as
well as standards and metrics. Both parties should understand what a “successful” project looks
like and how it will be approved.

Three Types of Statements of Work

There are three different categories of SOWs, some of which may be more popular than others in
different industries. The main types are:

Design/Detail Statement of Work

This category of SOW tells the vendor, contractor or supplier exactly how to do the work and
what processes to follow. It clearly defines the buyer, client or entity’s requirements, whether
they be materials, measurements, quality control requirements, or something else. This type of
SOW is often used in government contracts, where contractors are required to follow specific
regulations, and is the preferred SOW for manufacturing or construction projects.

In this type of SOW, the buyer, client or entity assumes most of the risk, since the contractor is
obligated to follow the standards laid out for them.

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Level of Effort/Time and Materials/Unit Rate Statement of Work
This is a flexible SOW that is frequently used for hourly service workers. It is simply based on
work hours and the material needed to perform the service. The SOW describes the service being
performed over a given period of time in a general way. It is often used for temporary or contract
workers, or for delivery order contracts.

Performance-Based Statement of Work

This is the preferred type of SOW by most government entities, and the standard SOW for most
American and Canadian government procurements. It covers the purpose of the project, the
resources and equipment that will be provided, and the quantifiable end results. However, it does
not tell the contractor how to perform the work. This SOW offers the most flexibility in terms of
how the contractor works, and focuses on outcomes over processes.

In this model, more accountability is placed on the contractor or supplier, since they are
responsible for delivering results using whatever methods they think are most effective.

Statement of Work Format

Regardless of your industry, you’ll want to make sure to include the following sections in your
SOW. These sections are important because they capture all the information both parties will
need to ensure work is done according to the agreed-upon specifications. The format for most
statements of work includes the following components.

Introduction
The introduction is where you identify the type of work to be done, whether it’s performing a
service or creating a product. This is also where you identify the two parties involved: the client,
vendor, buyer or entity, and the contractor, supplier, provider or agency. The introduction also
covers the type of formal agreement that the SOW will be used to create:

• Standing offer: A vendor agrees to let a client or buyer purchase products or services at
a certain price for a certain period of time.
• Contract: A more formal and legally binding agreement, where the details are agreed
upon by both parties.

Objectives/Purpose
This section describes why the work is being done. It talks about the purpose and objectives of
the project and why they are important. It may discuss specific benefits or improvements the
project is expected to bring, or may simply be a high-level overview of project goals and
objectives.

Scope of Work
The Scope of Work section outlines the work that needs to be done and the processes involved in

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completing the work. It covers the project outcome in terms of a service, product or time
commitment, and clarifies an acceptable outcome. It may include a high-level bulleted list of the
steps that need to be taken to complete the work. However, detailed task lists should go in the
Requirements and Tasks section (see below).

As an example, the scope section for a software development project might include steps such as
“develop application” and “test application,” while the requirements and tasks section would
break down the actual tasks involved in these processes, such as “code design for first module of
application”.

In some statements of work, hardware and software requirements are listed in the scope section.
In others, they may be listed under requirements and tasks. If requirements are technical and
specific, it may make more sense to break them off into a separate section.

Requirements and Tasks

The requirements and tasks section breaks down the scope into more granular tasks. This section
also lists requirements that contractors or service providers must meet (for example, certain
training, certifications or security clearances) or hardware and software that should be used.

The Strategic Plan is the process of identifying research and extension gaps in agriculture and
allied sectors. It suggests an appropriate strategic plan for agricultural development of the
district.

What is Strategic Planning?

Strategic planning is a management task concerned with the growth and future of an
organization. Its job is to ensure that the organization keeps moving in the right direction.

The following are some of the characteristics of strategic planning:

• A process in which the stakeholders of an organization (and others they invite to

be associated to) join in strategic thinking and acting to create the best fit between
the organization and its environment

• It is planning from outside in and from inside out.

