Definition of Project Report

Introduction

A project at the outset must bear a logical appearance, which it can get only after the feasibility test. Project report is a document, which clearly narrates the various aspects of project in a prescribed form. Project report preparation is a post investment decision exercise.

It involves the preparation of detailed specifications and designs for the project premises, detailed design of the process or other equipment and time schedules for the implementation of the project. Hence, the detailed project report is the work plan for the implementation of a project once an investment decision is arrived at.

A project report is meant to provide the necessary information, which may be required for the purpose of processing and assessing the proposal for getting the financial assistance from the financial institutions.

This is essentially prepared in order to provide a complete information with proximate values of the project and presented to the financial institution for appraisal. A project report prepared with utmost care would not only give a clear idea to the banker but also it relives the entrepreneur from the normal objections and formal queries of the banker.

In a developing economy like India, where the development banking is vigorous, an entrepreneur gets a lot of published materials with data relating to various feasibilities and promotional institutions engaged in entrepreneurship development produce good literature covering various aspects of producing a project or products in the country. The Director General of Technical Development (DGTD), National Small Industries Corporations (NSIC) are some of the pioneer institutions providing variety of information for small scale entrepreneurs to manufacture. They give guidelines for industries indicating those items, in which good scope exists for manufacturing.

With these available informations, an entrepreneur has to do the following for starting an industrial unit:

To decide the type and level of industrial production

To compare the requirements of funds with his personal availability of finance.

To prepare a nice project report containing all relevant information

Many of the institutions like SISI, State Financial Institutions also help in preparation of project report and later on recommend them to the banks. Besides these institutions, several commercial banks help the entrepreneurs to get a good project report.

Components of Project Report

The following are the important headings under which the complete information on relevant aspects should be included for a small scale industry’s project report.

General information

Rationale

Project description

Market potential

Capital expenditure and sources of finance

Assessment of working capital requirements

Other financial factors

Government and other statutory approvals

Economic and social variables

General Information

The following aspects should be given in the stage, which are of general Nature

Name and address of the entrepreneur

The qualifications, experience and other capabilities of the entrepreneur. If it is a partnership firm, these informations of other members should also be given.

A small reference of analysis of industry to which the project belongs e.g. past performance, present status, the way of organisation, the problems etc.

The organisational structure of the enterprise

The utility of the product and the range of products to be manufactured

Rationale

As mentioned earlier a project may have several objectives subsidiary to the prime objective of making profit. As a first step in project evaluation, it is essential that one looks at the broad rationale of the project proposal to ensure that the project is appropriate and justified. As an example, one could say that modernisation or pollution control may be fully justified on grounds of survival and environmental protection even if, in the short-term, the project expenditure may adversely affect the financial criteria of project evaluation. On the other hand, a project which would improve the earnings per share or the debt service cover or the production efficiency may not necessarily be justified if all this is to be achieved at the expense of national interest or public interest.

Project Description

A brief description of the project covering the following aspects should be given in the project report.

SITE: Location (Town, Complete address) whether owned or leasehold land, whether the site is approved industrial area? Is it suitable for the product under review.

Input Factors

Raw materials: What are the sources of raw materials? Are they locally available? Whether imported raw material is also required? If so, whether license has been obtained? Is it suitable to get quality raw materials continuously at reasonable prices?

The availability, quality critically and quality compatibility of the raw material with the technology as well as the plant and machinery are important factors to be clearly understood while evaluating a project especially those in hi-tech area.

This element is also intimately linked to many other elements in a project and can force necessary changes in them to ensure the viability of the project.

As a simple example, one can easily surmise that a raw material with a high volume to weight ratio will indicate the plant is located near the source of raw material. e.g. Cement, power (coal based).

On the other hand, if the value added in such a case is very high, then it may be possible or even necessary to locate the plant away from the source of raw materials. Textiles, power (gas based of oil based), processed foods like snack foods, ice creams are some the pertinent examples.

The characteristics of the raw materials are multivariate and not just on the volume weight ratio. It is imperative therefore that this element gets a careful consideration while assessing a project. The market, the management, and the utility needs of the projects also influence the locational decisions.

Labour: What is the type of labour required? Whether skilled or unskilled? Are they available in that area? If not, what arrangement have been made to recruit and train the labour in various skills?

Power: Inadequate supply and high cost of electricity is a major problem now-a-days. So, the project report should contain the information regarding the power requirements, the load sanctioned, stability of supply of power and the price at different consumption level.

Fuel & water: Whether the fuel systems like coal, coke, oil or gas are required and if yes, then state their availability position. Similarly water is an important factor. The source and the quality of water should be clearly stated.

Waste discharge: Most of the plants produce waste material or emissions that may result in many health problems to the public. The emissions and discharge may be various types like (a) gaseous (smoke, fumes, dust etc.) by physical (noise, hear, vibration etc.) or (c) liquid or solid discharged through pumps and sewers. Hence, it should be clearly stated that the arrangements made from these things.

