The appraisal of the financial aspects involves scrutiny of the following;
- Cost of the project & means of financing.
- Cash flow estimates.
- Projected balance sheets.
Cost of the Project & Means of Financing-
The financial plan for meeting the cost of the project depends on how accurately the cost is estimated. The estimate will have to provide for;
- Land & site development.
- Plant & machinery.
- Technical know-how fees.
- Miscellaneous fixed assets.
- Preliminary expense.
- Pre-operative expense.
- Provision for contingencies.
- Interest during construction.
- Margin money for working capital.
Cost of project having been accurately estimated, sources of finance should be identified. This is in the form of owned funds & borrowed funds. Borrowed funds or debt consists of term loan, public deposits, debentures, deferred payment guarantees etc. The debt-equity proportion of 2:1 should be generally adhered to.
Cash Flow Estimates-
In the cash flow statement, profit is the most important source of inflow & profit depends on how accurately the cost of production & sales estimates have been arrived at. Profit that is considered as an inflow could increase or decrease depending on management policies followed in the borrowing unit.
Projected Balance Sheets-
The projected balance sheets report the effect of the plan of operations on the assets, liabililties & capital of the business unit. In analyzing the projected balance sheets, attention is to be focused on the movement of funds & also analyse the impact of the term loan granted by the financial institution on the assets & liabilities of the business unit.