• It gives detailed attention to strengths, weaknesses, opportunities and threats

(SWOT) in terms of the organization, its mission, its vision and its environment

• It has to agree to the mission of the organization

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 • It should be in harmony with the organization’s vision that is carefully developed
and shared by the stakeholders

• Hopefully, it yields a strategic and implementable plan that constitutes the best fit
between the external environment and internal capabilities.
Strategic planning
• Serves as a road map for the organization

• Lends a framework for systematic handling of operational decisions

• Lays down growth objectives of the organization and also provides strategies
needed for achieving them

• Ensures the organization remains a prepared organization

• Ensures that the organization takes care of needs of the stakeholders

• Ensures best utilization of the organizations’ resources

• Serves as a coping mechanism against uncertainty arising from environmental change

• Helps the organization to understand trends in advance and provides the benefit of
a lead-time for taking crucial decisions and actions.

• Helps avoid haphazard response to environment

• Provides the best possible fit between the organization and the external environment.

• Helps build competitive advantages and core competencies

• Draws from both intuition and logic

• Prepares the organization to not only face the future but also even shape the future
in its favour.
Scope of Strategic Planning
• To be strategically alert

• To be future oriented

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 • To be able to take risks in tapping opportunities

• To be insulated against environmental threats

• To develop the competence for assimilating changes faster

• To respond effectively and more economically

• To bring convergence

• To be able to generate large resources

• To gain expertise in technology, extension and market support systems

Concerns of strategic planning

• Future — long-term dynamics is its concern; not day-today task

• Growth - direction, extent, pace and timing of growth

• Environment - the fit between the organization and its environment

• Strategy — strategy is its concern; not the operational activities

• Integration — integration is its concern; not a particular function

• Creating core competencies I competitive advantages creating long-term,

sustainable, organizational capacity is its concern

Need for strategic planning in agricultural development

The present mechanism of planning and implementation of agriculture and allied
development programs are centralized in nature. This top down approach focuses on
individual commodities / enterprises rather than on a holistic / integrated approach. It is
ad-hoc in nature and does not involve all actors. The farmers are considered as receivers
of benefits rather than as responsible

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 partners who can influence the production process. To address the aforementioned issues
of each district it is required to develop a Strategic Research and Extension Plan (SREP)
by involving all stakeholders.

The development and use of SREP would help in the following aspects:

• Get an overview of the prevailing scenario in the district

• Explore and understand the problems and opportunities in different farming

systems, preference and priorities of the farming community

• Facilitate long-term visioning and strategic planning for agricultural development

in the district in a concerted manner

• Facilitate involvement of all actors at different levels in the development process

and, in the long run, share the load on the public extension system

• Facilitate integration of and redesigning the on-going developmental programs for

the benefit of the farmers

• Development of annual action plans for each block in respect of the prevailing
Agro-Ecological Situation

• Develop farmer centered, market oriented, extension-research management system

Project planning is part of project management, which relates to the use of schedules such
as Gantt charts to plan and subsequently report progress within the project
environment.[1] Project planning can be done manually or by the use of project management
software.
the project schedule becomes what is known as the baseline schedule. Progress will be measured
against the baseline schedule throughout the life of the project. Analyzing progress compared to
the baseline schedule is known as earned value management.
In project management, a project charter, project definition, or project statement is a
statement of the scope, objectives, and participants in a project. It provides a preliminary
delineation of roles and responsibilities, outlines the project's key goals, identifies the
main stakeholders, and defines the authority of the project manager.[1]
A project charter should:

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• Contain the essence of the project.
• Provide a shared understanding of the project.
• Act as a contract between the project sponsor, key stakeholders and the project team.
The project charter is usually a short document that refers to more detailed documents such as a
new offering request or a request for proposal.
In Initiative for Policy Dialogue (IPD), this document is known as the project charter.
In customer relationship management (CRM), it is known as the project definition report. Both
IPD and CRM require this document as part of the project management process.
The project charter establishes the authority assigned to the project manager, especially in
a matrix management environment. It is considered industry best practice.
The purpose of the project charter is to document:

• Reasons for undertaking the project

• Objectives and constraints of the project
• Directions concerning the solution
• Identities of the main stakeholders
• In-scope and out-of-scope items
• Risks identified early on (A risk management plan should be part of the overall project
management plan)
• Target project benefits
• High level budget and spending authority
The three main uses of the project charter are:

