Role of Finance in Project Management

Author: Neelu Tiwari

Objective:
i)
An introduction to the different sources of finance available to management, both
internal and external.
ii)
An overview of the advantages and disadvantages of the different sources of funds.
iii)
An understanding of the factors governing the choice between different sources of
funds.
Statistical tools:
1. Technical Feasibility:
i.
ii.
iii.

Availability of basic infrastructure

Selection of Technology / Technical Process
Availability of Suitable Machinery / Raw Material / Skilled Labor Etc..

2. Managerial Competence:
The promoters of the project have to provide necessary leadership and their
qualification, experience and track record will be closely examined by lending institution.
3. Commercial Viability:
Regression method for estimation of demand are employed which is than to be matched
with the available supply of a particular product.
4. Financial Viability:
Cost of Project: Land Cost, Site Development Cost, Buildings Cost, Plant and
Machinery, Miscellaneous Fixed Assets, Preliminary Expenses, Contingencies, Margin
for Working Capital.
5. Break-Even Point:
The minimum level of production and sales at which the unit will run onno profit
no loss is known as break-even point.
6. Debt Service Coverage Ratio (DSCR) :
Debt Service Coverage Ratio is calculated to find out the capacity of the project
servicing its debt i.e. in repayment of the term loan borrowings and interest.
7. Internal Rate of Return:

The present investment in the cash flow which is assumed to be negative cash
flow and the return (cash inflow) are assumed to be positive cash flows.
Understandings from article:
A) The project will be financed by contribution of funds by the promoter himself and also by
raising loans from others including term loans from banks and financial institutions.
The means of financing will include:
i. Issue of share capital including ordinary/preference shares.
ii. Issue of secured debentures.
iii. Secured long-term and medium-term loans (including the loans for which the application
is being put up to term lending institutions).
iv.
Unsecured loans and deposits from promoters, directors etc.
v. Deferred payments.
vi.
Capital subsidy from Central/State Government
B) SECURITY COVERAGE AND PROMOTERS CONTRIBUTION:
The bankers wants that at least the promoters should contribute 40% of the total project
cost. The long term sources of funds are utilized for acquisition of land, procuring the fixed
assets and construction of building etc
In project funding the bank has charge on the land, building, any super structure thereof and
hypothecation of stocks & receivables and all the current assets relating to project.
C) Project loans repayment begins after 2-3 years, the time gap between the disbursement of
loan and repayment of first installment is called moratorium period.

Conclusion:
The most important thing in any project financing is preparation of Detailed Project Report
(DPR) which should be made beautifully for getting the project approved from banks/financial
institutions. After preparation of DPR the proposal is moved to the banks/financial institutions
for processing of the file.