3. At the end of this course the student able to understand :
◦ Concepts of project financial management
◦ How financial report are prepared?
◦ How to make financial analysis?
◦ Project cost estimation and techniques
◦ Prepare master budget (operating and financing budget)
Course objective :
4. Chapter One: Overviews of project Financial management
What is Financial Management
Objectives of Financial management
Important of financial management
What is project financial management
Project management cycle
Building Blocks of Financial Management
Chapter Two: Financial Reporting
Important of financial report
Principles and objectives of Financial Reporting
Financial statement
Chapter Three: Financial statement analysis
Objective of financial analysis
Ratio Analysis
Course Syllabus
5. Chapter Four: Project Cost Management
Meaning and need of Project cost estimation
Elements of project cost management
Classifications of project cost
Cost measurement
Purpose of cost estimation
Estimations of cost of project
Financial estimation and projection
Chapter Five: Master Budget
Operating Budget
Financing Budget
6. 1. One individual assignment (20%)
2. One group assignment with presentation (30%)
3. Final examination (50%)
Evaluation
8. In this chapter, we will attempt to explain the nature of project
financial management.
The chapter also examines the objectives of project financial
management.
It also explores the functions of the finance /roles of project
financial management.
INTRODUCTION
9. Financial management is the process of planning and
controlling of the financial resources of a firm.
It includes the acquisition, allocation and management of firms’
financial resources.
It is concerned with how best to manage an organization’s
resources in order to make sure that the resources are
maximized fully.
1.1. WHAT IS FINANCIAL MANAGEMENT?
10. The finance functions in all their facets are concerned with
decisions about
◦ investment,
◦ financing and
◦ appropriation of profit.
The quality of decision taken in these aspects has a lot of
implications for the success of an organization.
Cont…
11. According to the World Bank Financial Management Manual:
“Financial management is a process which brings together:
Planning,
Budgeting,
Accounting,
Financial reporting,
Internal control,
Auditing,
Procurement, disbursement and the physical performance of the
project with the aim of managing project resources properly and
achieving the project’s development objectives”.
Cont…
12. 1. Profit maximization
Main aim of any kind of economic activity is earning profit.
A business concern is also functioning mainly for the purpose
of earning profit.
Profit is the measuring techniques to understand
the business efficiency of the concern.
1.2 OBJECTIVES OF FINANCIAL MANAGEMENT
13. The finance manager tries to earn maximum profits for the
company in the short-term and the long-term.
He cannot guarantee profits in the long term because of
business uncertainties.
However, a company can earn maximum profits even in the
long-term, if:
The Finance manager takes proper financial decisions
He/she uses the finance of the company properly
Cont…
14. 2. Wealth maximization
Wealth maximization (shareholders’ value maximization) is
also a main objective of financial management.
Wealth maximization means to earn maximum wealth for the
shareholders.
◦ So, the finance manager tries to give a maximum dividend to the
shareholders.
He also tries to increase the market value of the shares.
◦ The market value of the shares is directly related to the performance
of the company.
15. Better the performance, higher is the market value of shares
and vice-versa.
◦ So, the finance manager must try to maximize shareholder’s value
This is being achieved through a combination of goals such
as:
i. Increase in the market share of the firm
ii. Increase in reported profits
iii. Continuous survival of the business
iv. Provision of valued services to customers
v. Ensuring public acceptability of the firm and its products/services
coupled with both social acceptability and legal acceptability.
16. 3. Proper estimation of total financial requirements
It is a very important objective of financial management.
The finance manager must estimate the total financial requirements
of the company.
The project manager should estimate the total financial
requirements of the project.
◦ He/she must find out how much finance is required to start and run the
project.
◦ He/she must find out the fixed capital and working capital requirements of
the project.
◦ His/her estimation must be correct. If not, there will be shortage or surplus of
finance.
17. Estimating the financial requirements is a very difficult job.
The finance manager must consider many factors, such as :
the type of technology used by company,
number of employees employed,
scale of operations, legal requirements, etc
18. 4. Proper mobilization
Mobilization (collection) of finance is an important objective of
financial management.
