Many professionals have business ideas that seem like practical business ventures. Most of these ventures require funding from multiple funding sources. So to reduce risks, the professional with the business idea, or sometimes even the investor or other interested parties will want to perform an analysis of all of the financial activity that is involved in the project. They depend on reliable financial information to perform the best financial analysis possible.
The financial information required is also needed so that the proposed business venture can be compared to similar ventures in its industry. This allows interested parties to gain a more realistic picture of the potential financial performance of the venture. Their main concern is that they receive a return on their investment or that they are repaid for various loans that have been made on behalf of the venture.
Some of the financial methods used to perform the best analysis possible are designed to ensure that investors and lenders can secure their investments; they are described in more detail below.
Financial modeling is one of the major sources used to perform a financial analysis of a business venture. It creates a financial reflection of the venture’s structure by clearly mapping out all aspects of the venture, including its sources of revenue, all project costs that are associated with the venture, as well as capital expenditures and its fixed and variable expenses. It helps funders make better, more informed decisions.
The financial model allows participants to evaluate the project’s estimated cash flows, estimated net profits, the estimated net worth, as well as a wide variety of other key financial indicators. The key financial indicators are used by investors and banks to compare the projected financial performance to other similar ventures in the marketplace. A credit union may also be a financial source that could have an interest in reviewing a financial model as well.
The financial model also clearly maps out the sources of business finance along with the timing of all of the funding sources and the investment loan repayments that are required at designated periods within the project.
Project Valuation Methods
In addition to analyzing the financial model for a specific venture, it is also very important to perform an analysis of the project’s valuation. The valuation of a business venture consists of a process and various procedures that are used to perform an estimation of the economic value of the venture – more specifically the owner, investor’s or lender’s interest in the venture. Typically, those who are involved in the venture in any capacity and have a financial interest in the project, uses the information provided in project valuations to better determine the future economic outcomes of the business venture.
There are a wide array of valuation methods used based on the specifics involved with the project. One of the more common one’s involves the project’s value after the sale of a business for a future period of time. Other methods consist of comparable multiples whereby areas such as P/E multiples are used, price to revenue, market to book and enterprise value to EBIT multiples are used.
Another method consists of the Discounted Cash Flow method whereby areas such as the net present value, the internal rate of return or the economic value added based methods may be used.
What is Project Analysis?
To ensure that their investments and funds are protected, investors and other lenders often hire a financial project manager who is responsible for overseeing how the venture is played out. They are also responsible for knowing how to read and understand the various financial modeling and valuation methods, as well as have knowledge about performing a thorough project analysis. Project valuation methods and a project finance valuation is also of great importance and is within the overall scope of analyzing the project.
The project manager must also be able to properly articulate what’s been analyzed along with their professional evaluation of the overall project. In essence, the financial project manager must be able to properly perform a detailed review of the project as well as oversee insurance for investments that have been made.
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