“I need Term Loan urgently whereas Banker is insisting for Project Report”- A common grievance among many SMEs in India
Detailed Project Report (DPR) prepared before starting a new project can eliminate risks to a large extent, reduce the timeframe of execution and contribute significantly to
Recently I met an entrepreneur who has started a new project in food processing space. He started construction work and given advance to machinery supplier. He approached his bank for financial assistance. Since his record of the relationship was very good, they readily agreed to sanction the loan.
As a pre-requisite for term loan, they have asked him to submit a detailed project report to establish technical feasibility and economic viability. The entrepreneur got annoyed and was complaining that even though he is a long standing customer, the bank was insisting for project report, which he found cumbersome.
What is the rationale behind seeking project report?
Lack of planning is likely to have the severe impact in growth stage as stakes are quite high for entrepreneurs in the growth stage.
It is not uncommon to find entrepreneurs in growth stage to loosen the rigours of prudence with which they started the business and succeeded. There are many entrepreneurs who feel that success in the growth stage will be much easier than start up which is untrue.
Many amazing businesses just failed in growth stage despite having proven products, established the market, technology and access to finance due to irrational exuberance showed in the growth stage.
What is the best course?
Have a detailed project report for the intended growth plan. A project report or DPR is a document which contains the details pertaining to industry, management, Business model and Financial aspects.
The primary objective of preparation of project report is to assess the technical feasibility and economic viability of the project under consideration. It should be taken as the one meant to satisfy entrepreneur himself.
This also gives comfort to lenders, suppliers, investors and other stakeholders otherwise a sense of clarity into the project proposed.
It reflects upon the preparedness of the entrepreneur for undertaking the project and the ability of the entity to endure the challenges in the course of its business.
Generally, the project appraisal framework comprises the following:
- Industry scenario: The discussion in industry scenario may encompass inputs, competition, regulations
- Business analysis: Assessment of firm’s sustainability and stability to withstand adverse business conditions. It includes the business fundamentals of rated companies, the characteristics of the industry it operates, its competitive market position in the industry and its operational efficiencies.
- Financial projections: It comprises the projection of sales, profitability, balance sheet structure and cash flow which ultimately establishes the sustainability and adequacy of cash flows with particular emphasis to debt servicing ability. Entrepreneurs must show care to build the financial model wherein the assumptions on costing of various parameters play a significant role. It is highly desirable that costing of parameters and pricing of services/ products remain conservative.
- Management capability: Any firm’s performance is significantly determined by the management goals, plans and strategies, capacity to overcome unfavourable conditions, skills and capabilities required and how the entrepreneurs have planned to hire human resources.
The importance of Project Report:
A guide to success- It is quite obvious that effective planning is essential for success. Project report serves as a guide to implement the project and realise the intended objectives of the project.
Describes Direction / Road Map-A project report is like a road map. It describes the direction in which the project should go & how to reach the goal. Without well-defined goals & equally well-documented processes, most enterprises land in troubled waters & flounder on the rocks of hard times.
Shows Feasibility- Technical feasibility needs to be understood beforehand. So that entrepreneurs will be able to execute the project.
A Clear understanding of requirements: A project report enables an entrepreneur to appreciate needs for implementing the project well in advance. It also gives a precise estimate of various resource requirements like raw materials, manpower, finance, infrastructure facilities etc. and also the means of procuring them. It brings to the fore the limitations and alternatives.
Presents benefits for the entrepreneur- It gives an indication of likely benefits which a prospective entrepreneur can get from his venture. This profitability indication will assist entrepreneurs to take an appropriate investment decision depending upon hurdle rate he has in his mind for any investment.
Helps in making timely decisions- Crucial decisions have to be made at various stages of production. How much to produce to achieve Break-Even-Level? How to keep up the repayment schedule? Such important decisions can be taken with the help of a project report prepared well in advance. It also anticipates problems in advance so that suitable decisions can be taken then & there to solve those problems.
Paves way for Financial Assistance- The preparation of a project report is absolutely essential for those enterprises which apply for financial assistance from banks. It is on the basis of project report, bank decideS to lend.
Defines the Market and Marketing Strategy- The survival of any business depends upon the marketability of its products. The project report projects the demand & supply situation, competitor’s position in the market, expected price etc. and thus gives a fair picture of business’s economic viability.
Assists in fixing suitable Repayment Plan: Project report covers the cash flow structure of the business and assists in fixing convenient repayment plan. This is the major challenge for SMEs that repayment plan is not in sync with cash flow characteristics of business.
Details the Expected Performance- A project report is prepared to plan in advance about the fulfilment of expected performance in various areas like technology, marketing, finance, personnel, production, customer satisfaction & social endowment.
Assesses Profitability- Project report assesses the demand potential of the proposed product, works out the cost of capital invested & operational costs & side by side expected the profitability of the proposed project.
Preparing Project Report- Few suggestions to Entrepreneurs:
So far we have detailed about the project report and its significance. We emphasise that an entrepreneur should demonstrate his grip on the process while undertaking new business planning. There are four important suggestions, we request entrepreneurs to observe:
Timing: Project report must be prepared before any commitment is made. For instance, recently I saw one case wherein machine supplier had induced an entrepreneur to book the machine without fully tying up the funds for project
Such actions compel one to somehow get a project report to comply with bank’s requirement to take a loan and as such he will be forced to ignore certain vital aspects for the success of the project.
Hence project report must be prepared well in advance.
Comprehensive: While undertaking new project planning, SMEs should ensure that the report is comprehensive, realistic and detailed.
Participation: It is a commonplace to find that SMEs rely on consultants to prepare a project report. It is alright so long you participate actively in the process of building the report.
It is a sort of test of preparedness for entrepreneur himself. The report so prepared must reflect on his ability to raise funds and capability to execute the project.
Many SMEs being promoted by technocrats and many of them have aversion to analyse the new project beyond the technical feasibility.
As your personal interest involved, no amount of effort is a waste if you make attempt to get a hold on all the aspects of project planning including finance.
Ensure that all the assumptions and cash flow characteristics are known to you and remain conservative.
Scrupulous Adherence: Once the report is prepared and accepted, promoters should adhere to blueprint while executing the project without compromising.
In the event any aspect is diluted or deviated from the documented one, ( Ex. starting the project without tying up the loan, delaying the execution beyond the time frame, changing other terms etc) it may harm the viability of the project and render it as sick.
There are many such stories of failure. Many SMEs have suffered huge loss and faced recovery action. The direct fallout will be severe damage to existing business and in the long run, it will cause severe injury to personal finance.
Since SMEs normally work under financial constraints, new project planning and implementation should be carefully executed.
Under any circumstances, if certain parameters need to be changed (Eg. reduction of term loan), its implication on the whole project needs to be reviewed before agreeing for change.
A project report highlights the practicability of a project in terms of different factors like economy, finance, technology & social desirability. It enables the entrepreneur to understand, at the initial stage, whether the project is sound on technical, commercial, financial & economic parameters.
New projects should be undertaken only after preparing Project report to ensure that new project will be executed as planned and eliminates the risks.