After estimating the financial requirements, the finance
manager must decide about the sources of finance.
He/she can collect finance from many sources such as
shares, debentures, bank loans, etc.
◦ There must be a proper balance between owned finance and
borrowed finance.
◦ The company must borrow money at a low rate of interest
19. 5. Proper utilization of finance
Proper utilization of finance is an important objective of
financial management.
The finance manager must make optimum utilization of
finance.
◦ must use the finance in profitable way.
◦ must not waste the finance of the company.
◦ not invest the company’s finance in unprofitable projects.
◦ must not block the company’s finance in inventories.
◦ must have a short credit period.
20. 6. Maintaining proper cash flow
Maintaining proper cash flow is a short-term objective of financial
management.
The company must have a proper cash flow to pay the day-to-day
expenses such as purchase of raw materials, payment of wages
and salaries, rent, electricity bills, etc.
If the company has a good cash flow, it can take advantage of
many opportunities such as getting cash discounts on purchases,
large-scale purchasing, giving credit to customers, etc.
A healthy cash flow improves the chances of survival and success
of the company.
21. 7. Survival of company
Survival is the most important objective of financial
management.
The company must survive in this competitive business
world.
The finance manager must be very careful while making
financial decisions.
One wrong decision can make the company sick, and it will
close down
22. 8. Creating reserves
One of the objectives of financial management is to create
reserves.
The company must not distribute the full profit as a dividend
to the shareholders.
It must keep a part of its profit as reserves.
Reserves can be used for future growth and expansion.
It can also be used to face contingencies in the future.
23. 9. Proper coordination
Financial management must try to have proper coordination
between the finance department and other departments of
the company.
24. 10. Create goodwill
Financial management must try to create goodwill for the
company.
It must improve the image and reputation of the company.
Goodwill helps the company to survive in the short-term and
succeed in the long-term.
It also helps the company during bad times.
25. 11. Increase efficiency
Financial management also tries to increase the efficiency of
all the departments of the company.
Proper distribution of finance to all the departments will
increase the efficiency of the entire company.
26. 12. Financial discipline
Financial management also tries to create a financial
discipline.
Financial discipline means:
◦ To invest finance only in productive areas. This will bring high returns
(profits) to the company.
◦ To avoid wastage and misuse of finance.
27. 13. Reduce cost of capital
Financial management tries to reduce the cost of capital.
That is, it tries to borrow money at a low rate of interest.
The finance manager must plan the capital structure in such
a way that the cost of capital it minimized.
28. 14. Reduce operating risks
Financial management also tries to reduce the operating
risks.
There are many risks and uncertainties in a business.
The finance manager must take steps to reduce these risks.
She/he must avoid high-risk projects.
He must also take proper insurance.
29. 15. Prepare capital structure
Financial management also prepares the capital structure.
It decides the ratio between owned finance and borrowed
finance.
It brings a proper balance between the different sources of
capital.
This balance is necessary for liquidity, economy, flexibility
and stability.
30. This form of management is important for various reasons.
1. Helps organizations in financial planning;
2. Assists organizations in the planning and acquisition of funds;
3. Helps organizations in effectively utilizing and allocating the funds received or
acquired;
4. Assists organizations in making critical financial decisions;
5. Helps in improving the profitability of organizations;
6. Increases the overall value of the firms or organizations;
7. Provides economic stability;
8. Encourages employees to save money, which helps them in personal financial
planning.
1.3 WHY IS FINANCIAL MANAGEMENT IMPORTANT?
31. Most companies experience losses and negative cash flows
during their startup period.
Financial management is extremely important during this
time.
Managers must make sure that they have enough cash on
hand to pay employees and suppliers even though they have
more money going out than coming in during the early
months of the business.
This means the owner must make financial projections of
these negative cash flows so he has to come with some idea
how much capital will be needed to fund the business until it
becomes profitable.
1.4 Life Cycles of a Business
32. As a business grows and matures, it will need more cash to
finance its growth.
Planning and budgeting for these financial needs is crucial.