Communication and Transport Facilities

Availability of communication facilities like telephone, telex and post and telegraph department, should be stated in the report. Similarly, transport is a basic necessity for industries. Raw materials as well as finished products has to reach destination only through a good transport systems available. So, the various transport facilities available in that should be clearly stated. Similarly availability of facilities like machine shops, welding shops and electrical repair shops etc., should also be stated.

List of Machinery & Equipments

A complete list of items of machinery and other equipments indicating their type, size and cost should be stated. Source of supply of capital equipment and the construction services should also be given.

The source of plant and machinery as also the specification for the same can often make or break a project. It is, therefore, equally important to evaluate the plant and machinery which is to be installed at the project. The reputation of the supplier and references to place where such/similar plant and machinery are installed is a good starting point while assessing this element.

Capacity & Technology

The installed and licensed should be stated and the number of shifts likely to follow should be stated. Similarly, Is the technology upto date and appropriate? Which other units are using the same technology and with what results? How the required know-how is proposed to be arranged?

The level of technology in terms of its “state of art” or obsolescence, adaptability to the local conditions, maintenance and repairability, sophistication in management and control are elements which have a significant impact on the quality and quantity of production that is envisaged in the project. It is thus necessary to have a clear understanding about the technology which is to be utilised in the project.

It is pertinent to note that there are no hard and fast rules but “appropriateness” and “relevance” are the two key operative words while assessing a technology proposed for the project. It is ridiculous to propose a highly sophisticated, push button control technology in a place where electricity supply follows its own rules or where a simpler technology is better understood and more manageable. Equally, it would be disastrous to recommend an obsolete technology on account of its durability or time tested proof of performance when everyone else is fast discarding it.

This technology elements is linked to every other element in the project proposal and these linkages also need to be looked into as an essential step in assessing the technology. One of the technologies available may necessitate creation of large capacity not necessarily advisable given the current raw material supply or the market size for the product.

For example, a capacity of 100 tpa for manufacture of peer starting from pulp or even hard wood or bamboo could be considered an or even the “minimum economic” size leading to acceptance of a particular technology which gives maximum efficiency at 10 tpa. But if raw material proposed is “agricultural waste” a whole lot of new considerations starting from collection and storage or raw materials come into play necessitating appropriate changes in the plant size and even perhaps the technology. Similar situations can arise in linkages of technology to management, availability of utilities, and cost of the project.

Quality Control

What is the system arranged for to check the quality of products on continuous basis? The quality marks like ISI, Agmark will enhance the values of the product as well as confidence among the consumers. If it is desired to get quality markings, the fact should be included in the project report.

Market Potential

Estimation of Demand & Supply

Facts regarding the anticipated demand for product and the level of supply, should be clearly stated. An estimate of manufacturing and administrative expenses together with the price expected along with the margin of profit should be stated.

Marketing strategy: What is the strategy adopted for marketing the product should be stated. Whether the products are to be supplied to the reputed sellers directly or distributors? Is there any possibility of getting a contract from the reputed concerns should also be stated in this project report. Similarly whether after sales service has been arranged and how to fill the gap of demand if there is fluctuations in the sales seasonal demand arrangements made for warehousing the products.

Capital Expenditure and Sources of Finance

Cost of the project: Since each project is profit motivate it is important that cost of the project is carefully assessed and evaluated. One of the most important factors in this assessment is the level of accuracy in the cost estimates, which in addition to proper data collection also depends upon the approach and the attitude of the evaluator himself. Some evaluators tend to see all cost estimates as “too high” leading to unnecessary under estimation of the project cost and consequent problems in project implementation and even project viability. On the other hand some evaluators tend to provide “cushions” at all levels of cost estimates which may erode the viability of the project on paper leading to a wrong decision on the issue of project selection and implementation.

An estimate regarding this various capital inputs required by the industry should be given. Those capital items include the following:

Land & Building

Plant and machinery

Preliminary expenses

Miscellaneous assets

Price escalation

Working capital limit

Means of financing: Having established the cost of a project as justified and reasonable, it is necessary to evolve the means of financing the project. It should be acceptable within the framework of the financial system and sufficiently attractive/or safe enough for the investor lender to come forward and extend the necessary assistance.

During the last decade, financial scenario in India has undergone substantive, qualitative as well as quantitative change almost amounting to a metamorphosis. As a result the project prosperity has a fairly wide range of means of finance available to him to choose from. Instead of a standard debt-equity ratio of 2:1, the promoter taking up 50% to 75% of the equity, the balance being offered to the public and the financial institutions and banks picking up the tap for the debt component.

The promoter can now think of a variety of instruments like equity cumulative convertible preference shares fully or partly or non-convertible debentures, as means of financing and also many other sources of funds like mutual finds, venture finance and lease finance. A clear understanding of the various elements and the various institutions operating in the financial system would help to assess the appropriateness of the means of finance. The cost of raising and servicing funds, and other terms and conditions accompanying funds, as all these have a direct impact on the viability of the project. At this juncture, it is worthwhile nothing that the project evaluation should also pay due attention to the ethics of fund raising especially if the means of finance involves premium carrying instruments.

