Financial Analysis For Commercial Projects
All projects require some form of financial analysis because they involve the expenditure of money, which must be both planned and justified. The main purposes of the financial analysis of projects are
• To provide an adequate financing plan for the proposed investment
• To determine the profitability of a project from the point of view of the owners or the project beneficiaries
• To assist in planning the operation and control of the project, by providing management information to both internal and external users.
In the financial analysis of projects the two most important concepts are those of liquidity and profitability. Financial analysis statements also provide performance indicators on a number of other issues for management information.
The concept of liquidity is concerned with the availability of funds for the continued implementation and operation of the project. The liquidity status of a project is determined primarily from the cash flow. This statement is also described by some people as the sources and applications of funds statement or as the funds flow statement. Liquidity is an important issue for all projects.
The concept of profitability is concerned with the question of whether the project is worthwhile from the point of view of the investor. Accountants’ measures of profitability are determined primarily from the profit and loss account, which is also known as the income statement, particularly in U.S. practice. Discounted measures of the value of a project to the owners can be derived from the cash flow. Measures of profitability to the project owners are only relevant to those projects with an output that is sold commercially.
Performance indicators of the f ...