Deciding whether to fund expansion
◦ internally or
◦ borrow from outside lenders is a decision made by financial
managers.
33. Financial management is finding the proper source of funds
at the lowest cost, controlling the company's cost of capital
and not letting the balance sheet become too highly
leveraged with debt with an adverse effect of its credit rating.
At the time of decline stage still financial mangers plays a
great role by reducing the total loss
35. In its normal operations, providing a product or service,
makes a sale to its customer, collects the money and starts
the process over again.
◦ Financial management is moving cash efficiently through this cycle.
This means that managing the turnover ratios of raw
materials and finished goods inventories, selling to customers
and collecting the receivables on a timely basis and starting
over by purchasing more raw materials.
1.5 Financial Management in Normal Operations
36. In the meantime, the business must pay its bills, its suppliers
and employees.
All of this must be done with cash, and it takes wise financial
management to make sure that these funds flow efficiently.
Even though economies have a long-term history of going up,
occasionally they will also experience sharp declines.
Businesses must plan to have enough liquidity to weather
these economic downturns, otherwise they may need to close
their doors for lack of cash.
37. Every business is responsible for providing reports of its operations.
Shareholders want regular information about the return and security
of their investments.
State and local governments need reports so that they can collect
sales tax.
Business managers need other types of reports, with key
performance indicators, which measure the activities of different
parts of their businesses.
As well, a comprehensive financial management system is able to
produce the various types of reports needed by all of these different
entities.
1.6 Reporting on Business Operations
38. Project financial management (PFM) determines how the
project will be financed, including the processes to acquire
and manage the financial resources for the project.
It is more concerned with revenue sources and monitoring
net cash-flows for the project construction than with
managing day-to-day costs.
1.7 PROJECT FINANCIAL MANAGEMENT
39. Therefore, the most critical finance manager jobs:
◦ to continuously monitor the project finances and
◦ to ensure the company's financial capacity to complete the project
This also includes the assessment and monitoring of financial risks
and the implementation of suitable financial risk management
strategies.
Under the project financial management financial management
process is the critical issue.
40. 1. Financial Management Planning
Project financial management planning is the initial phase of
financial management.
It identifies and provides all financial requirements for the
project and assigns financial management roles and
responsibilities.
1.7.1 Financial Management Processes
41. The goals of this financial management process:
Identification of sources of funds and alternatives,
Investigation of possibilities of short-term financial fluctuations,
Examination of the economic environment,
Development of financial analysis tools,
Evaluation of the most suitable legal entity,
Evaluation of contractual requirements,
Examination of financial impact risk factors,
Tax and other financial factors planning
43. It can be categorize in to four. Such as :
1. Finance function
2. Investment function
3. Dividend function
4. Liquidity function
1.8. Financial management functions
44. Finance functions have been acknowledged as major in most
organizations.
Finance functions require skill and professional planning,
control and execution of an organization’s activities.
The financial manager has to identify the time, place and the
technique for acquiring adequate funds to meet the
enterprise’s investment needs.
The central issue here is the determination of appropriate
proportion of internal (equity) and external (debt) finance
required by the enterprise.
1.8.1 THE FINANCE FUNCTIONS
45. The mix of the two is known as the capital structure.
The Financial Manager strives to obtain and sustain the best
financing mix, to optimize the capital structure, which forms
the base of financing.
The capital structure is said to be optimum when the market
value of shares is maximized.
46. Investment decisions involve capital expenditures which are
referred to as capital budgeting decision.
This is the decision of allocating capital to long-term assets
that will bring in beneficial yield (cash inflow) in the future.
There are three important aspects of investment decisions:
a) The evaluation of the prospective profitability of new investment; and
b) The measurement of a rate against the prospective return of new
investments could be compared.
c) Risk in investment
1.8.2 Investment Function
47. This is the other major financial decision which affects the
shareholders and the business as a whole – the decision to
distribute all profits or retain.
The proportion of distribution of profit and the balance
retained is subject to the firm’s policy, decision of the board of
director or economic situation as applied.
The proportion of profits distributed as dividend is called the
dividend-payout ratio.