Assessment of Working Capital Requirements

Many industries fail due to improper estimate of working capital requirements. It is very crucial to an entrepreneur. The unit could function only if the working capital limit is maintained properly. So, the working capital requirements should be very carefully calculated and stated in the project report.

Other Financial Aspects

It should be found out that the product taken up for production is profitable. For this, profit & Loss A/c an estimated one should be prepared, which shows sales revenue, cost of production and other costs and profit. Similarly a projected balance sheet and cash flow statement should be prepared to indicate financial position and financial requirements.

There should be always availability of funds for the smooth functioning of the unit. Next the break-even analysis must be given break-even point is that level of production sales where the industrial enterprise shall make no profit no loss. This break even analysis facilitates knowing the gestation period and the likely moratorium required for repayment of loan.

The return from a project is a very essence of evaluating a project especially as the prime motive for setting up a project is its profitability. The project return is to be assessed in terms of cost of production realisable selling price, financial charges, depreciation taxes and host of other financial and non-financial variables.

Government and Other Statutory Approvals

The project is not put up in a vacuum but in the real world which is subject not only to procedural requirements but also to policy guidelines and stipulations. These requirements, guidelines and stipulation could begin with the very permission to establish a project and go across various economic statutes of a country governing several aspects of a project. The project evaluation must take all these into account, not merely as an element of feasibility or otherwise of setting up the project but as part of the plan extending over the economic life of the project.

Economic and Social Variables

Among other things, what will be the abatement costs to control pollution and treating for the effluents and emissions, should be stated. Added to this, whether the project derives home some social benefits like the following:

It promotes an increases the employment potential in that area

It promotes an encourages smaller units (tiny sector) to grow

It effects overall development of that area

Economic and National Significance of the Project

Many projects have an economic and/or a national significance especially if they are in the area of hi-tech, import substitution, export orientation, defence and/or involve substantive outflow of foreign currency either for technology know-how or for raw materials. It is necessary to evaluate the economic and the national significance of a project is to be made acceptable in the prevalent economic scenario.

Social and Environmental Consideration

While setting up a project, issues not necessarily connected with the financial profitability of the project but to the environment and society as a whole have become important in more than one case. These issues relate to environmental pollution and safety as also different segments of the society coming in contact with the activities of the project.

Two models of project report are given at the end of this lesson.

Project Report Vs. Feasibility Report

The detailed project report differs from feasibility report in the following manner:

Objective: Feasibility report’s aim is to serve the top management in arriving at feasible and viable project alternatives. Detailed Project Report’s focus is to communicate formally about the project sponsor’s decision on a specific project to the government departments and financial institutions for seeking their approvals and funding.

Scope of information Management: The interests of the management can be met by collecting relevant information in vital areas of technical, economic, commercial and environmental areas at the onset. However, about 70-80% information may be collected and analysed in feasibility studies based on which certain reliable forecasts are made and decisions are taken by the management.

Time span: These studies are subjected to an exploratory type of research and hence consume a span of 6 to 15 months. A lot of care and diligence is inevitable on the part of the estimator while preparing the official document and hence may consume time within the range of 1 year to 2 years after the decision is taken by the top management.

Costs involved: The cost of feasibility studies varies on the type of project. As an average for any project the costs may range approximately between 1.5-3% of the project costs. The cost of preparing a detailed project report is little higher than that of feasibility studies. The total costs may range between 5%-7.5% of the expected investment. Reliability: These studies are reliable for a short period of time (till the decisions are made about a project). In the long run they serve only as a data bank as the information stinks. The detailed reports help in guiding the entire project and even if any variation is there in the project data it can be compared and observed. However, this acts as a major signpost for all practical purposes in the project development and for future reference. Depth of analysis: The depth and magnitude of the feasibility studies are obviously reflected through costs and time consumed in conducting studies. The level of information furnished in these reports is clear, yet some secondary issues are perfunctorily managed. The depth and magnitude is perfectly maintained by furnishing intricate details of the project. The report is prepared with diligence taking all precautions to avoid ambiguity and mystery concerning issues of the project.

Summary

Thus, Project report is a precise formal document of commitment prepared and presented by sponsors of a project. On the basis of this report, the Project Investment Board and Cabinet Committee on economic affairs of the concerned Ministry Proffer their exoneration of the project proposals. The preparation of detailed project report is the preliminary phase of a project life cycle. The preparation of project report starts only after the investment decision is made on the basis of the technical, economic and financial feasibility studies, so that expensive efforts involved in the preparation of report are not wasted. To prepare the project report from a techno-economic feasibility study, we have to Break-down all project components, time phase and schedule them minutely and prepare accurate cost estimates, furnishing with necessary and relevant assumptions and calculations.

Develop baselines for controlling time and costs that help the implementation of the project.

Resources to implement the project.