Project planning: matching benefits with costs
This week, I want to share the need for considering project costs and benefits as important steps when making your decision to invest particularly when it is a major project.
Practically, the conventional way to quantify the costs and benefits is through creation of a projected cashflow statement. This places your costs and benefits in the correct time framework too. If you want to finance your major purchase or project with a bank loan, your lender is likely to want to see a cashflow budget showing the effect of the project on your revenues, and robustly proving that you can make the anticipated loan payments.
Even if you are not considering external financing, you should consider creating such a budget (or, more likely, having your accountant doing it for you). It’s a way of systematically comparing the costs and financial benefits of your project over a period of time, and will enable you to get a good handle on how the project will affect your business. If done correctly for each project you consider, cashflow budgets should also point out projects that are financially unfeasible or only marginally feasible, thus saving you the trouble of finding that out the hard way later.
Your cashflow projection should show estimated cashinflows and outflows for the project, by month, for at least the first year. As a starting point in an already existing business, you can use the cashflow projections you’ve already done for your business, simply adding-in the changes that you expect the project to bring. Then you can compare your original statement (without the new project) to your new statement (with the project), to gauge the likely results of moving forward with your plans.
Ideally, you would also do a simplified projection that extends for the length of the asset’s useful life, or at least for the length of the loan or lease used to finance it. You might also like to project your cash flow out to the date when the project’s costs will be paid back by the benefits it generates.
Recognise, however, that the further out in time you go, the less certain your figures will be, because of the increased chances that there will be unexpected changes in interest rates, inflation, technological developments, consumer tastes and habits, or other factors that can affect your business. At this point, your simplified, long-range cash flow projection for the project should include only those inflows and outflows that are directly related to the project itself. Don’t include overhead costs that you would have regardless of whether you did the project or not.
Once you have created a projected cash flow statement for your project, you can use some financial analysis tools to see whether the project makes sense for your business. Watch out for subsequent weeks when we will discuss the financial analysis tools—a more interesting aspect of successful project implementation –getting more practical.
Blessed weekend to you and yours. n