1.8.3 Dividend Function
48. The retention ratio is the retained portion of profits.
The dividend policy is determined by its impact on the
shareholder’s value.
49. Liquidity and profitability affect investment in current assets in
business organizations.
Liquidity of an enterprise is affected by the level of
management of current asset.
Risk of illiquidity (lack of liquidity), in extreme situations, can
lead to a insolvency.
Current assets if properly/efficiently managed would
safeguard the business organization against risk of illiquidity.
1.8.4 Liquidity Function
50. The firm needs to invest sufficient funds in current assets in
order to become liquid.
It would lose profitability, if more of available current assets
are not utilized to earn any revenue.
51. Financial procedures involve a lot of measures to achieve
effective execution of finance function.
Some important routine finance functions are:
Supervision of cash receipts and payments and cash balances
safeguarding.
Custody and safeguarding of securities, insurance policies and other
valuable papers.
Taking care of the mechanical details of new outside financing.
Record keeping and reporting.
1.9 Financial Procedures
52. Finance is related to many other disciplines in that it can act
as a “tool” for decision making in disciplines like
administration, management, educational administration,
science and technology, law, economics, etc.
◦ This is due to the fact that finance has evolved from a purely
descriptive course to a normative one.
◦ That is, finance focuses on statements which articulate rules that help
to attain specified goals.
◦ Thus, each discipline makes use of the finance rules.
Finance is a special functional area of business
administration.
1.10 RELATIONSHIP BETWEEN FINANCE AND OTHER
DISCIPLINES
53. Finance is related to mathematics in that it adapts
mathematical equations or relationships to formulate models
and its systematic principles.
Finance also provides the basis for accounting.
In other words, without finance, accounting as a course may
not be as extensive as it is today and may in fact not have
existed.
Cont…
54. There are also financial laws showing the relationship
between finance and law as a discipline (commercial law, law
relating to banking etc).
Laws are normally used to regulate financial practices and
such laws are normally incorporated in the law discipline.
Cont…
55. The project cycle is the framework used to design, prepare,
implement, and supervise projects.
The duration of the project cycle is long by commercial standards.
It is not uncommon for a project to last more than four years; from
the time it is identified until the time it is completed.
A World Bank project consists of six stages:
Identification
Preparation
Appraisal
Negotiation/Approval
Implementation/Support
Completion/Evaluation
1.11 PROJECT FINANCIAL MANAGEMENT CYCLE
56. 1. Identification
Involve both the bank & borrower in selection of suitable projects
that support the national and sectoral development strategies.
Economic & sectorial analysis by the bank provide:
An understanding of the development potential of the borrowing country
A framework for assessing credit worthiness & for evaluating national & sectoral
policies
Continuous dialogue between bank and borrowing country leads to
The formation of a coherent development strategy
The identification of projects which fit into it
57. 2. Preparation
In this phase, feasibility studies would be carried out:
◦ To compare different technical &institutional alternatives and,
◦ To identify the solution most appropriate to the country’s resource
endowment & its stage of development
The borrower examines the technical, institutional, economic &
financial condition necessary to achieve project objective and
The bank provides guidance & makes financial assistance
available for preparation or helps the borrowers obtain
assistance from other sources
58. 3. Appraisal
Involves a comprehensive & systematic review of all aspects of the project by
the bank
Primarily covers four major aspects-
◦ Technical,
◦ Institutional,
◦ Economic,
◦ Financial
Lays the foundations for project implementation & evaluation
During this process: The project may be extensively modified or redesigned
and an appraisal report is drafted by the bank outlying the findings of the
appraisal and making recommendation for the terms and conditions of the loan
An appraisal report serves as a basis for negotiations with the borrower
59. 4. Negotiation
Involves discussion between bank & borrower on measures
needed to ensure project success
The agreement reached would be converted into legal
61. Good financial management involves the following four building blocks:
1. KEEPING RECORDS
The foundations of all accounting are basic records that describe your
earnings and spending.
This means the contracts and letters for money you receive and the
receipts and the invoices for things that you buy.