• To authorize the project - using a comparable format, projects can be ranked and authorized
by Return on Investment.
• Serves as the primary sales document for the project - ranking stakeholders have a 1-2 page
summary to distribute, present, and keep handy for fending off other project or operations
runs at project resources.
• Serves as a focal point throughout the project. For example, it is a baseline that can be used
in team meetings and in change control meetings to assist with scope management.
For a large multi-phased project, the charter can be created for each individual phase. For
example, there can be an initial charter during the Scope and Seek phase of a project, followed
by a Planning charter and an Execution Charter during the build phase of the project.
A project charter will be created in the initiating process group of a phase or a project at the very
start. Developing the charter and identifying the stakeholders are the two main actions of the
initiating process group.
Inputs to develop a charter can be:

• Project Statement of Work

• Business Case
• Agreements
• Assumptions

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• Enterprise standards, industry standards, regulations and norms
• Organizational process, assets and templates
Typically a project manager takes the lead in developing the charter. The project manager will
employ his or her expertise and experience to develop the charter. The project manager will work
with the key stakeholders (customers and business sponsors), the PMO, Subject Matter Experts
inside and outside the organization, other units within the organization and may also work with
Industry groups or professional bodies to develop the charter. The project manager will employ
facilitation techniques such as brainstorming, problem solving, conflict resolution, meetings,
expectations management etc. to develop the charter.
The charter once signed will provide authority to the project manager to officially execute the
project and employ organizational funds and resources to make the project successful.
Earned value management (EVM), earned value project management, or earned value
performance management (EVPM) is a project management technique for measuring project
performance and progress in an objective manner
Earned value management is a project management technique for measuring project performance
and progress. It has the ability to combine measurements of the project management triangle:
scope, time, and costs.
In a single integrated system, earned value management is able to provide accurate forecasts of
project performance problems, which is an important contribution for project management.
Early EVM research showed that the areas of planning and control are significantly impacted by
its use; and similarly, using the methodology improves both scope definition as well as the
analysis of overall project performance. More recent research studies have shown that the
principles of EVM are positive predictors of project success.[1] Popularity of EVM has grown in
recent years beyond government contracting, a sector in which its importance continues to
rise[2] (e.g. recent new DFARS rules[3]), in part because EVM can also surface in and help
substantiate contract disputes.[4]
Essential features of any EVM implementation include:

• A project plan that identifies work to be accomplished

• A valuation of planned work, called planned value (PV) or budgeted cost of work
scheduled (BCWS)
• Pre-defined "earning rules" (also called metrics) to quantify the accomplishment of work,
called earned value (EV) or budgeted cost of work performed (BCWP)
EVM implementations for large or complex projects include many more features, such as
indicators and forecasts of cost performance (over budget or under budget) and schedule
performance (behind schedule or ahead of schedule). However, the most basic requirement of an
EVM system is that it quantifies progress using PV and EV.
of work is started, and the remaining 50% is earned upon completion. Other fixed earning rules
such as a 25/75 rule or 20/80 rule are gaining favor, because they assign more weight to finishing
work than for starting it, but they also motivate the project team to identify when an element of
work is started, which can improve awareness of work-in-progress. These simple earning rules
work well for small or simple projects because generally each activity tends to be fairly short in
duration.
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These initial three steps define the minimal amount of planning for simplified EVM. The final
step is to execute the project according to the plan and measure progress. When activities are
started or finished, EV is accumulated according to the earning rule. This is typically done at
regular intervals (e.g. weekly or monthly), but there is no reason why EV cannot be accumulated
in near real-time, when work elements are started/completed. In fact, waiting to update EV only
once per month (simply because that is when cost data are available) only detracts from a
primary benefit of using EVM, which is to create a technical performance scoreboard for the
project team.

In a lightweight implementation such as described here, the project manager has not accumulated
cost nor defined a detailed project schedule network (i.e. using a critical path or critical chain
methodology). While such omissions are inappropriate for managing large projects, they are a
common and reasonable occurrence in many very small or simple projects. Any project can
benefit from using EV alone as a real-time score of progress. One useful result of this very
simple approach (without schedule models and actual cost accumulation) is to compare EV
curves of similar projects, as illustrated in Figure 5. In this example, the progress of three
residential construction projects are compared by aligning the starting dates. If these three home
construction projects were measured with the same PV valuations, the relative schedule
performance of the projects can be easily compared.

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