1.12 THE BUILDING BLOCKS OF FINANCIAL
MANAGEMENT
62. These basic records prove that each and every transaction has taken
place.
◦ They are the cornerstones of being accountable.
◦ You must make sure that all these records are carefully filed and
kept safe.
You must also make sure that you write down the details of each
transaction.
◦ Write them down in a 'cashbook' - which is a list of how much you
spent, on what and when.
63. 2. INTERNAL CONTROL
Internal control is a process designed to provide
reasonable assurance regarding the achievement of
objectives related to operations, reporting, and compliance
Make sure that your organization has proper controls in
place so that money cannot be misused.
64. Controls always have to be adapted to different
organizations. However, some controls that are often used
include:
Keeping cash in a safe place (ideally in a bank account).
Making sure that all expenditure is properly authorized.
Following the budget.
65. Internal control systems have five primary components as listed
below.
A. Control environment. It is the responsibility of top
management to make it clear that the organization values
integrity and that unethical activity will not be tolerated.
This component is often referred to as the “tone at the
top.”
65
66. B. Risk assessment.
Companies must identify and analyze the various factors that
create risk for the business and must determine how to
manage these risks.
66
67. Risk Response
Reduce
◦ Implement effective internal control
Accept
◦ Do nothing, accept likelihood and impact of risk
Share
◦ Buy insurance, outsource, or hedge
Avoid
◦ Do not engage in the activity
7-67
68. C. Control activities. To reduce the occurrence of fraud,
management must design policies and procedures to address
the specific risks faced by the company
68
69. D. Information and communication. The internal control
system must capture and communicate all pertinent information
both down and up the organization, as well as communicate
information to appropriate external parties.
E. Monitoring. Internal control systems must be monitored
periodically for their adequacy. Significant deficiencies need to
be reported to management and/or the board of directors.
69
70. Monitoring
• Perform internal control evaluations (e.g., internal audit)
• Implement effective supervision
• Use responsibility accounting systems (e.g., budgets)
• Monitor system activities
• Track purchased software and mobile devices
• Conduct periodic audits (e.g., external, internal, network
security)
• Employ computer security officer
• Engage forensic specialists
• Install fraud detection software
• Implement fraud hotline 7-70
71. Principles of Internal Control Activities
The six principles of control activities are as follows.
Establishment of responsibility
Segregation of duties
Documentation procedures
Physical controls
Independent internal verification
Human resource controls
71
72. 3. BUDGETING
For good financial management, you need to prepare accurate
budgets, in order to know how much money you will need to carry out
your work.
A budget is only useful if it is worked out by carefully forecasting how
much you expect to spend on your activities.
The first step in preparing a good budget is to identify exactly what
you hope to do and how you will do it.
List your activities, then plan how much they will cost and how much
income they will generate.
Cont…..
73. Monitoring how much money has been spent on what every
month.
Employing qualified finance staff.
Having an audit every year.
Carrying out a 'bank reconciliation' every month - which
means checking that the amount of cash you have in the
bank is the same as the amount that your cashbook tells
you that you ought to have.
74. 4. FINANCIAL REPORTING
The fourth building block is writing and reviewing financial reports.
A financial report summarizes your financial position (asset, liability
and owners equity), statement of profit/loss(revenue and expense)
and cash flow statements( cash inflow and cash outflows )
Financial reports summarize the information
76. Sound financial management is one of the most important policy
development and monitoring areas of a board of directors.
A good policy is:
1. Easily understood and has a definite purpose for its creation and is
linked to strategy
2. Is flexible, can adapt to change and is suited to the culture of the
organization
3. Is developed through the involvement of employees and interested
stakeholders
4. Is communicated to all relevant people.
1.13 Policies and Standards
77. To develop a policy you must:
Discuss (including consultation with board members, employees,
volunteers and service users as applicable) and agree on the final
version
In the case of board policy, ensure the entire board ratifies the
document and builds in a date for review.
Sound financial management involve long-term strategic planning,
and short-term operations planning.
This financial planning should become part of organization's ongoing
planning process.
Cont…
